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Biden Focus on Agency Biases Could Implicate Tax Administration

Posted on Mar. 30, 2021

While the scholarship documenting biases in tax law is well developed — and an issue of presidential concern — research on bias in tax administration lags. That could be changing soon.

According to Francine J. Lipman of the University of Nevada Las Vegas, “it’s hard to say” whether the IRS is targeting minority families for audits, enforcement, or other scrutiny. But minority and low-income taxpayers disproportionately face obstacles that other taxpayers don’t, and the impact of that “is discriminatory, and even racist,” she said.

President Biden signed an executive order January 20 calling on the Office of Management and Budget to audit federal agencies for barriers to equitable treatment, especially for minorities and the poor. The OMB director is tasked with producing a report on best agency practices for identifying and removing implicit biases, and expanding the use of those practices across the executive branch.

For Lipman, the case for rooting out systemic bias is already made. “It would be shocking to find a government institution that lacks implicit bias, just because it’s so pervasive,” she said.

Annette Nellen of San Jose State University told Tax Notes that she was shocked to learn of the extent of bias and legal discrimination in federal housing and other laws, as documented in Emory University professor Dorothy A. Brown’s new book The Whiteness of Wealth: How the Tax System Impoverishes Black Americans — And How We Can Fix It, and in Richard Rothstein’s The Color of Law: A Forgotten History of How Our Government Segregated America.

“These problems caused many inequities, with the ill effects still harming many today,” Nellen said.

During an Aspen Institute webinar March 24, Brown described the ways that tax policy regarding issues such as homeownership and education disadvantage Black and other minority taxpayers, and she argued that addressing the racial-wealth disparity will require a reform of the tax system.

Nellen agreed that with more attention focused on inequities in the tax law beyond just income-related ones, she hopes policymakers will act to address the problems as part of tax reform.

Race, Class, or Both

Lipman said that while class bias in IRS administration based on income levels might be more readily identifiable, administrative results can be racist because they tend to reinforce the prejudices of wealth-producing markets like housing, which were set up with higher-income white people in mind.

Part of the problem in proving racist outcomes is that the IRS doesn’t publish any data broken down by race, Brown said during the Aspen Institute webinar. “We need IRS statistics by race,” she said.

While Biden’s executive order requires agencies to disaggregate their data by race, ethnicity, and disability, Brown said she’s wary of expecting too much because the president’s Treasury appointees are more comfortable talking about income bias than race.

Former IRS Commissioner John Koskinen told Tax Notes that while the agency must always be on alert for implicit biases, as commissioner from 2013 to 2017, he never encountered an accusation of racial bias in IRS enforcement.

“Tax enforcement bias is hard to detect,” Koskinen added, but he discounted the value of race-based IRS data. Including race, ethnicity, gender, or other personal signifiers on tax forms “won’t help reduce bias; that’s what anonymity does,” he said, noting that IRS enforcement officers analyze large data sets stripped of their individual characteristics.

Further, adding race-based questions to IRS forms would likely be followed by requests for tax form questions on the taxpayer’s immigration status, Koskinen cautioned.

Two-Tiered System?

The topic of biased tax administration has matured enough to attract the attention, if not yet the intervention, of Congress.

At a March 18 House Ways and Means Oversight Subcommittee hearing, Rep. Steven Horsford, D-Nev., cited 2017 statistics showing that the IRS audited fewer than 600 taxpayers reporting more than $10 million but audited 285,000 taxpayers who made less than $25,000.

Horsford also noted that low-income people who haven’t had to file a tax return in years are being told they have to file to claim the third round of economic impact payments and other pandemic relief. He asked IRS Commissioner Charles Rettig, “Why do we have a two-tiered system of tax administration and enforcement in the IRS?”

“We absolutely do not” have a two-tiered system, Rettig replied. He disputed Horsford’s numbers, saying that the IRS’s coming data book for 2020 will show that the agency audited 8 percent of taxpayers earning $10 million or more in 2019, though that’s down from 23 percent in 2010.

Rettig also cited a 2010 law, the Improper Payments Elimination and Recovery Act, that he said requires the IRS to audit more recipients of the earned income tax credit because more of their returns contain errors.

“You’re actually making my point,” Horsford said. “We have policies on the books that target the poor in this country. Meanwhile, the very wealthy get audited at a very different rate. . . . We do have a two-tiered tax system.”

Rettig told the congressional subcommittee that Congress and the IRS can work together to make a difference in equalizing disparate audit rates. But he added, “This is not the arena that the difference will be made in.”

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