January 20, 2006

IRS Unfairly Targets The Working Poor In Latino Community

Major media outlets throughout the country recently revealed that the Internal Revenue Service’s (IRS) criminal division unfairly targeted 1.6 million working poor taxpayers. The IRS froze these hardworking families’ refunds, causing an average delay of at least eight months of what could be up to 25% of their total income.

The reason? The IRS’s computer program unjustly labeled their returns as fraudulent. This action was part of the IRS criminal division’s program to protect against refund fraud, which labels suspicious refund requests and flags these taxpayers for additional scrutiny in the future.

The result? Nearly three-quarters of the people affected were employed parents applying for the Earned Income Tax Credit (EITC), i.e. poor families who are trying to improve their circumstances through work. Many of these workers are Hispanic.

The EITC functions by relieving the working poor of unfair payroll tax burdens through a refund of income and Social Security taxes if they qualify. This amount could be up to $4,400 for couples who earn a total of $37,000 or less and have two or more children.

So why the barbaridad (outrage)?

• The average income of those targeted was around $13,000 and the average refund due was nearly $3,500 according to the IRS Taxpayer Advocate Report. Yet, the U.S. Congress has given the IRS more than $875 million to investigate suspected fraud in the EITC program.

• The IRS spent more money investigating the returns and refund requests of the working poor than it did on investigating real criminals who do not file or who understate their income.

• The working poor were not informed about the reason for the delay and, as a result, were unable to dispute the IRS’s unfair claims of fraud suspicion.

• About two-thirds of the taxpayers who insisted on receiving their refunds were found not to have committed fraud and received their full refund.

The bottom line?

Tax credits help Latino families gain economic security and become part of the ownership society. The inadequacies in the IRS’s review process disproportionately affect hard-working families. This means that more than one-third of Hispanic households could suffer from this delay. Despite some aspects that must be improved, tax credit programs such as the EITC and the Child Tax Credit have proven instrumental in helping families transition from poverty to self-sufficiency.

The National Council of La Raza (NCLR) will be sending tool kits designed to help taxpayers apply for the EITC this tax season. Also, low-income workers can receive free tax preparation from local Volunteer Income Tax Assistance (VITA) sites by calling 1-800-829-1040 for the local site.

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