IRS Signals Leniency On Audits Of Lower-Income Taxpayers

IRS Commissioner Daniel I. Werfel said the changes were coming in an effort to make sure income tax audits are more fair and equitable to taxpayers

After several reports analyzing the disproportionate focus of IRS audits on lower-income people, the IRS appears to be cutting a little slack this year. According to Yahoo, the IRS announced that it will be more lenient on taxpayers who qualified for the Earned Income Tax Credit (EITC). That credit typically is applied to American citizens or residents who report earning below $59,187 and/or report earning below $10,300 in investment income on their federal taxes.

In a Sept. 18 letter to the Senate Finance Committee, IRS Commissioner Daniel I. Werfel said the changes were part of an effort to make sure income tax audits are more fair and equitable to taxpayers, writing, “Over-reliance on audits to resolve basic errors can lead to fewer taxpayers receiving credits and deductions for which they are eligible and thus decrease accuracy in tax administration.”

Werfel’s letter continued, “We are making broad efforts to overhaul compliance efforts in a manner that robustly advances our commitment to fair, equitable, and effective tax administration.”

In 2022, according to Syracuse University’s Transactional Records Access Clearinghouse, about half of audits initiated by the IRS were focused on those with an annual income below $25,000 who claimed the EITC. Joanna Ain, the Associate Director of Policy for Prosperity Now, a non-profit that is dedicated to expanding economic opportunity for low-income families and communities in the U.S., told Yahoo in February 2023, “As we know, tax time is a critically important time for families and individuals — especially low-income households and households of color — and a tax refund can be a lifeline, helping households meet daily needs and start saving for their futures.”

Most of those audits came via the postal service, which Erin Collins, the National Taxpayer Advocate, told Congress was a point of concern via her annual report, “Correspondence audit letters fail to provide a point of contact,” Collins wrote. “Low-income taxpayers encounter communication barriers that hinder audit resolution, leading to increased burdens and downstream consequences for taxpayers.”

Black taxpayers were also selected for audits at a rate between three and five times that of non-Black taxpayers, according to a Stanford University study. The study also found that even when Black taxpayers did not claim the EITC, a disparity was still present in their audits. Dorothy Brown, a Georgetown Law tax professor and lawyer, praised Commissioner Werfel’s letter before issuing a critique, telling Yahoo, “The Commissioner’s letter to the Senate was a great first start,” Brown said. “Going forward, he needs to ensure that regardless of income level, Black taxpayers are not more likely to be audited than non-Black taxpayers.”

Ain, in turn, praised both Brown and Steven Dean for their work in making sure that the disparities in tax audits from the IRS were put forth to the media, which created pressure on the IRS to change how it conducts its tax audits. Ain told Yahoo, “The initiative outlined in this letter is an outcome of the incredible work of legal thinkers and tax law professors like Dorothy Brown and Steven Dean to bring this disparity to the attention of the media and policymakers.”

Ain continued, focusing on the propensity of the rich to legally dodge paying their fair share of taxes, saying, “The need to focus tax audits on the wealthy and corporations and high-end tax evasion rather than households with low-incomes and households of color is critical to putting forward a fair and equitable tax code.”