IRS audits raise anxiety for many taxpayers. What can be even more frustrating is when those examinations seem unevenly targeted to taxpayers with lower incomes. That’s been the case with the earned income tax credit (EITC), which has been the subject of recent controversy. (A study released earlier this year found that the IRS audits Black taxpayers at about three to five times higher rates than the agency audits other taxpayers.)
But beyond the EITC, there have been concerns over the years over whether the IRS focuses enough on higher earners and has the resources to effectively audit complex partnerships and large corporations. Now, in a Sept. 18 letter to Senate Finance Committee Chair Ron Wyden (D-Ore.), IRS Commissioner Danny Werfel is pledging to reduce the agency’s focus on EITC and similar audits.
“In fiscal year (FY) 2024, we will be substantially reducing the number of correspondence audits focused specifically on certain refundable credits,” Werfel 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.”
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The move is part of what the agency describes as a “rebalancing effort” to focus tax enforcement and compliance efforts on wealthier taxpayers and large corporations. That rebalancing stems partly from billions of dollars in funding for the agency under the Inflation Reduction Act (IRA).
Fewer IRS audits involving credits for taxpayers with lower incomes?
The EITC, in particular, is claimed on many federal income tax returns. (The IRS reports that as of Dec. 2022, around 31 million workers and families received about $64 billion in earned income credits.)
The credit, designed to benefit workers with lower incomes, can lower tax liability for eligible households or result in a cash-back refund. Last year, the average earned income tax credit nationwide was just over $2,000. For the 2023 tax year (returns normally filed in 2024), the maximum EITC amount, which depends on several factors, is $7,430.
The Standford Institute for Economic Policy study, released earlier this year, found that the EITC was the main source of the racial disparity in IRS audit rates. It should also be noted that:
- Black taxpayers aren’t more likely to claim the EITC than non-Blacks (e.g., Hispanics and Whites).
- The IRS says it doesn’t have information about taxpayer race when it identifies tax returns for audit.
- The audit disparity was considered significant and likely attributable to IRS audit algorithms targeting the refundable tax credit.
[Note: The study findings were based on data from 148 million tax returns and 780,000 IRS audits. The study was produced with input from researchers from other universities and the U.S. Treasury Department.]
Commissioner Werfel says taxpayers can expect to see fewer correspondence audits (simple reviews of tax returns often conducted via mail) involving the following tax credits for the 2024 filing season:
- Earned Income Tax Credit (EITC)
- American Opportunity Tax credit
- Health Insurance Premium Tax Credit
- Additional Child Tax Credit
The agency has already implemented some changes and will, according to Werfel, conduct future pilots for the EITC audit selection process. The IRS plans to monitor and publicly share the findings.
Wealthy taxpayers, millionaire evaders, and large corporations
In the meantime, the IRS continues to ramp up enforcement and compliance efforts involving wealthier taxpayers, millionaire tax evaders, large corporations, and complex partnerships. The agency is also cracking down on "unscrupulous promoters" and scams that harm taxpayers and honest business owners.
For example, the agency recently announced an immediate moratorium on processing new employee retention credit (ERC) claims. The IRS is also looking to hire 3,700 new revenue agents to focus on complex audits.
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