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Higher audit rates for lower incomes

Few things can create as much stress for a taxpayer as an IRS audit.  Many people assume that the IRS primarily audits people with higher incomes.

Generally, in the past, the odds of being audited significantly increased as income increased. However, recently the IRS began to increase the focus on audits of certain low-income taxpayers.

If you are claiming the earned income tax credit (EITC) you are at a much higher risk of being audited. People with income under $20,000 who receive the EITC are audited at twice the rate of people with income between $200,000 and $500,000.

According to the IRS, tax returns claiming EITC have error rates of about 50%. The improper payments involving EITC is estimated to be more than $17 billion each year.

The IRS budget was reduced by about two billion dollars between 2010 and 2017. Due to the crippling budget cuts over the years, the IRS has lost almost 30,000 full-time positions between 2010 and 2019. The IRS career leadership team has the responsibility for making the high-level decision of where to focus their limited audit resources.

These cuts in funds caused the IRS to shift its focus audits from high-income people to low-income people who claimed the EITC. The IRS commissioner, Charles Rettig, announced that the IRS will need more money to hire and train auditors so that it will be able to balance the number of audits across all income levels.

Charles Rettig has admitted that auditing lower-income people is easier than auditing wealthier ones.

Low-income taxpayers are the easiest and cheapest to audit since the majority of these audits are performed by mail and by central IRS campus operations. This method of auditing reduces the cost of audits.

It generally takes two to three years for the IRS to train an agent for more complex audits. The IRS has been hiring more auditors for complex audits which are done by revenue agents. However, these hires are largely being offset by the decrease of its workforce due to employees retiring.

EITC audits make the IRS look efficient since most mail audits aren’t challenged by the taxpayer. Most people default on their audit or never respond.

It appears that the IRS audit strategy will remain unchanged. Until the IRS receives the funds needed to train more agents for complex audits, low-income individuals will continue to be large proportion of the audits.

David Zubler is a tax accountant and Enrolled Agent representing clients before the IRS with over 25 years of tax experience. He is the author of four tax books and is the founder and president of Your Tax Care. The company provides business and tax education to the public at its website, YourTaxCare.com. David can also be contacted by email at zublerdavid@gmail.com.