IRS to target ‘unscrupulous’ tax preparers amid crackdown of small business tax credit

Roughly one year after Congress approved tens of billions in IRS funding, the agency has unveiled plans to crack down on tax preparers with “questionable practices.” The news comes amid heightened scrutiny of a popular small business tax credit.

“We are devoting more resources to addressing unscrupulous preparers who are leading their customers to underreport income or overclaim credits and deductions,” IRS Commissioner Danny Werfel said in a letter sent on Monday to Senate Finance Committee Chair Ron Wyden, D-Ore.

Tax experts say these preparers create issues for filers who may later face an IRS audit or future tax liability. They also cause problems for “good tax preparers” who face pushback from clients for following the rules, said Josh Youngblood, an enrolled agent and owner of The Youngblood Group, a Dallas-based tax firm.

“I think it’s something that [the IRS] definitely needs to make a high priority,” he added.

The plan is part of the agency’s elevated focus on employee retention credit claims, according to April Walker, lead manager for tax practice and ethics with the American Institute of CPAs.

A pandemic-era tax break, the employee retention credit, or ERC, was designed to support small businesses that kept employees on payroll during shutdowns or revenue declines in 2020 and 2021.

Worth thousands per employee, the program sparked a cottage industry of specialist firms pushing businesses to amend payroll returns to claim the complicated tax break.

Roughly one week ago, the IRS announced plans to halt processing for the popular credit amid a “surge of questionable claims,” a move that the AICPA applauded. The processing pause for new claims will last at least through the end of 2023.

Meanwhile, the agency has also announced plans to reduce the number of audits on lower-income filers, while targeting unpaid taxes from higher earners, partnerships and large corporations.

In the same letter, Werfel shared IRS plans to “substantially” decrease the volume of so-called correspondence audits, or exams conducted by mail, for certain credits. He included the earned income tax credit, a tax break claimed by low- to moderate-income filers, which has been prone to mistakes due to complex eligibility requirements.

“It’s long been recognized that correspondence audits have a lot of problems,” said Chuck Marr, vice president for federal tax policy at the Center on Budget and Policy Priorities, noting that many filers don’t receive or understand the notices.

During fiscal year 2020, more than $16 billion of the credit was claimed improperly — over one-quarter of the total paid — according to the National Taxpayer Advocate’s 2022 report to Congress.

While IRS audit rates have dropped overall, the rates have declined more slowly for filers claiming the earned income tax credit than higher earners. “The IRS audits a higher percentage of taxpayers with the earned income tax credit than any other taxpayers, except those with at least $5 million of total positive income,” National Taxpayer Advocate Erin Collins wrote in her 2022 report. ‘Bad actors’ target tax returns for ‘vulnerable filers’

The agency’s research suggests “bad actors” may disproportionally file tax returns for “vulnerable filers,” such as lower earners, filers of color or those with limited English proficiency, according to Werfel’s letter. He said this may contribute to higher audit rates for these filers.

The IRS in May said Black Americans are significantly more likely to face an audit, confirming findings published by economists from Stanford University, the University of Michigan, the U.S. Department of the Treasury and the University of Chicago.

“Over time, we believe stepped-up efforts to stop unscrupulous preparers that target this population, will lead to higher quality tax preparation and increased return accuracy, thereby reducing the number of individual taxpayers at risk of audit,” Werfel wrote.

The IRS has been weaponized. The one surefire method of stopping the weaponization of government agencies is to eliminate them. There are significant costs associated with tax preparation. That has long been the case for businesses and individuals. Billions can be saved by eliminating the IRS and scrapping the entire tax code.

There isn’t a more opportune time to do exactly that. We are experiencing chronic inflation in addition to weaponization. A key contributing factor to inflation is declining productivity. Specifically, that’s increasing the unit cost of good and services due to increased labor costs. The billions in tax preparation fees, accounting, and legal expenses are not borne by businesses. Those costs appear in the cost of goods and services that are paid by consumers. That, of course, is in addition to the actual taxes businesses pay.

There are significant inefficiencies, particularly for smaller businesses, to comply with the tax code. Think of this as a percentage of total labor hours that a business must pay. Large businesses that have a large number of employee, per definition. The cost of tax compliance for large businesses as a percentage of employees is lower than many small businesses, which obviously have fewer employees. It’s the same whether taxes are done in house or by a CPA.

The tax code needs to be simplified. I don’t have all the answers, but I tend to lean towards a consumption tax. This proposition is even somewhat scary to me since I am retired. I have to trust knowing that if business taxes are eliminated that all the costs associated with business taxes disappear and that should lower the cost of goods and service prior to a consumption tax being collected at the point of sale. Those that work should not see a reduction in their gross pay, but they should see an increase in net pay since federal taxes are no longer withheld. The same should be true for FICA/MCARE. The Social Security part of that presents another problem to be solved. Today, social security is calculated based on your lifetime earnings. If that is not somehow tracked, then social security benefits cannot be calculated. I suppose it could be as simple as businesses reporting employee wages, as that occurs for unemployment benefits already.

It also seems that just having a consumption tax is limiting. Tariffs have existed since our constitution was signed. They are an important foreign and trade policy tool. I’ve never been found of excise taxes. They are generally hidden and are quite often designed to pick winners and losers. I don’t go for government compelling behavior through tax code. That is not freedom. Thus, revenue to government should come from tariffs first and a consumption tax second.

For a consumption tax to truly replace income taxes, the 16th Amendment needs to repealed. There is no way government should ever have the power to bloat the tax code and weaponize the agency that collects taxes. And certainly never have the power to collect a consumption tax and an income tax.

Additionally, the federal government should never be allowed to collect a consumption tax. Consumption taxes should be collected by the States, in the same manner sales taxes are currently collected. Once collected, States transfer consumption tax proceeds to the U.S. Treasury.

It is interesting to note that there is possibly a new check and balance provided to States. Specifically, States should be able withhold a percentage of federal consumption taxes when the government imposes laws and regulations upon States, their people and businesses. That would go a long way to giving some teeth to the 10th Amendment and countering federal overreach beyond the powers enumerated by the Constitution.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.