The IRS is planning to intensify its efforts against tax preparers who engage in dubious practices such as encouraging clients to underreport income or overclaim credits and deductions. This move coincides with the agency’s increased scrutiny of the employee retention credit (ERC), a tax incentive introduced during the pandemic to support small businesses affected by the COVID-19 pandemic.
The ERC, which provides significant benefits per employee, has led to a rise in specialist firms advising businesses to revise payroll returns to claim this complex tax incentive. In response to this, the IRS has announced a halt in processing new ERC claims due to an influx of dubious claims.
The IRS is also shifting its enforcement emphasis towards higher earners, partnerships, and large corporations, while reducing the number of audits on lower-income filers. The agency intends to lessen the amount of correspondence audits for certain tax credits, such as the earned income tax credit (EITC), which is claimed by low to moderate-income filers.
The EITC has been subject to errors due to its complicated eligibility requirements. In the fiscal year 2020, over $16 billion of the credit was claimed erroneously, accounting for over a quarter of the total amount paid.
The IRS admits that correspondence audits have problems, as many filers don’t receive or understand the notices. Audit rates have decreased more slowly for EITC filers as compared to higher earners, making them a prime target for audits. The IRS is of the view that addressing dishonest preparers, especially those exploiting vulnerable filers, will result in better tax preparation and increased return accuracy, reducing the number of taxpayers at risk of audit.
This effort is aimed at enhancing tax compliance, protecting taxpayers from unscrupulous tax preparers and ensuring legitimate tax credits are claimed correctly. The initiative is expected to improve the overall quality of tax filing and reduce the risk of audits for individual taxpayers.