The Internal Revenue Service’s long-standing resource constraints and customer-service challenges are hampering what is supposed to be a streamlined process used to audit low-income taxpayers who claim the earned income tax credit.
The agency typically relies on “correspondence audits” to conduct hundreds of thousands of earned income tax credit audits each year. Correspondence audits are designed to be narrowly focused, typically focusing on a specific issue on a taxpayer’s return in a single year, allowing the agency to conduct a larger number of audits with fewer employees.
The IRS maintains that auditing taxpayers claiming the earned income tax credit is a priority in light of the program’s high improper payment rate. Yet the agency devotes limited resources to conducting hundreds of thousands of correspondence audits, posing a problem for low-income taxpayers targeted for exams, who are less likely to be represented by tax professionals than those with higher incomes.
Ambiguity in the IRS letters sent to audit targets, combined with the agency’s lingering backlog of unprocessed paper tax documents and low answer rate for its help lines, is slowing down the process. Since EITC audits often are conducted before tax returns are processed, audit delays leave taxpayers waiting to receive their refunds.
“The barriers are stacked against them,” said Sabrina Strand, assistant director of the University of Denver’s low income taxpayer clinic. “Whether it’s a language barrier, a time barrier, the inability to contact the IRS, or not understanding what the IRS is asking for.”
The inefficiency of the correspondence audit process illustrates the agency’s struggle to fulfill its core mission of collecting revenue and enforcing tax laws, something magnified by the Covid-19 pandemic.
The IRS has been working to bolster its customer service by hiring more telephone assistors and adding more features to its phone lines. Tax professionals who are knowledgeable about EITC audits say the IRS could do even more, such as assigning taxpayers a specific point of contact at the agency.
Simple Audits, Complex Issues
The IRS audits a small amount of taxpayers each year, but those claiming the EITC are disproportionately audited. About 40% of audited individual tax returns for tax year 2017 were EITC returns, though only about 18% of all individual returns claimed the credit, according to a Congressional Research Service report released earlier this month.
While the IRS uses correspondence audits for issues that it views as non-complex, National Taxpayer Advocate Erin Collins said the issues around the earned income credit aren’t always simple. At issue in many audits is whether a household is eligible to claim the credit for a child.
“Especially in today’s society, we don’t have, you know, the husband and wife and 2.5 children anymore,” Collins said in an interview, noting that there are many multi-generational families and families where parents share custody of their children.
Tax professionals say the notification letters the IRS sends out at the beginning of a correspondent audit aren’t precise enough, making it difficult to figure out the agency’s areas of concern.
“We’re auditing you, and it could be for X, Y, or Z,” Jennifer Gardiner, director of the low income taxpayer clinic at Legal Aid of Arkansas, said of the IRS notification letters. “And you go, ‘Well, which one is it?’”
The confusion can lead taxpayers to send in irrelevant documents, potentially further lengthening the process as the IRS has more to review. Even when the right documents are submitted, it still can take the IRS a long time to complete the audit, with paper documents caught up in the pandemic-related backlog the IRS has been struggling to eliminate.
The IRS is currently “not timely with anything, and correspondence audit is no different,” Collins said.
Poor Phone Service
Taxpayers unsure about what the IRS needs from them to conduct a correspondence audit face another barrier tax pros know well: trouble reaching IRS representatives on the phones.
Collins said the level of service on the main phone line for correspondence audits is currently about 47%. While that is up slightly from previous years and higher than many other IRS telephone lines, it still makes it difficult for people to get answers to their audit-related questions.
Getting a hold of the IRS is a time-consuming process for which lower-income people in particular do not have the time Strand said. People who work long hours or multiple jobs can’t wait for hours on hold with the IRS, she said.
The confusion over the audit notices and the difficulties reaching the IRS on the phone sometimes prompt taxpayers to give up on trying to respond to the IRS, tax professionals said.
It is not uncommon for the IRS to have trouble reaching the taxpayers they are auditing, which can result in the IRS determining the taxpayer isn’t entitled to some or all of the credit they claimed. According to a report Collins issued in January, in fiscal 2019, the agency closed 35 percent of audits of taxpayers with incomes under $50,000 without getting a response, and about 14 percent of those cases involved the IRS’s initial audit notices being undeliverable. If the IRS does not reach a taxpayer after sending two notices, it will issue a deficiency notice.
Tax professionals said the IRS is taking some steps to try to improve the correspondence audit process, including adding QR codes on audit notice letters that would allow people to avoid the paper backlog by uploading documents online.
Agency spokesman Bruce Friedland said the IRS also has added a fast-track option on the phone for taxpayers who want to know if the IRS has received their documents, as well as a call-back option on a correspondence audit phone line.
“We continue to make improvements in Correspondence Exam that make it easier for taxpayers to communicate with us and bring their case to resolution,” Friedland said in an email, echoing comments the IRS made in the January Taxpayer Advocate report.
The agency is also in a hiring spree that includes more customer service representatives, and the agency has resources on its website to help taxpayers respond to notices about EITC audits, Friedland said. The IRS also is trying to raise awareness of the tax credit’s eligibility requirements.
Collins and other tax professionals have made a number of additional recommendations about how to improve the audit process for low-income taxpayers, including assigning people a specific point of contact for their audit and allowing people to choose to hear from the IRS by email or phone.
In the Taxpayer Advocate report, the IRS said “limiting taxpayers’ access to one single point of contact could increase taxpayer burden, as taxpayers will no longer have access to all available assistors who answer calls 12 hours per day, five days a week.”
Former National Taxpayer Advocate Nina Olson, who is now executive director of the Center for Taxpayer Rights, said two years into the pandemic, the IRS should be taking more responsibility for the delays taxpayers experience.
“If you only have a certain number of employees, then only start a certain number of audits, the audits that can be handled by that number of employees,” she said.