Last Updated on September 24, 2023 by Robert C. Hoopes
IRS Commissioner Daniel Werfel appeared before the Senate Finance Committee yesterday to address the agency’s handling of employee retention credit (ERC) claims. The ERC, a tax break aimed at assisting small businesses that retained employees during shutdowns or revenue declines in 2020 and 2021, has come under scrutiny due to a surge in questionable claims.
In response, the IRS announced a pause in processing new claims for the ERC. This pause will continue at least until the end of 2023 to allow the agency to investigate the legitimacy of the claims. The decision to halt processing was applauded by the American Institute of CPAs, who believe it will help address the rising concerns surrounding false claims.
Furthermore, the IRS is shifting its enforcement efforts to target higher earners, partnerships, and large corporations while reducing audits on lower-income filers. The agency plans to decrease correspondence audits for certain tax credits, including the earned income tax credit (EITC), typically claimed by low- to moderate-income individuals. Correspondence audits have proven problematic, with many filers not receiving or comprehending the notices sent by the IRS.
The need for stricter enforcement measures is underscored by the fact that in fiscal year 2020, over $16 billion of the EITC was claimed improperly, according to a report from the National Taxpayer Advocate. Surprisingly, audit rates for EITC claimants have declined at a slower pace compared to audits on higher earners. The IRS currently audits a higher percentage of taxpayers with the EITC than any other group, except those with at least $5 million in total positive income.
Additionally, concerns have been raised about “bad actors” preying on vulnerable filers’ tax returns. These individuals specifically target low- to moderate-income taxpayers, taking advantage of their limited knowledge and resources. The IRS aims to combat this issue through increased enforcement and education efforts.
As the IRS faces scrutiny over its handling of the employee retention credit claims, it is clear that changes are necessary to ensure the program benefits those who truly need it. The agency’s decision to prioritize higher earners and partnerships in its enforcement efforts, while reducing audits on low-income filers, aims to strike a balance between fairness and efficiency in tax enforcement. With the surge in questionable claims, it is important for the IRS to remain vigilant and protect taxpayers from those seeking to exploit the system.