Congress establishes certain refundable credits to assist taxpayers with particular expenses. In an attempt to prevent improper claims of these credits, Congress authorizes the IRS to ban taxpayers from claiming certain refundable credits for two years if it determines that the taxpayers claimed the credit(s) due to reckless or intentional disregard of the rules and regulations.
In a Taxpayer Advocate Service (TAS) research study on these bans, we found on average, taxpayers in the study lost approximately $4,100 each year of the ban. This is a significant dollar amount for many taxpayers, particularly low-income taxpayers claiming the Earned Income Tax Credit (EITC). Considering the financial impact this ban has on taxpayers, it is especially concerning that the study showed that the IRS often fails to follow its own policies and procedures when imposing this ban.
TAS reviewed 352 cases where the IRS imposed a two-year ban during Fiscal Year (FY) 2022 or the first eight months of FY 2023, and found:
- In 76 percent of the cases, the IRS failed to secure required managerial approval;
- In 81 percent of the cases, the IRS did not adequately explain to the taxpayer why it imposed the ban, as required;
- In 30 percent of the cases, the IRS did not previously disallow the same credit for the same reason for which it imposed the ban; and
- At least 50 percent of the prior audits took place more than three years from when the IRS imposed the two-year ban.
A number of the taxpayers on whom the IRS imposed the two-year ban had their returns completed by a paid preparer. Specifically, 169 taxpayers out of the 352 cases (48 percent) used a paid preparer. However, only 15 of the 169 preparers had a professional designation, including one who was a state regulated return preparer and another who was a Volunteer Income Tax Assistance volunteer.
The IRS imposes the two-year ban one of two ways:
- Manually, where an auditor reviews the case and makes a decision regarding the ban, or
- Systemically, where certain factors are met and the IRS imposes the ban automatically, without including a review from an IRS auditor.
When the IRS imposes the ban systemically, the taxpayer’s failure to respond to the audit will automatically lead to the application of the ban. Out of the 352 cases reviewed, 162 taxpayers – 46 percent – never responded to the audit, but the United States Postal Service returned just 16 percent of the no-responses as “undeliverable mail.” For these taxpayers, failure to respond would be considered as either a factor for the IRS to assert the ban if it was being imposed manually or would have resulted in an automatic assertion if the IRS imposed the ban systemically.
It is concerning that the IRS doesn’t require examiners to attempt to reach the taxpayer if the taxpayer hasn’t responded to the audit, considering the significant consequences such an omission can cause.
Read the full 2023 TAS study on this issue.
