IRS changes audit practice that discriminated against black taxpayers | ET REALITY

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The Internal Revenue Service is reviewing the way it examines the tax returns of low-income Americans as part of an effort to reduce disparities in enforcement that have left black taxpayers far more likely than anyone else. another person from being audited.

At the center of this effort is a major change in the way the IRS conducts audits of recipients of the earned income tax credita special tax refund that was created to help low-income workers.

Historically, tax returns claiming the EITC have been more likely to be selected for audits, even if those investigations tend to result in few taxes owed. Research has shown that audit rates for African Americans are three to five times higher than other taxpayers, with tax credit-focused audits a major driver of the disparity.

The IRS has pledged to use the $80 billion it received through the Inflation Reduction Act of 2022 to target wealthy taxpayers and make the tax system more equitable by ensuring taxpayers are not scrutinized. disproportionately because of their race.

“We are making extensive efforts to review compliance efforts in a way that strongly advances our commitment to fair, equitable and effective tax administration,” IRS Commissioner Daniel Werfel wrote in a letter to Senator Ron Wyden of Oregon. the democratic president. of the Senate Finance Committee, on Monday.

The earned income tax credit, which was first introduced in 1975, is available to low-income taxpayers. The size of the credit depends on how many children a person or household can claim as dependents. According to the IRS, at the end of last year 31 million workers and families received credits; the average amount was $2,043.

The letter acknowledged that its internal research has validated academic studies that have shown that scrutiny of earned income tax credit claims has driven disparity in how the tax code is applied and made it much more likely that black taxpayers be audited.

The IRS has focused its attention on tax returns with erroneous earned income tax credit claims because those cases are easier to audit than the tax returns of wealthy taxpayers with complicated tax returns.

As part of its renewed focus on scrutinizing wealthy taxpayers, the IRS is deploying more tax agents and artificial intelligence technology to target hedge funds, law firms, private equity groups and other types of complex partnerships.

Changes to oversight of earned income tax credit applications will include adjusting how the IRS considers information about where children live in its “automatic risk rating” process. The agency is also testing additional changes to its case selection process and is dedicating more resources to helping taxpayers correct errors.

Reducing racial disparities in tax filing is challenging because the IRS does not collect information on race as part of the tax filing process.

Werfel said in the letter that it could take several months after the next tax filing season for the IRS to know if the changes have been successful. He said the agency will also reduce audits related to the American Opportunity Tax Credit, the Health Insurance Premium Tax Credit and the Additional Child Tax Credit.

The IRS did not specify by how much audit fees for tax credits would decrease, but said they would be reduced “substantially.”

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