IRS Cracks Down on Shady Tax Preparers: Business Tax Credit in Spotlight

In the wake of growing scrutiny over a favored small business tax incentive, the Internal Revenue Service (IRS) has amplified its intent to combat tax preparers adopting shady practices. Evidence from the agency’s studies highlights a concerning trend where such tax preparers predominantly cater to “vulnerable filers,” inadvertently leading to increased audit occurrences.

Josh Youngblood, an esteemed enrolled agent and head of The Youngblood Group, voiced his agreement on the urgency of this matter. He emphasized the need for the IRS to prioritize this crackdown, especially given that it has been a year since Congress sanctioned substantial funds for the IRS. Youngblood, along with other tax experts, warns of the repercussions of these unethical practices. They believe these malpractices not only harm unsuspecting taxpayers, who may unknowingly face an audit or unforeseen tax liabilities but also challenge upright tax professionals. The latter often confronts skepticism from clients when abiding by tax rules.

In a communication to the Senate Finance Committee, IRS Commissioner Danny Werfel expounded on the IRS’s renewed dedication. The focus is primarily on those preparers who mislead taxpayers into underreporting income or overstate credits and deductions. Werfel expressed concern over the adverse impact on both taxpayers and the overall integrity of the tax system.

One significant area under the IRS’s lens is the Employee Retention Credit (ERC). This tax relief, established during the pandemic, sought to assist small businesses in retaining staff amidst economic downturns in 2020 and 2021. While it promised substantial benefits, it inadvertently paved the way for firms to urge businesses to revisit and revise payroll returns to take advantage of this complex relief. Not surprisingly, a week prior, the IRS temporarily suspended processing for this tax credit, given the influx of dubious claims. This halt is projected to last till the end of 2023.

In a related development, the IRS also unveiled plans to redirect their audit efforts. The strategy involves lessening scrutiny on lower-income individuals and increasing focus on wealthier individuals, partnerships, and significant corporate entities. Werfel disclosed a substantial reduction in mail-based audits for specific tax breaks, like the earned income tax credit, which has historically been plagued by inaccuracies owing to its intricate qualifying criteria. This decision stems from a recognized inefficacy of these audits, as many taxpayers reportedly either overlook or misinterpret them.

Alarming data from 2020 showcases that over $16 billion of such credits were incorrectly claimed. The National Taxpayer Advocate’s 2022 report highlighted the persistent decline in IRS audit rates. Still, it revealed a less pronounced drop for those who availed the earned income tax credit.

One of the critical findings from the IRS’s research suggests an uneven targeting of vulnerable tax filers by dishonest tax preparers. This vulnerable group, more often than not, includes lower-income groups, ethnic minorities, or individuals with limited English comprehension. As a result, these demographics face a disproportionally high risk of audits.

In conclusion, the IRS’s heightened focus aims at improving tax preparation integrity and increasing return accuracy, thereby safeguarding individual taxpayers from potential audit risks. The agency’s proactive stance and strategic initiatives are a testament to its commitment to ensuring an equitable tax system for all.

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