The Internal Revenue Service is reforming the way it examines the tax returns of low-income Americans in an effort to reduce enforcement disparities that make Black taxpayers more likely to be audited than anyone else.
At the center of this effort is a major change in how the IRS audits recipients earned-income tax creditA special tax refund that was created to help low-income workers.
Tax returns claiming the EITC have historically been more likely to be selected for audit, even if those investigations result in very little in the way of taxes owed. Research has shown that audit rates for Black Americans are three to five times higher than other taxpayers, with audits focused on tax credits being a major driver of disparity.
The IRS has promised to use the $80 billion it received through the Inflation Cut Act of 2022 to target wealthy taxpayers and make the tax system more equitable by ensuring that taxpayers are not disproportionately examined because of their race.
IRS Commissioner Daniel Werfel wrote in a letter to the Democratic chairman, Senator Ron Wyden of Oregon, “We are making broad efforts to improve compliance efforts in a way that solidly furthers our commitment to fair, equitable, and effective tax administration. Increase.” of the Senate Finance Committee on Monday.
The Earned-Income Tax Credit, first introduced in 1975, is available to low-income taxpayers. The size of the credit depends on how many children an individual or family can claim as dependents. According to the IRS, 31 million workers and families received the credit at the end of last year; The average amount was $2,043.
The letter acknowledged that its internal research validated academic studies that showed that scrutiny of earned-income tax credit claims has led to disparities in the way the tax code is enforced and the likelihood of black taxpayers being audited. There is much more.
The IRS has focused its attention on tax filings with false earned-income tax credit claims because those cases are easier to audit than the tax returns of wealthy taxpayers with complex tax returns.
As part of its new focus on investigating wealthy taxpayers, the IRS is deploying more revenue agents and artificial intelligence technology to target hedge funds, law firms, private equity groups and other types of complex partnerships.
Changes to the oversight of earned-income tax credit filings will include adjusting how the IRS considers information about where children live in its “automatic risk scoring” process. The agency is also testing additional changes to its case selection process and devoting more resources to helping taxpayers fix mistakes.
Reducing racial disparities in tax enforcement is challenging because the IRS does not collect information about race as part of the tax-filing process.
Mr. Werfel said in the letter that it could take several months after the next tax filing season for the IRS to know whether the changes were successful. He said the agency will also reduce audits related to the American Opportunity Tax Credit, the health insurance premium tax credit and the additional child tax credit.
The IRS did not specify how sharply audit rates for the tax credit would drop, but said they would be reduced “substantially.”
