The Internal Revenue Service (IRS) and the Justice Department, IRS Commissioner Daniel Werfel announced a renewed effort to combat fraudulent tax preparation practices.
The agency’s commitment to addressing this issue is part of a broader announcement by IRS leaders to revamp their auditing priorities and reduce audits of taxpayers claiming the Earned Income Credit and other benefits for lower-income Americans.
IRS Takes Aim at Tax Fraud
In a letter addressed to the Senate Finance Committee leaders, Commissioner Werfel emphasized the need to crack down on lousy tax preparers who disproportionately target vulnerable taxpayers, including low-income individuals, people of color, and those with limited English proficiency.
The IRS recognizes that these bad actors can have a detrimental impact on tax return accuracy and the financial well-being of their clients.
The shift in focus away from auditing low-income taxpayers claiming various credits, such as the Earned Income Credit, represents a significant change in the IRS’s approach to tax enforcement.
Instead, the agency plans to direct its auditors toward high-income individuals and complex corporate partnerships.
Additionally, the IRS intends to refer more tax preparers suspected of fraud to its criminal investigation division, a step that has been relatively rare in the past.
The move is accompanied by plans to support Volunteer Income Tax Assistance programs in low-income neighborhoods, offering taxpayers the option to have their taxes prepared by ethical volunteers, thereby reducing the need for unscrupulous preparers.
Doug O’Donnell, IRS Deputy Commissioner for Services and Enforcement, emphasized the importance of expanding access to ethical return preparation.
He also pledged to address the challenge posed by tax preparers taking advantage of marginalized communities more effectively.
This shift in auditing priorities represents a reversal of previous trends, where the IRS had reduced its audits of high-income individuals and large corporations while continuing to audit those claiming the Earned Income Credit, who tend to be low-income earners.
The change in direction is made possible by funding from the Inflation Reduction Act, which provides additional resources for hiring more auditors capable of conducting complex audits that yield higher tax revenues.
Senate Finance Committee Chair Ron Wyden welcomed the IRS’s new approach, highlighting that Congress had increased funding for the agency precisely for this purpose.
Wyden emphasized the importance of ensuring that the IRS eliminates racial bias from its audit selection methods.
While specific figures regarding the reduction in audits of low-income taxpayers were not provided, the IRS expressed its commitment to substantially decreasing such audits.
Commissioner Werfel outlined the credits that would face reduced audits, including the Earned Income Credit, 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.
The Earned Income Credit and the Child Tax Credit are crucial sources of government aid for low-income families.
Still, they have faced allegations of fraudulent claims and unfair targeting of Black taxpayers. Commissioner Werfel acknowledged the disproportionate auditing of Black taxpayers in the past and affirmed that the new auditing priorities would address this disparity.
Cracking Down on Complex Partnerships and High-Value Debts for a Fairer Tax System
Looking ahead, IRS auditors will focus on complex partnerships, particularly those with significant discrepancies between reported assets and recorded balance sheets, signaling potential efforts to evade taxes.
Additionally, the agency will extend its efforts to collect tax debts, with a heightened focus on individuals owing at least $250,000.
The IRS’s commitment to combatting fraudulent tax preparation practices and rebalancing its audit priorities represents a significant step toward enhancing fairness and equity in the US tax system.
The agency’s actions aim to protect vulnerable taxpayers while holding unscrupulous preparers accountable for their actions and ensuring that tax enforcement efforts are more effectively directed towards high earners and complex corporate entities.