In September, the IRS committed to significantly decreasing audits on a low-income tax credit, a promise they are now actively fulfilling.
During a recent House Ways and Means Committee hearing, IRS Commissioner Danny Werfel announced a substantial reduction in audits concerning the earned income tax credit for the upcoming tax year. “We are also experimenting with modifications to the audit selection algorithm to mitigate the disproportionate impact observed,” he stated. Werfel mentioned that further time is needed to fully assess the effectiveness of these measures.
A study published in January 2023 by researchers from Stanford University, the University of Michigan, the U.S. Department of the Treasury, and the University of Chicago revealed that Black Americans are three to five times more likely to undergo an IRS audit compared to other taxpayers. This discrepancy is partly attributed to an ineffective software algorithm at the IRS, particularly in relation to the earned income tax credit.
In May, Werfel acknowledged these issues in a letter to the Senate Finance Committee. He noted that the IRS has invested substantial efforts in rectifying the problem, including a thorough review of its automated systems and data processes for selecting tax examinations.
The IRS, in September, reiterated its dedication to resolving this inequity, announcing plans to reduce correspondence audits, which are conducted via mail, particularly for those claiming the earned income tax credit.
This credit, which saw about 23 million filers receive $57 billion in 2022, has an average value of $2,541. It’s a refundable credit, allowing claimants to receive a refund even with no tax liability. However, eligibility for the credit is complex, leading to a high rate of improper payments, as noted by National Taxpayer Advocate Erin Collins in her 2023 Purple Book of legislative recommendations.
Despite the complexity, Werfel highlighted in a January press call that nearly 20% of eligible taxpayers don’t claim the credit, often overlooking it. For the 2023 tax year, the IRS states the credit can amount to as much as $7,430 for households with three or more children, and up to $600 for eligible workers aged 25 to 64 without a qualifying child.
