Following a recent exposé by The Washington Post, which highlighted the lack of consequences faced by unscrupulous tax preparers at the hands of the Internal Revenue Service IRS and the Justice Department, IRS Commissioner Daniel Werfel announced in a letter addressed to the Senate Finance Committee leaders on Monday that the agency is committed to revitalizing its efforts to combat unethical preparers.
According to Werfel, research findings indicate that these unethical individuals disproportionately handle tax returns for vulnerable taxpayers, including those with low incomes, individuals from diverse racial backgrounds, and those with limited proficiency in English. He expressed the belief that intensifying efforts to combat unscrupulous preparers who target this particular demographic will ultimately result in improved tax preparation quality and enhanced accuracy in tax returns.
IRS Shifts Audit Focus Supporting Lower-Income Americans and Targeting High-Income Tax Evasion
This commitment was part of a broader announcement made by IRS leaders, signaling a reduction in audits for taxpayers claiming the Earned Income Credit and other tax benefits designed to support lower-income Americans. This shift comes in response to concerns that this auditing practice disproportionately impacts impoverished and Black taxpayers.
Instead, the IRS will redirect its audit efforts towards high-income individuals and intricate corporate partnerships. This approach also extends to dishonest preparers who manipulate their clients’ returns to inflate refunds, thereby increasing their fee percentages.
Doug O’Donnell, IRS Deputy Commissioner for Services and Enforcement, revealed that the IRS plans to refer more tax preparers suspected of fraudulent activities to its criminal investigation division, a move that has been relatively rare until now. Recent reports indicate that over the past decade, more than 112,000 people have reported fraud or misconduct by tax preparers, yet the IRS has only disbarred one or two preparers each year and suspended fewer than 70. Criminal charges have been brought against fewer than 10 preparers annually for various reasons.
O’Donnell also revealed the IRS’s intention to bolster Volunteer Income Tax Assistance programs in underserved, low-income neighborhoods. This initiative aims to offer taxpayers the option of having their taxes prepared free of charge by volunteers instead of resorting to unethical tax preparers.
He emphasized, “The key to addressing this problem is to expand the avenues through which taxpayers can access ethical tax return preparation. In cases where we observe tax preparers exploiting marginalized communities, we are committed to intensifying our efforts to tackle this challenge in ways that we have not pursued previously and that are within our capacity.”
IRS Reforms: Prioritizing Equity and Shifting Focus in Tax Audits
Monday’s announcement marks a significant departure from the previous trend. Over the years, the IRS had been reducing its workforce dedicated to auditing high-income individuals and large corporations, while still focusing on auditing individuals claiming the Earned Income Credit, typically those with lower incomes. In his letter, Werfel explained that this change in direction would be financially supported by the Inflation Reduction Act, which injects additional funding into the IRS for the purpose of hiring more auditors. These new auditors would have the capacity to dedicate the necessary time to conduct more intricate audits, resulting in higher tax liabilities being identified and recovered.
Senate Finance Committee Chair Ron Wyden (D-Ore.) expressed his support for the proposed change in focus in response to Werfel’s letter, stating, “This is precisely why Congress increased funding for the IRS. I will continue to closely monitor the agency’s efforts to revamp its approach to tax enforcement and ensure the complete elimination of racial bias from its audit selection methods.”
While IRS officials did not disclose specific figures regarding the reduction in audits for low-income taxpayers, they did indicate that such audits would be substantially decreased.
Werfel’s letter outlined the IRS’s intention to reduce audits for taxpayers claiming various credits, including the Earned Income Credit for individuals earning less than $59,000, particularly those with dependent children; the American Opportunity Tax Credit for higher education expenses; the Health Insurance Premium Tax Credit for low-income individuals with health insurance; and the Additional Child Tax Credit for parents.
Both the Child Tax Credit, which can provide up to $2,000 per child, and the Earned Income Credit, which can amount to up to $600 for childless workers and up to $7,430 for households with at least three children, play a crucial role in the annual budgets of many low-income families and represent a significant source of government assistance to those in need. However, the Earned Income Credit program has faced persistent allegations of fraudulent claims by families, as well as efforts to combat fraud that some argue unfairly target Black taxpayers.
Werfel acknowledged that the historical emphasis on auditing individuals claiming the Earned Income Credit has resulted in a disproportionate number of audits of Black taxpayers compared to others. He stated on Monday that the shift in auditing priorities aims to rectify this disparity.
In the future, a significant portion of auditors’ efforts will be directed toward scrutinizing intricate partnerships, with particular attention given to hundreds of cases where the disparity between their reported assets and recorded balance sheet values exceeds $10 million. This notable discrepancy serves as a compelling indicator that they may be concealing funds from tax authorities. In his letter on Monday, Werfel announced that the IRS would also expand upon a previously announced initiative from earlier in the year, intensifying its efforts to recover tax debts. This expanded initiative will now concentrate on individuals who owe a minimum of $250,000 in unpaid taxes.