Earned Income Tax Credit (EITC) recipients typically earn less than $20,000 per year—yet they are more likely to be audited by the Internal Revenue Service (IRS) than are many wealthier taxpayers. Funding for the IRS was slashed over the past decade, so the agency targets much of its enforcement power to the lowest-income families. Why this paradox? For one, auditing the poor is relatively easy and inexpensive compared to auditing the rich. Moreover, the EITC has complex eligibility rules that have made it a target for auditors. 

The IRS now has fewer auditors than at any time since World War II because of budget cuts. As a result, audit rates for the wealthiest individuals and large corporations have dropped sharply since 2010. While the wealthiest taxpayers—those making over $1 million annually—are still audited at higher rates than the lowest-income households, the audit rates of the two groups are converging. So, even though the richest individuals and businesses are responsible for a larger percentage of the taxes that go uncollected each year, EITC recipients are the ones disproportionately audited. Many of the counties with the highest audit rates are predominantly Black, Latinx or Native American.  

One reason for this trend is that audits of EITC recipients are easier to conduct. They are often automated and don't require specialized staff. Unfortunately, given the IRS' lack of resources, the low-income families and people of color who claim the EITC have become low-hanging fruit for the agency. 

Many of the counties with the highest audit rates are predominantly Black, Latinx or Native American.

-Myrto Karaflos

As the IRS itself acknowledges, the EITC's eligibility rules are another reason it has become the focus of audits. Improper payments of the tax credit have raised concerns about tax filers committing fraud, but in reality, the errors are often unintentional. Low-income families are more likely to have complex family structures—for example, living in multigenerational homes—which can create confusion around who qualifies for the EITC. Moreover, the majority of paid tax preparers lack basic competency standards, leading to inaccuracies on tax returns and improper claims of the credit. 

Fortunately, as a way of funding his American Families Plan, President Biden has called for increasing IRS funding and enforcement power to reduce tax evasion by corporations and the rich. The proposal includes giving the agency an additional $80 billion and more authority over the next 10 years. In addition, it calls for strengthening third-party reporting, which can be used to verify information on tax returns (much like employers report employees' wages on W-2 forms). Doing so for certain types of income that tend to be underreported can help the IRS curb noncompliance. Finally, the proposal calls for modernizing the IRS' dated technology.  

The measures above should allow the IRS to redirect more of its enforcement activities to wealthy individuals and businesses. However, in the meantime, the government should also take steps to help low-income families properly claim the EITC: 

• Join us in asking Congress to give the IRS authority to regulate paid tax preparers, so that families can have reliable assistance when filing their taxes.  

• The Volunteer Income Tax Assistance (VITA) program is also an excellent resource for low-income taxpayers and can help them access tax credits like the EITC. Ask your legislators to fund the VITA program at $30 million for fiscal year 2022.  

Taken together, these steps can move us closer to a tax system that works for everyone, not just the wealthy few.