Tax season is a difficult time for taxpayers, who are understandably anxious to get their refunds quickly and may be concerned that processing issues may delay their checks. But some Americans may have more concerns than others: low-income households with less than $ 25,000 in annual income.
This group is five times more likely to be audited by the IRS than everyone else, according to a new analysis of IRS data by the Transactional Records Access Clearinghouse (TRAC) at Syracuse University. About 13 tax returns out of 1,000 filed by those earning less than $ 25,000 were audited during the fiscal year ended Sept. 30, compared to a rate of 2.6 per 1,000 tax returns for individuals. with revenues in excess of $ 25,000, TRAC found.
The reason is an increase in what is known as “correspondence audits,” a review of a tax return that is typically handled by the IRS through letters and phone calls, as opposed to more complex face-to-face audits. More than half of the correspondence audits initiated by the IRS last year involved low-income people claiming the Labor Income Tax Credit (EITC), TRAC found.
- Call or type, it’s almost impossible to contact the IRS
This could be worrying given the EITC expanded through the U.S. Rescue Plan, the $ 1.9 trillion pandemic relief bill signed last year by President Biden. For the first time, the EITC can be claimed by both younger workers and the elderly, which means that more people could be on the other side of an IRS audit after filing their statements during the current fiscal season, which ends April 18th.
There is an explanation for why EITC claims are more likely to trigger an audit than other tax returns. One analysis found that up to half of tax credit claims had claimed too much wrongly, or even incorrectly, according to the conservative Heritage Foundation.
“What is fair about a tax system”?
But the highest audit rate among poor taxpayers also raises issues of fairness and whether it represents the best use of resources, said Susan B. Long, co-director of TRAC and professor of administrative statistics at Syracuse.
“When you have a tax system that targets lower wages at a much higher rate than higher-income taxpayers, what exactly is a tax system?” Long told CBS MoneyWatch. “And what about taxpayer confidence?”
He added: “And at the same time, when you don’t provide the agency with the budget to administer tax laws fairly, that’s really short-sighted.”
The IRS did not immediately comment on the TRAC report, but noted a blog post about audit fees. Taxpayers with revenues of more than $ 10 million had “substantially higher audit rates” than those of all other revenue categories from 2010 to 2015, the agency noted.
Your risk of being audited
The risk of being audited by the IRS has been declining for years due, in part, to a reduced workforce. The agency employed about 82,000 workers in fiscal year 2021, compared to about 94,000 in 2010. With fewer agents on hand, the audit rate has steadily declined, even for millionaires, TRAC noted.
The number of people earning more than $ 1 million has risen by 50 percent over the past decade, TRAC said. But the number of multi-million dollar tax returns audits fell to about 14,000 last year from about 41,000 in 2012, according to the analysis.
The result: No matter what your income level is, your chances of being audited have decreased. The audit rate dropped to 0.2% in 2020 due to the pandemic, according to Jackson Hewitt. This compares to a 0.9% audit rate in 2009.
Still, the focus on auditing low-wage workers raises the issue of efficiency and fairness, Long said. After all, richer taxpayers could be more lucrative for the IRS when it comes to collecting unpaid taxes. This idea was at the heart of the Biden administration’s Build Back Better plan would have been funded partially strengthening the application of taxes to the IRS.
The idea: to spend $ 80 billion to get the IRS to hire more specialized agents to eliminate tax evasion, as well as upgrade the agency’s technology. The White House predicted it could generate an additional $ 400 billion in 10 years. But with the Build Back Better Act stalled in Congress, it is unclear whether the IRS will receive more funding.
“The IRS has a real problem if you don’t have the staff to do a decent job,” Long said.
“Lowest Customer Service”
Correspondence audits were cited as one of the IRS’s biggest problems by National Taxpayer Advocate Erin Collins in her report to Congress earlier this year. Taxpayers caught in these audits are usually the lowest-earning Americans, he noted. At the same time, the IRS devotes “the least amount of resources to conducting the largest number of examinations,” he found.
This translates into “the lowest level of customer service for taxpayers most in need of assistance,” Collins wrote.
Receiving a letter from the IRS can be confusing, even for people familiar with taxes, Long said. Taxpayers who receive a correspondence audit often cannot reach a single point of contact when they call the IRS for answers or to track the information they sent to the agency, Collins wrote. (And last year, just move on to the The IRS was almost an impossibility.)
“It’s amazing, the focus and guidance on the poorest families,” Long said. “That’s five times the rate for other people, does that really make sense?”
- In:
- internal revenue service
- tax returns
- tax fraud
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