Tax season can be a difficult time for taxpayers. They are eager to receive their refunds as quickly as possible and may worry about delays due to processing problems. But some Americans may have more grounds for concern than others: low-income households with less than $25,000 in annual earnings.
This group is five times as likely to be audited by the IRS as 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 in the fiscal year ended September 30, compared with a rate of 2.6 for every 1,000 returns for people with incomes above $25,000, TRAC found. The reason for this is the rise of “correspondence audits”, which are reviews of tax returns that the IRS typically conducts via phone and letters, rather than the more complicated face-to-face audits. TRAC discovered that more than half the IRS correspondence audits last year were initiated by low-income individuals who had claimed the Earned Income Tax Credit.
That could prove concerning given the EITC was expanded through the American Rescue Plan, the $1.9 trillion pandemic relief bill signed into law last year by President Biden. For the first time, the EITC can be claimed by both younger workers and senior citizens, which means more people could find themselves on the other side of an IRS audit after filing their returns in the current tax season, which ends on April 18.
There is a reason why EITC returns are more likely than any other tax returns to be audited. One analysis found that as many as half of returns claiming the tax credit had erroneously claimed too much, or even incorrectly claimed the credit at all, according to the conservative Heritage Foundation.
“How fair of a tax system”?
But the higher rate of audits among poor taxpayers also raises questions of fairness and whether it represents the best use of resources, said Susan B. Long is co-director at TRAC, and also a professor of management statistics at Syracuse.
“A tax system that targets the lowest-wage earners at higher rates than those who have higher incomes is not fair. Long spoke to CBS MoneyWatch. What does this do to taxpayer confidence? “
She said, “And at one time when you don’t provide the agency the budget to fair administer the tax laws — that’s really shortsighted. “
The IRS did not immediately respond to the TRAC report but pointed out a post on audit rates. Taxpayers with incomes of more than $10 million had “substantially higher audit rates” than those in every other income category from 2010 to 2015, the agency noted.
Your risk of getting audited
The risk of getting audited by the IRS has been declining for years due in part to a shrinking workforce. The agency employed about 82,000 workers in fiscal year 2021, compared with about 94,000 workers in 2010. TRAC stated that the number of agents available has decreased steadily, even for millionaires.
The number of people with incomes over $1 million has jumped by 50% over the last decade, TRAC noted. But the number of audits on million-dollar tax returns dwindled to about 14,000 last year from about 41,000 in 2012, the analysis found. The bottom line: No matter your income, audits are more likely to be done. The audit rate slipped to 0.2% in 2020 due to the pandemic, according to Jackson Hewitt. That compares with an audit rate of about 0.9% in 2009.
Long stated that the emphasis on low-wage workers raising questions about efficiency and fairness raises concerns. The IRS could make more money collecting taxes from wealthy taxpayers, which is a good thing. That idea was at the center of the Biden administration’s Build Back Better plan, which would have been funded partially by bolstering tax enforcement at the IRS.
The idea: spend $80 billion for the IRS to hire more specialized agents to root out tax evasion, as well as update the agency’s technology. The White House forecast that it could generate an additional $400 billion over 10 years. The Build Back Better Act is currently in limbo and it remains to be seen if the IRS will get more funding.
” The IRS is in serious trouble if it doesn’t have enough staff to perform a good job,” Long stated.
“Lowest level of customer service”
Correspondence audits were cited as one of the IRS’ biggest problems by National Taxpayer Advocate Erin Collins in her report to Congress earlier this year. The lowest-earning Americans who are caught up in such audits often have the highest incomes, she pointed out. She also found that the IRS uses the least resources to perform the most number of inspections.
This results in the IRS providing “lowest level of customer support to taxpayers who have greatest needs for assistance,” Collins stated.
Getting an IRS letter can seem confusing even for people who are familiar with tax law. Collins explained that taxpayers receiving a letter audit often can’t get through to the IRS and get the answers they need or find the correct information. (And last year, simply getting through to the IRS was almost an impossibility. )
” It’s amazing, the targeting and focus on the poorest families,” Long stated. It’s five-times the rate of everyone else. Does this make any sense? “