Black Taxpayers Much More Likely to Be Audited, Report Finds
Black taxpayers are about three to five times more likely to be selected for audit by the IRS than non-Black taxpayers, according to Stanford University’s Institute for Economic Policy Research.
The institute used microdata from Treasury on approximately 148 million tax returns and 780,000 audits to examine racial disparities in audit selection. In its report released January 30, it found that the main reason for the disparity was differences in audit rates among claimants of the earned income tax credit.
Most of the disparity is because of higher audit rates for Black taxpayers who claim the EITC, not because more Black taxpayers claim the EITC, as some have previously suggested, the report says.
Black claimants of the EITC are between 2.9 and 4.4 times more likely to be audited than non-Black claimants of the credit, the research found. Authors of the report said they observed “a much smaller, though still statistically significant, difference in audit rates between Black and non-Black taxpayers who do not claim the EITC.”
The IRS doesn’t collect data on race, so the researchers used taxpayers’ names and locations to estimate the probability that they were Black or non-Black.
“The methodology that we provide, we hope, is a good roadmap for how . . . implementation of systems and processes might create disparity unintentionally, and especially as we use more [artificial intelligence] throughout society,” Hadi Elzayn, a researcher at Stanford University who wrote the report, told Tax Notes.
Evelyn Smith, a doctoral candidate at the University of Michigan who also wrote the report, said that the IRS’s historic focus on refundable credits rather than the total dollar amount of underreporting seems to be contributing to the difference in audit rates between Black taxpayers and non-Black taxpayers.
“The differences we observed between Black and non-Black taxpayers are not explained by differences in the underlying dollar amount of noncompliance,” Smith said. “Our understanding is that what’s happening is that Black taxpayers on the returns tend to make the types of mistakes and errors that the IRS audits more heavily.”
Calls for Reform
The report suggests that the IRS ease racial disparities in audits in part by changing the algorithms it uses to select returns for audit and by using some of its resources to audit more complex EITC returns.
However, the report notes that some things are out of the IRS’s hands because Congress determines information reported by third parties, rules about credit eligibility, and funding for the IRS.
Noting that the research focused on a period when the IRS’s funding was declining, Daniel E. Ho, a professor at Stanford Law School, said that audits devoted to claimants of the EITC, which are largely done by mail, stayed at the same level during that period, while audits for high-income taxpayers declined.
“What is important to keep in mind is how much of the focus of the EITC is in fact driven by the pretty significant resource constraints that the IRS increasingly had to contend with,” Ho said.
Rep. Richard E. Neal, D-Mass., ranking member of the House Ways and Means Committee, called the findings in the report “unacceptable, but a consequence of algorithmic tools that exacerbate racial biases in our institutions.”
“It’s clear we must address the discrimination at the IRS,” Neal said, adding that he will work with Treasury Secretary Janet Yellen “to turn over a new page at IRS, spurred by our multiyear investments from the Inflation Reduction Act. All taxpayers deserve fair treatment, and Ways and Means Democrats won’t stop until that’s a reality.”
A Treasury spokesperson said that “equitable enforcement of our tax laws is a top priority for the administration, and resources provided by the Inflation Reduction Act will enable the IRS to upgrade technology and hire top talent to go after wealthy tax evaders.”
The Treasury spokesperson pointed to an October 19, 2022, letter from Deputy Treasury Secretary Wally Adeyemo to then-IRS Commissioner Charles Rettig on the importance of equity in tax enforcement.
In the letter, Adeyemo said that “historic challenges and underfunding have led to audit rates for those at the top of the distribution decreasing more than the correspondence audits of those at the bottom in the last decade, which should change.”
Steven Dean of Brooklyn Law School said that the Biden administration “seems to be spinning the study as proof that they need to spend more on enforcement to minimize discrimination.”
“But more spending without specific efforts to address bias would not help,” added Dean, a proponent of addressing potential racial bias in the tax code. “The real lesson of the bias built into their algorithms is that bias can crop up anywhere if we’re not careful.”
Alexander Rifaat contributed to this article.
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Tax Notes Federal, Feb. 6, 2023, p. 896
178 Tax Notes Federal 896 (Feb. 6, 2023)
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