EITC audits: IRS' planned changes and recent problems

The Earned Income Tax Credit was one of the many tax matters mentioned in the Internal Revenue Service's Sept. 8 announcement that, thanks to Inflation Reduction Act funds, it is revising its enforcement efforts.

The tax agency's primary goal, per it's news release, is to restore fairness to the tax system.

To do that, IRS personnel will focus more on high-earning taxpayers, both individuals and businesses, that have seen sharp drops in audit rates over the last decade.

EITC audit reforms on the way: Change also are planned in how the IRS deals with the millions of taxpayers who aren't in the wealthy category.

IRS Commissioner Danny Werfel said his agency will be adding new fairness safeguards for those claiming the Earned Income Tax Credit (EITC), a refundable tax credit that was created to help taxpayers with much more modest incomes.

"Audit rates of those receiving the EITC remain at high levels in recent years, while rates dropped precipitously for those with higher income, partnerships and others with more complex tax situations," said Werfel. "The IRS will also be working to ensure unscrupulous tax preparers do not exploit people claiming these important tax credits."

Details of the IRS' EITC audit procedures changes will be announced this fall, and implemented for the next filing season.

Destroyed tax documents and audit issues: While we wait for that updated EITC audit information, it's also helpful to look at an audit problem in this area that the IRS recently created for itself.

"Taxpayers who claimed the earned income tax credit for 2019 were audited as a result of the IRS's destruction of millions of information returns, despite the agency's claim that no 'negative consequences' resulted from its action," wrote Chandra Wallace in a recent Tax Notes article.

The documents' destruction was discovered by the Treasury Inspector General for Tax Administration (TIGTA) and reported in September 2021. TIGTA followed up in May 2022 with a second report on its investigation.

And just this week, Leslie Book's Tax Notes piece offers further analysis of these problematic EITC audits.

EITC audit issues for all: Book, who is (among many other things) a law professor and a Tax Analysts contributing author through the Procedurally Taxing blog, notes (among many other points in the piece) the special problems that both the IRS and many audited EITC claimants face.

As for the IRS, the agency faces unique challenges when tax credit eligibility often hinges on issues outside its knowledge.

"In addition to the difficulty that the IRS faces when it tries to understand the complexities of family life, the IRS struggles to understand the economic activities of taxpayers who are working outside of traditional W-2 employee status," writes Book.

As for the taxpayers seeking the EITC, many struggle to even respond to an audit. They also tend have a limited political voice — that is, they're not financially well-off enough to be campaign donors — that could help to ensure the government — in this case, the IRS — acts in a way that doesn't violate their interests or rights.

Balancing fairness and collecting: Book doesn't argue for an end to EITC audits.

"While some may disagree with IRS decisions about who is or is not audited, most agree that the IRS must audit some EITC-claiming taxpayers to ensure the program's integrity," he writes.

But Book also notes that a common theme by those examining IRS' EITC audit procedures is the need to consider both the lives of those who are facing audit and the policy objectives underlying audit programs.

Will that balance be part of the IRS re-evaluation of EITC audit standards? I suspect so, which is why the two recent Tax Notes EITC articles earn this weekend's Saturday Shout Outs.

Here are the links —

• How Many EITCs Were Lost When the IRS Destroyed 30 Million 1099s? by Chandra Wallace, and
• EITC Audits and Destroyed Information Returns by Leslie Book.

If you're also interested in the IRS decision to trash the 30 million tax documents and the problems that caused, you also can read the TIGTA reports —

• Effects of the COVID-19 Pandemic on Business Tax Return Processing Operations (Sept. 2, 2021)
• A Service-Wide Strategy Is Needed to Address Challenges Limiting Growth in Business Tax Return Electronic Filing (May 4, 2022)

Also, you might find these (shameless self-promotion alert) EITC blog posts of interest:

• Don't miss out on EITC, but note the 2022 tax return changes
• The EITC: a valuable tax-saving option that's often overlooked
• LBJ's war on poverty, aided by the Earned Income Tax Credit
• Taxpayer Advocate suggests 3 ways to improve the EITC

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