IRS Targets 'Unscrupulous' Tax Preparers in Crackdown on Small Business Tax Credit
The IRS is intensifying its efforts to combat fraudulent practices by tax preparers, particularly in relation to the employee retention credit (ERC), a pandemic-era tax break designed to support small businesses. The program, worth thousands of dollars per employee, has attracted specialist firms pushing businesses to amend payroll returns to claim the complex tax break. In response to a surge in questionable claims, the IRS recently announced a pause in processing new credit claims, which will extend through the end of 2023. Additionally, the agency plans to reduce audits on lower-income filers while focusing on unpaid taxes from higher earners, partnerships, and large corporations.
Addressing Correspondence Audits and Complex Eligibility Requirements
The IRS is taking steps to substantially decrease the volume of correspondence audits, which are conducted by mail, for certain tax credits. One such credit is the earned income tax credit (EITC), claimed by low- to moderate-income filers and prone to mistakes due to its intricate eligibility requirements. Chuck Marr, vice president for federal tax policy at the Center on Budget and Policy Priorities, acknowledges the longstanding issues with correspondence audits, emphasizing that many filers do not receive or understand the notices.
Disproportionate Impact on Vulnerable Filers
The National Taxpayer Advocate's 2022 report to Congress revealed that more than $16 billion of the earned income tax credit was claimed improperly during fiscal year 2020, accounting for over one-quarter of the total paid. While overall IRS audit rates have declined, the rates for filers claiming the EITC have decreased at a slower pace compared to higher earners. The IRS's research suggests that "bad actors" may disproportionately file tax returns for vulnerable filers, such as lower earners, filers of color, or those with limited English proficiency. This disparity contributes to higher audit rates for these filers.
The IRS's commitment to curbing unscrupulous preparers targeting vulnerable populations, particularly Black Americans, is evident. The agency's efforts align with findings from economists at esteemed institutions, including Stanford University, the University of Michigan, the U.S. Department of the Treasury, and the University of Chicago. By intensifying measures to stop these practices, the IRS aims to improve the quality of tax preparation, enhance return accuracy, and reduce the number of individual taxpayers at risk of audit.
In conclusion, the IRS is taking decisive action to address fraudulent practices by tax preparers, focusing on the employee retention credit and correspondence audits. By targeting unscrupulous preparers and addressing complex eligibility requirements, the agency aims to protect vulnerable filers and improve the integrity of the tax system.
IRS Crackdown on Small Business Tax Credit: Implications for New Businesses
The IRS is ramping up its efforts to combat fraudulent tax preparation practices, particularly those related to the employee retention credit (ERC). This move could significantly impact new businesses that rely on these credits. The ERC, a pandemic-era tax break, was designed to support small businesses that retained employees during shutdowns or revenue declines. However, the complexity of the tax break has led to an increase in questionable claims, prompting the IRS to pause the processing of new credit claims until the end of 2023.
Reducing Correspondence Audits
In addition to the ERC crackdown, the IRS is also reducing the volume of correspondence audits for certain tax credits, including the earned income tax credit (EITC). The EITC, often claimed by low- to moderate-income filers, has been prone to errors due to its complex eligibility requirements. This reduction could potentially ease the administrative burden on new businesses and their employees.
Protecting Vulnerable Filers
The IRS's efforts to curb fraudulent practices extend to protecting vulnerable filers, such as lower earners, filers of color, and those with limited English proficiency. These groups are often targeted by "bad actors" who file tax returns on their behalf, leading to a higher audit rate for these filers. The IRS's commitment to addressing these issues is expected to enhance the quality of tax preparation, increase return accuracy, and reduce the number of individual taxpayers at risk of audit.
In essence, the IRS's decisive action to combat fraudulent tax preparation practices, particularly those related to the ERC, is likely to have significant implications for new businesses. By addressing these issues, the IRS is not only protecting vulnerable filers but also working towards improving the integrity of the tax system.
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