“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,” Werfel wrote. “ … 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.”
The promise was part of a larger announcement by IRS leaders that they will conduct fewer audits of taxpayers who claim the Earned Income Credit and other tax benefits for lower-income Americans, curbing a practice that had become a target of scrutiny for its disproportionate effects on poor and Black taxpayers.
Instead, the IRS will focus its auditors’ firepower on high earners and complex corporate partnerships. That’s in addition to the unscrupulous preparers who lie on their clients’ returns to inflate the size of the refund and thus the percentage fee that the preparer collects.
Doug O’Donnell, IRS Deputy Commissioner for Services and Enforcement, said the IRS would refer more tax preparers suspected of fraud to its criminal investigation division, which is currently a rare step. The Post reported last month that more than 112,000 people have reported fraud or misconduct by their tax preparers over the past decade, but the IRS has only disbarred one or two preparers each year and suspended fewer than 70. Fewer than 10 preparers a year have faced criminal charges for any reason.
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O’Donnell also said the IRS planned to support Volunteer Income Tax Assistance programs opening in more low-income neighborhoods, so that taxpayers can choose to have their taxes prepared free by volunteers instead of going to unscrupulous preparers.
“The way to fix this issue is to provide a lot more opportunities for taxpayers to have access to ethical return preparation,” O’Donnell said. “And where we do see tax preparers taking advantage of marginalized communities, we will be really pushing to focus on that challenge in ways we haven’t and that we can.”
Monday’s announcement reverses a trend: For years, the IRS’s shrinking workforce cut back on auditing high-income individuals and large corporations while continuing to audit people who claim the Earned Income Credit, who tend to be low-income. Werfel’s letter said the change in course would be funded by the Inflation Reduction Act’s infusion of cash into the IRS to hire more auditors who can spend the time it takes to conduct more complex audits that yield more money in taxes owed.
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Senate Finance Committee chair Ron Wyden (D-Ore.) praised the planned shift in focus in a statement responding to Werfel’s letter. “This is exactly why Congress boosted funding for the IRS,” Wyden said. “I will continue to watchdog the agency in its work to overhaul its approach to tax enforcement and make sure that it fully eliminates racial bias from its audit selection methods.”
IRS officials would not provide any specific numbers to say how sharply they now plan to reduce audits of low-income taxpayers, saying only that they would curb such audits “substantially.”
Werfel’s letter said the agency would reduce audits of taxpayers who claim credits including the Earned Income Credit for people who work and earn under $59,000, especially people with children; the American Opportunity Tax Credit for higher education; the Health Insurance Premium Tax Credit for low-income health insurance customers; and the Additional Child Tax Credit for parents.
The Child Tax Credit, which is worth up to $2,000 per child, and the Earned Income Credit, which is worth up to $600 for childless workers and up to $7,430 for households with at least three children, make up an important part of many low-income families’ annual budgets and represent one of the largest sources of government aid to the poor. But the Earned Income Credit program has been dogged for years by allegations that families often claim the lucrative credit fraudulently, and by efforts to crack down on fraud that some say unfairly target Black taxpayers.
Werfel has acknowledged that the focus on auditing people who claim the Earned Income Credit has led to disproportionate auditing of Black taxpayers compared to others. He said Monday that the shift in auditing priorities will address that disparity.
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Going forward, much of the auditors’ time will focus on complex partnerships, including hundreds where the difference between what they report in assets and what they record on their balance sheets exceeds $10 million — a strong signal that they might be hiding money from tax collectors. Werfel’s letter Monday said the agency would also extend an effort announced earlier this year to work harder to collect tax debts, which will now focus on those who owe at least $250,000.