Causes and cures for persistent high rates of improper payments of the earned income tax credit (EITC) and consequent high audit rates by the IRS of taxpayers claiming the credit were among topics discussed Wednesday by members of the Oversight Subcommittee of the House Ways & Means Committee.
The session, "On Taxpayer Fairness Across the IRS," drew upon a report released Tuesday by the U.S. Government Accountability Office (GAO) that was compiled at the request of the subcommittee's chair, Rep. Bill Pascrell, D-N.J. That report, Trends of IRS Audit Rates and Results for Individual Taxpayers by Income, included analysis of IRS audits of returns claiming the EITC. On hand to present those findings was James McTigue Jr., the GAO's director, strategic issues.
Also appearing as a witness was Ken Corbin, commissioner of the IRS's Wage and Investment Division and, since last year, the Service's chief taxpayer experience officer.
At the outset of the hearing, Pascrell decried what he called "one tax system for the wealthy and another for everyone else," stating that the IRS's enforcement is experienced by billionaires in a "vastly different" mode than by the "average American." Claimants of the EITC are much more likely to be audited than other taxpayers, Pascrell said.
The GAO report found that the audit rate for EITC taxpayers is 0.77%, roughly three times the average for all taxpayers of 0.25%.
IRS administrative shortcomings also adversely affect all taxpayers, Pascrell said. These include backlogs of returns in the tens of millions, erroneous notices to taxpayers, and unanswered taxpayer phone calls, Pascrell said.
Ranking member Rep. Tom Rice, R-S.C., likewise lamented slow processing times and spotty phone customer service, while praising the "heroic" efforts of IRS employees to administer COVID-19 tax relief measures such as economic impact payments (EIPs) amid the pandemic's impediments to the agency's own operations.
Rice noted that this was the seventh time the subcommittee has examined the EITC, and he urged fellow legislators to "move beyond talking points" to better understand the reasons for an approximately 25% rate of improper payments of the credit annually, involving an estimated $19 billion in the most recent tax year for which data is available.
"This is a huge problem" that necessitates audits, said Rice, who also noted his own experience as a tax lawyer and CPA. "Instead of criticizing the audit rate, let's fix the underlying problem," he said. That solution should focus on the credit's complexity and eligible taxpayers' difficulties in documenting the presence of a qualifying child under the credit's rules.
One tool the IRS has instituted to help taxpayers better understand the EITC and correctly claim it is its online EITC Assistant, Corbin said.
Corbin called upon the legislators to support President Joe Biden's fiscal 2023 budget request, including a $14.1 billion allocation for the IRS and for "stable, multiyear funding."
McTigue also cited funding in explaining why the IRS has been challenged to replace retiring and leaving audit personnel. The exodus is one reason why the GAO found that time spent on audits of higher-income taxpayers has increased and audit rates for all taxpayers have declined generally over more than a decade.
The Service's $11.9 billion budget for 2021 is 20% below that of 2010, adjusted for inflation, McTigue said. The approximately 75,000 staff employed by the IRS this fiscal year is nearly identical to its workforce in 1973, he added. At the same time, the Service's responsibilities have swollen to include such provisions as EIPs and subsidizing health care insurance, along with many other new tax provisions.
While audit rates have decreased, taxpayers collectively have continued to underreport their tax liabilities by an estimated $245 billion annually, McTigue said. Audits remain an important incentive for taxpayers' voluntary compliance with tax laws, he said.
"Historically, the rate of compliance has been fairly stable, but if audit rates continue to decline, one of the key tools for boosting voluntary compliance may lose its effectiveness, and taxpayers may begin to lose confidence in our tax system, further eroding compliance," McTigue said.
The IRS's response last week to revelations by the Treasury Inspector General for Tax Administration that the Service in 2021 destroyed about 30 million unprocessed information returns to program computers for an upcoming tax filing season was expected by some to be a focus for the subcommittee Wednesday.
Instead, it came up only in passing, as Rep. Carol Miller, R-W.Va., invoked the incident to illustrate how, in her view, the IRS is unlikely to be able to handle a likely higher stream early next year of Forms 1099-K, Payment Card and Third Party Network Transactions. Effective in 2022, the filing requirement threshold for that information form decreased to $600 in reportable transactions from $20,000 or 200 transactions previously.
Miller asked her fellow representatives to support H.R. 3425, the Saving Gig Economy Taxpayers Act, that she introduced last year. The bill would repeal the lower threshold, restoring the higher one, thereby "saving working-class people who are just trying to make ends meet, as well as saving the IRS from a flood of paperwork and phone calls," Miller said.
And Miller asked Corbin if the IRS is ready for the many nonplussed taxpayers' phone calls she said are bound to ensue, considering that its rate of picking up the phone currently has been "hovering at around 10%."
Corbin answered that the IRS plans to have enough customer service representatives in place by then to do so and will further expand its callback capability. Also, Corbin said, the IRS will address the issue in taxpayer education information and outreach campaigns with community partners.
— To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.