The IRS plans to crack down on tax preparers with “questionable practices” that lead customers to underreport income or overclaim credits and deductions. This initiative comes as the agency increases its scrutiny of the employee retention credit (ERC), a pandemic-era tax break designed to support small businesses during the COVID-19 pandemic.
The ERC, worth thousands per employee, has led to a surge in specialist firms encouraging businesses to amend payroll returns to claim the complex tax break. To address this issue, the IRS recently announced a halt in processing new ERC claims due to a “surge of questionable claims.”
Additionally, the IRS is shifting its enforcement focus to higher earners, partnerships, and large corporations while reducing the number of audits on lower-income filers. The agency plans to decrease the volume 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 earned income tax credit has been prone to mistakes due to complex eligibility requirements. During fiscal year 2020, over $16 billion of the credit was claimed improperly, representing over one-quarter of the total paid.
The IRS acknowledges that correspondence audits have issues, with many filers not receiving or understanding the notices. Audit rates have declined more slowly for EITC filers compared to higher earners, making them a higher audit target. The IRS believes that addressing unscrupulous preparers, particularly those targeting vulnerable filers, will lead to higher-quality tax preparation and increased return accuracy, reducing the number of individual taxpayers at risk of audit.
This initiative aims to improve tax compliance and protect taxpayers from unscrupulous tax preparers while ensuring that legitimate tax credits are claimed correctly.