IRS audits the poor at 5 times the rate of everyone else, analysis finds
Tax season is a fraught time for taxpayers, who are understandably eager to get their refunds quickly and who may fret that processing hiccups could delay their checks. 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 is a rise in what are known as "correspondence audits," a review of a tax return that's typically handled by the IRS via letters and phone calls, as opposed to the typically more complex face-to-face audits. More than half of the correspondence audits initiated by the IRS last year involved low-income people who claimed the Earned Income Tax Credit (EITC), TRAC found.
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's an explanation for why returns claiming the EITC are more likely to trigger an audit than other tax returns. 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, co-director of TRAC and a professor of managerial statistics at Syracuse.
"When you have a tax system where you are targeting the lowest-wage earners at a much higher rate than higher-income taxpayers, how fair of a tax system is that?" Long told CBS MoneyWatch. "And what does it do to the confidence of taxpayers?"
She added, "And at the same time when you don't provide the agency with the budget to fairly administer the tax laws — this is really shortsighted."
The IRS didn't immediately comment on the TRAC report, but it pointed to a blog post about 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. With fewer agents on hand, the audit rate has declined steadily — including for millionaires, TRAC noted.
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 upshot: Whatever your income level, the odds of getting audited has declined. 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.
Still, the focus on auditing low-wage workers raises the question of efficiency as well as fairness, Long said. After all, wealthier taxpayers could prove more lucrative to the IRS in terms of collecting unpaid taxes. 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. But with the Build Back Better Act stalling in Congress, it's unclear whether the IRS will receive more funding.
"The IRS has a real problem if you don't have the staff to do a decent job," Long said.
"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. Taxpayers who get caught up in these audits are often the lowest-earning Americans, she noted. At the same time, the IRS devotes the "least amount of resources to conduct the largest number of examinations," she found.
That results in "the lowest level of customer service to taxpayers having the greatest need for assistance," Collins wrote.
Getting a letter from the IRS can be confusing, even to people familiar with taxes, Long said. Taxpayers who get a correspondence audit frequently can't reach a single point of contact when they call the IRS to get answers or track down the information they sent to agency, Collins wrote. (And last year, simply getting through to the IRS was almost an impossibility.)
"It's unbelievable, the focus and targeting on the poorest families," Long said. "It's five times the rate for everyone else — does this really make sense?"
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