The Internal Revenue Service said Monday it plans to lower its audit rate of low-income taxpayers who claim refundable tax credits like the Earned Income Tax Credit as it increases audits of wealthier taxpayers and large companies.
IRS Commissioner Daniel Werfel wrote about the "rebalancing effort" in a
"In Fiscal Year 2024, we will be substantially reducing the number of correspondence audits focused specifically on certain refundable credits, including the Earned Income Tax Credit, American Opportunity Tax Credit, Health Insurance Premium Tax Credit and Additional Child Tax Credit," he wrote. "Over-reliance on audits to resolve basic errors can lead to fewer taxpayers receiving credits and deductions for which they are eligible and thus decrease accuracy in tax administration, whereas focusing on helping taxpayers submit accurate filings upfront will increase payment accuracy while reducing administrative burdens for the IRS and the tax filer. This strategy will allow us to repurpose resources to focus on other work that better aligns with IRS's strategic priorities and further our core objectives of equitable and efficient tax administration."
The IRS also hopes to reduce the disparity in its audits of Black taxpayers, after a study earlier this year found it audits Black taxpayers at 2.9 to 4.7 times the rate of non-Black taxpayers, mainly due to automated algorithms that flag discrepancies in claims for tax credits (
"In advance of the next filing season, I commit to updating you on our plans to redeploy our freed-up compliance resources to focus on other pressing priorities," Werfel wrote. "As we've discussed, recent research using imputed race information estimated that Black taxpayers are audited at three to five times the rate of non-Black taxpayers. This research, the general findings of which IRS and Treasury's ongoing internal work has validated, demonstrated that the volume of exams focused on the EITC that the IRS performs is a major driver of overall disparity."
The IRS also plans to crack down on "unscrupulous preparers" who prey on "vulnerable taxpayers."
"In addition, we are devoting more resources to addressing unscrupulous preparers who are leading their customers to underreport income or overclaim credits and deductions," said Werfel. "To do so, we are leveraging data that identifies tax preparers with questionable practices. Our research suggests that these bad actors disproportionately file tax returns for vulnerable taxpayers, including low-income filers, filers of color, and those with limited English proficiency, which may contribute to higher audit rates for this taxpayer segment. Over time, we believe stepped-up efforts to stop unscrupulous preparers that target this population, will lead to higher quality tax preparation and increased return accuracy, thereby reducing the number of individual taxpayers at risk of audit."
The IRS is also continuing its work on a pilot test of an online DIY direct filing system for taxpayers for next tax season. The agency also hopes to provide alerts to taxpayers if it discovers problems with a filing early in the process.
"Along those lines, as directed by the Treasury, we are moving to implement a scaled pilot of a free, IRS-run direct filing option in the 2024 filing season," Werfel wrote. "Additionally, we are developing approaches to alert taxpayers promptly to potential issues, such as those related to refundable tax credits, to encourage self-correction upfront and reduce the potential for an audit, as outlined in the Strategic Operating Plan."
The news follows on the heels of an announcement earlier this month about the IRS's plans to increase audits of large partnerships, big corporations and high-income taxpayers, leveraging artificial intelligence for its audits of partnerships, using the extra funding from last year's Inflation Reduction Act (
Werfel referred to that effort in his letter as well.
"Following a top-to-bottom review of enforcement and in line with our Strategic Operating Plan, the IRS has begun announcing sweeping efforts to overhaul compliance efforts to improve tax administration," he wrote. "For example, the IRS is intensifying collections activities that focus on high-income taxpayers with more than $250,000 in recognized tax debt. This builds off earlier successes that collected $38 million from more than 175 high-income earners this past spring. In addition, IRS staff are closely examining potential non-compliance among large, complex partnerships, including 75 of the largest partnerships in the U.S. identified as higher risk for tax compliance with the help of new AI tools, as well as hundreds of partnerships with over $10 million in assets and balance sheet discrepancies."
Wyden praised the move to shift the audit rates for low-income and high-income taxpayers.
"I'm pleased to see the IRS using the enforcement funding from the Inflation Reduction Act to help lower-income taxpayers catch mistakes from the start and identify credits they are eligible for, while reserving enforcement resources to crack down on wealthy tax cheats and those who prey on vulnerable filers," he said in a statement Monday. "This is exactly why Congress boosted funding for the IRS. ... I am encouraged by the IRS's pilot programs and look forward to continued updates on the IRS's progress in addressing these racial disparities."
House Ways and Means Committee ranking member Richard Neal, D-Massachusetts, also hailed the move to rebalance its compliance initiatives to focus on identifying and auditing high-wealth tax evaders as well as complex partnerships and large corporations.
"Ways and Means' Democrats' generational investment in the IRS is allowing it to focus its compliance initiatives on holding the wealthy and well-connected accountable, and away from the historic trend of disproportionately auditing the poorest taxpayers," he wrote. "Today's announcement makes good on the IRS's commitment to equity, and will not only reduce racial disparities but also help Americans entitled to refundable credits claim them."
Cybersecurity issues
Senate Republicans focused Monday on a
The report, requested by House Ways and Means Committee Chairman Jason Smith, R-Missouri, and Senate Finance Committee ranking member Mike Crapo, R-Idaho, found dozens of longstanding cybersecurity vulnerabilities at the agency.
"As this report illustrates, the IRS has repeatedly squandered the public's trust by failing to protect taxpayer privacy and in some cases willfully ignoring recommendations that would have increased taxpayer information security," Smith said in a statement Monday. "President Biden's solution is to reward the IRS with an $80 billion pay raise to increase audits on working families, while doing very little to shore up the vulnerabilities that put taxpayers at risk. Meanwhile, as the IRS works to establish a new e-file system that would make the agency tax preparer, collector and auditor, the public is no closer to learning who is responsible for the politically timed ProPublica leak of confidential taxpayer information. This report is further proof that the IRS does not need a raise; it needs a reckoning."
The GAO report found that since 2010, the IRS has failed to implement 77 GAO recommendations for safeguarding taxpayer information, including multiple recommendations that have been open for over seven years and two high-priority recommendations that would "significantly improve" data protection.
"From serious breaches of confidential taxpayer data and document mismanagement to poor cybersecurity training and infrastructure vulnerabilities, the IRS has a decades-long and troubled history with adequately protecting American taxpayers' information," Crapo said in a statement. "Now, in addition to tax collector and enforcer, the agency wants to act as tax preparer, despite the evidence showing it is unprepared to be trusted with such responsibility. Instead of devoting time and resources to developing new federal programs that would collect and expose even more sensitive information from taxpayers, the IRS should instead focus on addressing the security weaknesses identified by the GAO and Treasury Inspector General for Tax Administration and improving its woeful customer service."
