Category Archives: Taxes

Home Equity Theft: How a Man’s Home Was Seized Over $8.41 in Unpaid Taxes

The unconstitutional practice of home equity theft has allowed individuals to be stripped of their property without fair compensation.

by Brittany Hunter

For three years, the pair scrimped and saved in order to fix up the four-unit property. On the weekends, Ramouldo would spend his days off making the 11-hour drive from New Jersey to Michigan to work on the house, making the much-needed repairs himself. In addition to the small complex, the family had purchased a small home next door. The plan was to renovate and rent out each unit and then use that money to help Ramouldo retire and move his family to the small home in Michigan, where the rest of their extended family resides.

Erica, who had seen her father work long hours and sacrifice to provide for her family over the years, was happy to help her father buy the property. She was eager to begin building her own financial legacy and saw the property as an excellent investment opportunity.

These plans were derailed, however, when their property was seized by Wayne County, Michigan, in 2017 and sold to a private buyer.

All because they unknowingly underpaid their tax bill—by $144.

While the father and daughter had been paying their property taxes diligently for each year they owned the property, in 2014, they unintentionally underpaid by $144. Neither knew about this miscalculation or the situation could have quickly been remedied. And without knowledge of this outstanding debt, the small amount grew as the county tacked on interest charges to the tune of $359.

To be sure, when interest was accounted for, the Perez family did owe roughly $500 in unpaid taxes to the county. County officials used this as justification to seize, sell, and then keep the $108,000 revenue earned from the sale of said property.

The government is allowed to seize property in order to settle a debt owed by an individual. However, it isn’t allowed to take more than it is owed. 

In the American legal system, there is a maxim: the punishment must fit the crime. But when considering the small amount by which the Perez family underpaid their property taxes, this seems like a disproportionate punishment to receive.

The government is allowed to seize property in order to settle a debt owed by an individual. However, it isn’t allowed to take more than it is owed. And in the instance of the Perez family property, Wayne County kept every penny it earned from the sale of their property—a practice known as home equity theft.

Fortunately, Pacific Legal Foundation (PLF) has stepped in and on July 9th, announced that it had filed suit on behalf of the Perez family against Wayne County and County Treasurer Eric Sabree.

Many of us have accidentally underpaid a bill before. Whether we were distracted, busy, or simply not paying enough attention to the total amount due, accidents happen to everyone. Eager to get the full amount owed, most companies will send strongly worded letters or call incessantly until you cough up the remaining amount due. It’s completely understandable as to why an entity would do this: they want what is owed.

However, if they tried to take your car away over the miscalculation of a few dollars, most people would be angry—and justifiably so.

When it comes to property taxes, if an individual underpays by even just a few dollars, there are 12 different state governments that can and will seize your property and sell it, without having to pay you a dime of the earnings. This is known as home equity theft. Unfortunately, the Perez family is not the only victim of this practice in Michigan.

In 2014, Uri Refaeli lost his home after it was foreclosed on and seized by Oakland County, Michigan. In 2011, Rafaeli purchased a small $60,000 property for his business, Rafaeli, LLC. While he had paid his 2012 and 2013 property taxes in full, he discovered that he had accidentally underpaid in 2011. When he made this realization and tried to correct his mistake in 2013, he forgot to account for the interest that had accrued on his back taxes. As a result, he underpaid by a measly $8.41. The county seized and sold his property for $24,500. Rafaeli never saw a dime of this money.

When it comes to outstanding debt, just like private companies, governments are eager to get what is owed and there nothing wrong with them attempting to do so. However, when they begin to go after more than they are owed, the situation becomes troublesome.

To make matters worse for Michigan, the state also has a shady reputation for using this practice to its own benefit. According to Pacific Legal Foundation (PLF), local governments pad their budgets with the money earned from this stolen property. Each year in Detroit’s budget, there is a line with the estimated total revenue that the government is expecting to bring in from foreclosures of this very nature.

Earlier this year, it was discovered that Wayne County Treasurer Eric Sabree had violated Treasurer’s office rules by funneling foreclosed properties to family members and well-established and connected businessman for a fraction of the cost.

While state Treasurer’s office rules prohibit family members from participating in these auctions, several Freedom of Information Act requests filed on behalf of a Detroit News investigation found that transfers involving Sabree's family overlap with his time in office. Since 2011, when Sabree began as deputy treasurer, Wayne County has transferred ownership of more than 1/4 of privately owned properties in Detroit as a result of back taxes—making the whole situation in Michigan even more suspicious.

Michigan is not the only state guilty of using the practice of home equity theft. In Montana, local governments have been known to sell private homes of those with back taxes to “preferred” private investors, a practice that helped get the practice of home equity theft banned statewide just a few months ago.

Eighty-year-old electrician Gary Guidotti once owned four homes in Great Falls, Montana, which he rented out to help support himself and pay his bills. When the Great Recession hit in 2007, some of his tenants were no longer able to afford rent and stopped paying altogether. And without their rent helping to support him, Guidotti stopped paying his property taxes.

In 2008, Cascade County, Montana issued a tax lien of $1,125.45 on one of his homes. Just 17 months after issuing the lien, the county ended up selling it to a well-connected private entity for pennies on the dollar at $667.20. The private company, Sunrise Financial, acquired the deed to the property in 2011 and in 2015, sold the property for $139,300. Guidotti, of course, received no compensation from the sale of his home.

“This can’t be fair,” Guidotti said. “It (the law) has to be changed, but what’s the sense in fighting? The lawyers will have it all anyway. It’s just the way it goes.”

Without his properties, Guidotti was forced to move into a motorhome parked behind one of the homes that he used to own.

Our country was founded on the fervent belief that individuals have the right to their life, liberty, and, as is especially applicable here, their property. Greatly influenced by philosopher John Locke and his Second Treatise on Government, our country’s Founders understood how important property rights were to securing individual liberty and protecting Americans against government overreach.

In chapter five of Locke’s famous essay, “On Property,” he writes:

Though the earth, and all inferior creatures, be common to all men, yet every man has a property in his own person: this no body has any right to but himself. The labour of his body, and the work of his hands, we may say, are properly his. Whatsoever then he removes out of the state that nature hath provided, and left it in, he hath mixed his labour with, and joined to it something that is his own, and thereby makes it his property. It being by him removed from the common state nature hath placed it in, it hath by this labour something annexed to it, that excludes the common right of other men: for this labour being the unquestionable property of the labourer, no man but he can have a right to what that is once joined to (emphasis added), at least where there is enough, and as good, left in common for others.

When a person works, like Ramouldo Perez did, and uses the fruits of his or her labor to purchase property, that property is theirs and theirs alone. This respect for the sanctity of property rights has been one of the most defining characteristics of the American idea.

Yet, practices like home equity theft and civil asset forfeiture, which allow law enforcement to strip individuals of their property without due process, have belittled this sacred principle and harmed many innocent people in the process. The confiscation of a person’s property, especially over a few dollars of unpaid taxes, is thoroughly unAmerican. Private property should be protected by the government, not seized and sold off before an individual has an opportunity to remedy the situation.

The unconstitutional practice of home equity theft has allowed individuals to be stripped of their property without fair compensation. But there is hope that this practice could soon be reined in or perhaps even stopped altogether.

In May, after diligent efforts made by PLF, Montana passed Senate Bill 253, giving property owners further protections against home equity theft.

The new law protects homeowners’ equity by requiring homes be sold to the highest bidder. Now the extra profits must be returned to the former owner after deducting taxes, interest, penalties, and costs,

Christina Martin of the Pacific Legal recently wrote.

In addition to Perez v. Wayne County, this fall, the Michigan Supreme Court will also begin hearing oral arguments for Rafaeli v. Oakland County.


Republished with permission under license from FEE.org

You Can Now Search the Full Text of 3 Million Nonprofit Tax Records for Free

Search the full text of nearly 3 million nonprofit IRS filings, including investments and grants given to other nonprofits.

by Ken Schwencke

On Thursday, ProPublica launched a new feature for our Nonprofit Explorer database: The ability to search the full text of nearly 3 million electronically filed nonprofit tax filings sent to the IRS since 2011.

Nonprofit Explorer already lets researchers, reporters and the general public search for tax information from more than 1.8 million nonprofit organizations in the United States, as well as allowing users to search for the names of key employees and directors of organizations.

Now, users of our free database can dig deep and search for text that appears anywhere in a nonprofit’s tax records, as long as those records were filed digitally — which according to the IRS covers about two-thirds of nonprofit tax filings in recent years.

How can this be useful to you? For one, this feature lets you find organizations that gave grants to other nonprofits. Any nonprofit that gives grants to another must list those grants on its tax forms — meaning that you can research a nonprofit’s funding by using our search. A search for “ProPublica,” for example, will bring up dozens of foundations that have given us grants to fund our reporting (as well as a few filings that reference Nonprofit Explorer itself).

Just another example: When private foundations have investments or ownership interest in for-profit companies, they have to list those on their tax filings as well. If you want to research which foundations have investments in a company like ExxonMobil, for example, you can simply search for the company name and check which organizations list it as an investment.

The possibilities are nearly limitless. You can search for the names or addresses of independent contractors that made more than $100,000 from a nonprofit, you can search for addresses, keywords in mission statements or descriptions of accomplishments. You can even use advanced search operators, so for instance you can find any filing that mentions either “The New York Times,” “nytimes” or “nytimes.com” in one search.

The new feature contains every electronically filed Form 990, 990-PF and 990-EZ released by the IRS from 2011 to date. That’s nearly 3 million filings. The search does not include forms filed on paper.

So please, give this search a spin. If you write a story using information from this search, or you come across bugs or problems, drop ProPublica a line! They’re excited to see what you all do with this new superpower.


Republished with permission under license from ProPublica, a Pulitzer Prize-winning investigative newsroom. 

It’s Getting Worse: The IRS Now Audits Poor Americans at About the Same Rate as the Top 1%

As the agency’s ability to audit the rich crumbles, its scrutiny of the poor has held steady in recent years. Meanwhile, a new study shows that audits of poor taxpayers make them far less likely to claim credits they might be entitled to.

employee exits the building in Washington, D.C.

By Paul Kiel

Every year, the IRS, starved of funds after years of budget cuts, loses hundreds more agents to retirement. And every year, the news gets better for the rich — especially those prone to go bold on their taxes. According to data released by the IRS last week, millionaires in 2018 were about 80% less likely to be audited than they were in 2011.

But poor taxpayers continue to bear the brunt of the IRS’ remaining force. As we reported last year, Americans who receive the earned income tax credit, one of the country’s largest anti-poverty programs, are audited at a higher rate than all but the richest taxpayers. The new data shows that the trend has only grown stronger.

Audits of the rich continue to plunge while those of the poor hold steady, and the two audit rates are converging. Last year, the top 1% of taxpayers by income were audited at a rate of 1.56%. EITC recipients, who typically have annual income under $20,000, were audited at 1.41%.

Part of the reason is ease. Audits of EITC recipients are largely automated and far less complicated.

“While the wealthy now have an open invitation to cheat, low-income taxpayers are receiving heightened scrutiny because they can be audited far more easily. All it takes is a letter instead of a team of investigators and lawyers,” said Sen. Ron Wyden, D-Ore., the ranking member of the Senate Finance Committee.

“We have two tax systems in this country,” he said, “and nothing illustrates that better than the IRS ignoring wealthy tax cheats while penalizing low-income workers over small mistakes.”

In a statement, IRS spokesman Dean Patterson acknowledged that the sharp decline in audits of the wealthy is due to the agency having lost so many skilled auditors. And he didn’t dispute that pursuing the poor is just easier.

Because EITC audits are largely conducted through the mail by lower-level employees from a central location, they are “less burdensome for taxpayers than in-person audits as they mail in their documentation and don’t have to take time out of the workday,” Patterson said.

“Correspondence audits are also the most efficient use of IRS’ limited examination resources.”

In April, Wyden, citing ProPublica’s reporting, asked IRS Commissioner Charles Rettig to deliver a plan to address the agency’s disproportionate focus on auditing the poor. The deadline has passed, but Wyden’s office said the senator still expects a response. The IRS did not comment on the delay.

The agency audited 382,000 recipients of the EITC in 2018, accounting for 43% of all audits of individuals last year. When we mapped the estimated audit rates for every county in America, the counties with the highest audit rates were poor, rural, mostly African American and in the South, a reflection of the high number of EITC claims there.

Natassia Smick and her husband were among those unlucky 382,000 households. We wrote about them last year. They live outside Los Angeles and saw their entire refund frozen in February 2018. For a couple who earned about $33,000 in 2017, that $7,300 refund was big money ($2,000 of it stemmed from the EITC). When it didn’t come, Smick said she had to abandon plans for catching up with her credit card debt.

After Smick sent in all her supporting documents, it took until this May to get a final answer from the IRS. Fourteen months after it all started, the IRS said it agreed Smick and her husband were due about $7,000, she said. But the agency disagreed on the remaining $350, because it couldn’t verify her husband’s employment for part of the year. Smick said the IRS was wrong to hold back the $350, but she couldn’t afford to contest it and further delay the $7,000.

“I’m not going to fight anymore,” she said. “We have already waited too long, and we are not in a financial position to wait another three months to appeal.”

A new study by academic and government researchers shows that there has been a big cost to these audits: They’ve discouraged hundreds of thousands of families who might qualify for the credit from claiming it in future years.

For poor taxpayers, the worst part of the EITC audits is usually the beginning. That’s because they almost always begin with the shock of the refund being held.

But the audits also hardly ever end well. According to data in the new study, most end without the taxpayer responding at all, and the poorer the audit target, the more likely that is to happen. Those with wage income under $10,000 per year, for instance, didn’t respond at all in 64% of the EITC audits. For those with income over $40,000 per year, that rate dipped to 35%.

The diminished response rate of the poorest taxpayers in part reflects that they are harder to reach: In 15% of those audits, the mail couldn’t be delivered. But earlier studies have also shown that many poor taxpayers don’t understand they are being audited or have trouble deciphering what the IRS is asking in its letters.

The EITC is aimed mainly at low-income workers with children. Last year, 26 million households received an average credit of about $2,500. Most EITC audits require taxpayers to dig up documents to show that a child meets the legal threshold of a “qualifying child,” a status that’s distinct from a dependent. The IRS has long blamed the law’s complexity as the main reason taxpayers may incorrectly claim the credit.

Smick was among the rare audit veterans who prevailed. Taxpayers rarely win against the IRS regardless of how likely they are to qualify for the credit, according to the new study, which was done by Day Manoli, an assistant professor of economics at the University of Texas at Austin, and researchers with the IRS and Treasury Department.

The authors sliced the population of EITC recipients into categories. At one end of the spectrum were tax returns with red flags that made it almost certain they would be audited. On the other end were returns very unlikely to be audited. But, looking over time, the outcomes of those audits weren’t all that different. When those returns with red flags were audited, the taxpayers prevailed 7% of the time. The taxpayers at the other end of the spectrum — the group seemingly most likely to qualify for the credit — only prevailed 10% of the time.

The audits have a long-term impact on the lives of those who go through them, the study found. In the years after they were audited, wage earners were 68% less likely to claim the credit compared with similar taxpayers who had not been audited. They were even 14% less likely to file taxes at all.

These taxpayers surrender “benefits from potentially legitimate EITC claims,” the study authors write, and, when they fail to file taxes at all, leave money on the table in the form of other credits and withholdings.

Because the IRS conducts so many EITC audits — between 380,000 and 600,000 per year over the past decade — at the very least, hundreds of thousands of taxpayers have likely avoided claiming the credit in response to having it denied through an audit. By discouraging people from claiming the credit, the audits clash with an avowed goal of the IRS: to encourage people to claim it. About a fifth of those eligible for the credit don’t claim it, and the IRS runs education campaigns to increase uptake.

EITC recipients are audited at such a high rate in part because Republicans in Congress have long pressured the IRS to reduce incorrect payments of the credit.

The IRS estimates that there was about $18 billion in incorrect claims in 2018. In most contexts, $18 billion is a big number, but when compared with the full scope of unpaid taxes, which likely total more than $600 billion each year, it’s not so big.

And while that $18 billion number, which Republicans touted as a “big problem” in the April hearing, is often cast as a kind of government waste, the study shows things are far more complicated.

In the years following an audit, the study found, children who were claimed on one taxpayer’s return often were claimed on a different taxpayer’s return. In other words, the kids might have just been claimed on the wrong return, and if that’s the case, the money should have been paid out, just to someone else.

The authors distinguish between the $18 billion in “gross overpayments” of the credit, which would include such misdirected payments, and what they call “net overpayments,” money that shouldn’t have been paid out at all. The “net” number, they say, could be one-third to one-half smaller than the “gross” one.

The IRS, in its statement, said the study had focused on a sample of only one type of taxpayer (single and head-of-household filers), and so the estimate of “net overpayments” should not be generalized to the entire EITC-claiming population.


Republished with permission under license from ProPublica, a Pulitzer Prize-winning investigative newsroom.

Who’s More Likely to Be Audited: A Person Making $20,000 — or $400,000?

If you claim the earned income tax credit, whose average recipient makes less than $20,000 a year, you’re more likely to face IRS scrutiny than someone making twenty times as much. How a benefit for the working poor was turned against them.

by Paul Kiel and Jesse Eisinger,

When Natassia Smick, 28, filed her family’s taxes in January, she already had plans for the refund she and her husband expected to receive. Mainly, she wanted to catch up on her credit card debt. And she was pregnant with their second child, so there were plenty of extra expenses ahead.

The earned income tax credit is supposed to be a boon for low-income families like Natassia Smick’s. But, as she’s found, claiming the credit often prompts a grueling, slow-moving review by the IRS.

Since Smick, who is taking classes toward a bachelor’s degree, and her husband, a chef, together earned around $33,000 in 2017, about $2,000 of that refund would come from the earned income tax credit. It’s among the government’s largest anti-poverty programs, sending more than $60 billion every year to families like Smick’s: people who have jobs but are struggling to get by. Last year, 28 million households claimed the EITC.

Smick, who lives outside Los Angeles, thought she’d get her refund in a month or so, as she had the year before. But no refund came. Instead, she got a letter from the IRS saying it was “conducting a thorough review” of her return. She didn’t need to do anything, it said. Smick waited as patiently as she could. She called the IRS and was told to wait some more.

It wasn’t until four months later, in July, that she got her next letter. The IRS informed her that she was being audited. She had 30 days to provide “supporting documentation” for basically everything. As she understood it, she needed to prove that she and her husband had earned what they’d earned and that her child was her child.

By this point, Smick was home with her baby. She set about rounding up W-2s, paycheck stubs, bank statements and birth certificates. Proving that her 4-year-old had lived at the family’s address for most of the year, as the EITC requires, was the hardest thing, but she did her best with medical records, some papers from his day care, and whatever else she could think of.

She sent it all off and hoped for a quick resolution, but the next IRS letter quashed that hope. The IRS said it would review her response by Feb. 16, 2019 — six months away. Collectors were calling about the credit card bills. She didn’t know how she’d make it that long.

Smick couldn’t understand why this was happening. All she had done was answer the questions on TurboTax. Isn’t it rich people who get audited? “We have nothing,” she said, “and it’s just frustrating knowing that we have nothing.”

It seemed there was nothing she could do. And when she called the IRS to ask how it could possibly take so long to review her documents, she remembers being told that there was nothing they could do, either: The IRS was “extremely short staffed,” the person said.

Budget cuts have crippled the IRS over the past eight years. Enforcement staff has dropped by a third. But while the number of audits has fallen across the board, the impact has been different for the rich and poor. For wealthy taxpayers, the story has been rosy: Not only has the audit rate been cut in half, but audits now tend to be less thorough.

It’s a different story for people who receive the EITC: The audit rate has fallen less steeply and the experience of being audited has become more punishing. Because of a 2015 law, EITC recipients are now more likely to have their refund held, something that can be calamitous for someone living month-to-month.

IRS computers choose people to audit, but if those taxpayers respond, a person must review the documents. With fewer employees to do that, delays have mounted in a process that was already arduous, according to several attorneys who represent taxpayers through the Low Income Taxpayer Clinic program. It regularly takes more than a year to get a taxpayer’s refund released, they said, even for those who are represented.

“If the service doesn’t have the personnel to evaluate evidence submitted in a timely manner, then they should not be initiating the exams in the first place,” said Mandi Matlock, an attorney with Texas RioGrande Legal Aid.

Generally, the more money you make, the more likely you are to be audited. EITC recipients, whose typical annual income is under $20,000, have long been the major exception. That’s because many people claim the credit in error, and, under consistent pressure from Republicans in Congress to curtail those overpayments, the IRS has kept the audit rate higher. Meanwhile, there hasn’t been similar pressure to address more costly problem areas, like tax evasion by business owners.

The budget cuts and staff losses have made this distortion starker. The richest taxpayers are still audited at higher rates than the poorest, but the gap is closing.

“What happens is you have people at the very top being prioritized and people at the very bottom being prioritized, and everyone else is sort of squeezed out,” said John Dalrymple, who retired last year as deputy commissioner of the IRS. In 2017, EITC recipients were audited at twice the rate of taxpayers with income between $200,000 and $500,000. Only households with income above $1 million were examined at significantly higher rates.

Put another way, as the IRS has dwindled in size and capability, audits of the poor have accounted for more of what it does. Last year, the IRS audited 381,000 recipients of the EITC. That was 36 percent of all audits the IRS conducted, up from 33 percent in 2011, when the budget cuts began.

“Those struggling to make ends meet are being unfairly audited while the fortunate few dodge taxes without consequence,” Sen. Ron Wyden, D-Ore., the ranking member on the Senate Finance Committee, told ProPublica. “The IRS needs more manpower to go after tax cheats of all sizes, and working Americans need a simpler way of obtaining a tax credit they’ve earned.”

The IRS declined to answer questions about its EITC audits.

The EITC has bipartisan roots. Conceived as a “work bonus” for low-income wage earners in the 1970’s and an alternative to welfare, the program has grown over the decades with the support of Republicans and Democrats. These days, the average credit is for about $2,500, but for larger families, the amount can exceed $6,000. The Census Bureau recently estimated that the EITC and the child tax credit together boost millions of children out of poverty every year, more than any other government program.

Unlike Social Security or food stamps, the EITC has no application process. Instead, taxpayers simply claim the credit on their tax returns. Millions of people get it wrong in both directions, according to IRS estimates. About a fifth of eligible taxpayers don’t seek the EITC. And almost a quarter of the $74 billion paid out this year was issued “improperly.”

That estimate of “improper payments,” about $17 billion, is the reason the EITC is such a focus for the IRS. Some tax experts — including the Taxpayer Advocate Service, an independent office within the IRS — argue the estimate is way too high. One reason is that it is based on the outcome of audits, and low-income taxpayers are much less likely to have competent representation to dispute the IRS’ conclusions.

Regardless of the precise error rate, the IRS acknowledges the primary cause of the problem is not fraud: It is the law itself. It is too complex, too easy for someone to think themselves eligible when they are not. The same child might be a “dependent,” for example, but not a “qualifying child” under the EITC, and the IRS’ instructions for claiming the credit run to 41 pages.

“My third-year law students, they sit down and study this material, and sometimes they still don’t get it,” said Michelle Lyon Drumbl, a professor at Washington and Lee School of Law.

Since the 1990s, Republicans in Congress have focused on these improper payments as a major problem and harshly criticized the IRS for failing to stop them. In 2015, the Republican Congress passed, and President Barack Obama signed, a bill that required the IRS to hold EITC refunds until Feb. 15 each year. The purpose was to give the IRS more time to match tax returns with the corresponding W-2s to avoid misstatements of income. But it also meant people who are audited are more likely to see their refund held — instead of receiving the credit and then undergoing audit. That’s a crucial difference for low-income taxpayers.

“You expect this money during tax season and you don’t get it… It tears you down,” said Paul McCaw, a forklift operator in Rock Island, Illinois. He had refunds held for several years in a row because the IRS doubted that his niece’s three young children lived with him. For years, the family struggled. Bills piled up and eviction was a constant threat. Finally, this year, with the help of a legal aid attorney at Prairie State Legal Services, Macaw, 50, was able to convince the IRS to release the refunds.

“I was just beside myself,” he said of finally getting his refunds, adding, “I caught everything all up, and I also paid a month in advance.”

Stopping faulty refunds from going out, rather than trying to recoup them through an audit is “always the better option” because it is more effective, said Jesse Solis, a spokesperson for House Ways and Means Committee chair Kevin Brady, R-Texas. Congress should continue to look for ways to reduce improper payments, he said.

Taxpayers of all kinds cheat. And IRS studies have found that EITC recipients aren’t close to the worst offenders. For certain kinds of business income, for instance, people pay only about 37 percent of the tax they owe because they simply don’t report the income. Hundreds of billions of dollars in government revenue is lost. But people who have their own businesses are audited at about the same rate as EITC recipients.

The IRS’ disproportionate focus on stopping EITC “improper payments” is misguided, said Nina Olson, the national taxpayer advocate. “What’s the difference between an erroneous EITC dollar being sent out and a dollar attributed to unreported self-employment income not collected?” she asked. Unreported business income is “where the real money is,” she said.

When EITC cheating does occur, the culprits are usually tax preparers, said Chi Chi Wu of the National Consumer Law Center. “They know the system, they game the system and ultimately the taxpayer ends up on the hook if there’s an audit,” she said. In undercover investigations by the NCLC and the Government Accountability Office, multiple preparers advised taxpayers to file bogus EITC claims.

About 60 percent of taxpayers use a preparer, but in most states, preparers are not required to be licensed, and the IRS’ ability to oversee them is limited. After the agency launched a program to certify preparers and subject them to regular compliance checks, a federal appeals court ruled in 2014 that the IRS doesn’t have that power. Congress could pass a bill to confer such authority on the agency, but it has not done so, despite some bipartisan support for the idea.

The IRS has a difficult task in auditing taxpayers who claim the EITC. Low-income families are often complicated; they’re more likely to be multi-generational than more affluent filers, for instance, or to add or subtract household members from year to year. A study by the nonpartisan Tax Policy Center found that only about 48 percent of low-income households with children were married couples, while for other households it was 75 percent.

But advocates for taxpayers say the IRS makes the situation needlessly worse. Virtually all the EITC audits are conducted by correspondence, and the computer-generated letters are far from simple. A survey by the Taxpayer Advocate Service found that more than a quarter of EITC recipients who were audited didn’t even understand that they were under audit.

“When I first got audited, I couldn’t figure out what was going on,” said Denise Canady, 62, of West Memphis, Arkansas, who at the time was earning $8.50 an hour as a home health aide. The audit sent her on a scramble to get documents from her granddaughter’s doctor, pharmacy, hospital and school that would demonstrate that the toddler had lived at her address. “A lot of people don’t want to give you old records,” she said.

She eventually found her way to Legal Aid of Arkansas, where an attorney helped bolster her case, but, a year after her audit began, she is still awaiting the outcome.

“I pray and hope,” she said.


Republished with permission under license from ProPublica, a Pulitzer Prize-winning investigative newsroom. 

 

You Don’t Earn Much and You’re Being Audited by the IRS. Now What?

By Paul Kiel,

The Internal Revenue Service audited nearly 1.1 million tax returns last year, but that represented just 0.5 percent of all returns. That means the chances of getting audited are fairly low.

But if you are audited, there’s a good chance it’s because you claimed the earned income tax credit. That’s a credit the federal government offers to people who work, have kids to take care of and don’t earn much money. Most households who claim it earn between $10,000 and $40,000 a year. The average credit is for $2,400, but it can go above $6,000 for larger families.

The IRS audits a lot of people who claim this credit. When that happens, the IRS blocks the refund. Some people may actually end up owing tax instead of getting a refund.

Here is an actual audit notice sent to a taxpayer last year, which was provided to us by the taxpayer’s legal aid attorney. We’ve annotated it to provide important context and added links to helpful resources for those facing an IRS audit.

If you claim the credit and are audited, there’s an excellent chance it will be done entirely through the mail. Of the 1 million-plus audits the IRS conducted last year, less than three-quarters were done by mail, with the remainder by examiners in the field. But for those who claimed the earned income tax credit, nearly all — 92 percent — were done by mail.

In the example here, the audit is ongoing, meaning the IRS hasn't yet made a final determination and won’t release the refund until the audit is closed. And the forms don’t make clear why this taxpayer, or any other, is selected for an audit. But for those claiming the EITC, the main issue is typically whether they have what's called a “qualifying child.” In other words, if you are audited, it’s usually because the IRS doubts that the child or children you claimed on your tax return actually live with you or are related to you (biologically or through adoption or marriage).

Whether a child qualifies can be confusing. This IRS FAQ can be helpful.

No single IRS employee is in charge of an EITC audit. Instead, taxpayers are told to call a service center to speak with a tax examiner. If you call, you may speak with a different person every time.

This taxpayer claimed the EITC and had been expecting a refund of several thousand dollars. Instead, because the IRS believes she doesn’t qualify for the credit, she is being told that she owes $599.53. Almost all of that amount is tax, not interest or penalties.

Since this is an open audit, she doesn’t owe the money quite yet. The tax is legally owed after she receives a notice of deficiency, which would be a separate letter. This taxpayer eventually was able to reverse the IRS’ audit finding through the help of a lawyer with the Low-Income Tax Clinic program and the Taxpayer Advocate Service.

The IRS has a full rundown of potential penalties and interest charges.

Taxpayers are responsible for notifying the IRS of their current address. So if this notice goes to an old address and isn’t forwarded, the taxpayer may lose the ability to respond to the audit notice. That doesn’t mean there’s no way to undo an IRS audit after it’s done, but it’s a lot harder.

Taxpayers can respond to audits on their own. However, your chances are much better with help. If you qualify for the EITC, then you will likely qualify for free legal help. Here is a directory of Low-Income Taxpayer Clinic locations. If, when the audit is finished, the IRS still does not agree that you qualify for the credit, the next step is usually to file a petition with the U.S. Tax Court.

To qualify for assistance from a low-income clinic, your household cannot make more than 250 percent of the federal poverty level. For example, a family of four living in the contiguous U.S., Washington, D.C., or Puerto Rico has to earn less than $62,750 per year in order to qualify. And the amount in dispute generally must be less than $50,000.

Once you receive the final notice of deficiency from the IRS, you legally owe the tax. Your best option then is to file a petition in Tax Court. If you don’t file within 90 days of receiving the notice of deficiency, you lose your chance to go to Tax Court. If you don't file a petition in Tax Court, the IRS may start to try to collect the tax you owe. You may still have a chance of undoing the audit finding through an audit reconsideration process, but that can take a very long time and your chances of success are lower.

Taxpayers who qualify for the EITC generally qualify for free legal help through the Low-Income Taxpayer Clinic program.

This letter was signed by an IRS manager in Austin, Texas. These audits are generally computer-driven with minimal human interaction. However, if you respond to an audit, it will be reviewed by a human being. But that’s also why the IRS can take as long as six months to review documentation that you submitted.


Republished with permission under license from ProPublica, a Pulitzer Prize-winning investigative newsroom.