Tax Notes logo

Werfel, Wyden Discuss Fixing Racial Disparities in Audit Rates

MAY 15, 2023

Werfel, Wyden Discuss Fixing Racial Disparities in Audit Rates

DATED MAY 15, 2023

May 15, 2023

The Honorable Ron Wyden
Chairman, Committee on Finance
United States Senate
Washington, DC 20510

Dear Senator Wyden:

This letter is in response to your request for information about the apparent racial disparity in the selection of tax returns for audit, along with our plan to address this issue.

Let me start by stressing that the IRS is committed to enforcing tax laws in a manner that is fair and impartial. When evidence of unfair treatment is presented, we must take immediate actions to address it. It is also important to reiterate that we do not and will not consider race as part of our case selection and audit processes. Nevertheless, a recent study estimated, using imputed race values, that Black taxpayers are audited at three to five times the rate of non-Black taxpayers.1 The research further suggests that most of this disparity is driven by differences in correspondence audit rates among taxpayers claiming the Earned Income Tax Credit (EITC). We are deeply concerned by these findings and committed to doing the work to understand and address any disparate impact of the actions we take.

As soon as I was confirmed, I met with the IRS team that has been studying this issue. Their research is ongoing and additional time is needed to yield a robust understanding of the drivers of this disparity and to thoroughly evaluate the right potential programmatic changes to address it. In this letter, we provide our initial findings. I want to note that fairness in audit selection is a complex topic, and our initial findings will evolve as the work continues. IRS does not collect data on race and there is substantial uncertainty in any estimates of the audit rate by race or differences in audit rate by race.

While there is a need for further research, our initial findings support the conclusion that Black taxpayers may be audited at higher rates than would be expected given their share of the population. We are dedicating significant resources to quickly evaluating the extent to which IRS's exam priorities and automated processes, and the data available to the IRS for use in exam selection, contribute to this disparity. As part of this work, we are evaluating the potential impact of methodological changes to case selection (e.g., optimizing on broader tax issues rather than focusing on EITC overpayments). As this work progresses, additional information will be shared externally regarding the research findings and the appropriate corrective actions IRS will take.

I will stay laser-focused on this to ensure that we identify and implement changes prior to next tax filing season.

As we continue to evaluate ways to address any bias that exists within our audit program, the IRS will take steps to advance our commitment to fair and equitable tax administration more broadly. In the Inflation Reduction Act (IRA) Strategic Operating Plan, the IRS committed to conducting research to understand any potential systemic bias in compliance strategies and treatments. We will work to identify any disparities across dimensions including age, gender, geography, race, and ethnicity as well as continually refining our approaches to compliance and enforcement to improve fairness in tax administration and maintain accountability to taxpayers as informed by our research. The ongoing evaluation of our EITC audit selection algorithms is the topmost priority within this larger body of work, and we are committed to transparency regarding our research findings as the work matures.

The Inflation Reduction Act funding will allow us to focus even more attention on reaching underserved communities to provide education and real-time assistance in claiming available credits and incentives. This will help to promote the uptake of credits and incentives and ensure that all taxpayers have a better understanding of eligibility and documentation requirements for such provisions. Legislative changes streamlining eligibility requirements could support our education efforts, reduce honest mistakes, and improve administrability.

We are also working to advance equitable tax administration by holding accountable unscrupulous return preparers who fail to exercise due diligence and disadvantage taxpayers through poor-quality advice. The proposal outlined in the Fiscal Year 2024 Treasury Greenbook includes expanded and increased penalties for unscrupulous preparers. In addition, the IRS is accelerating an existing research effort that aims to detect and ensure compliance among “ghost preparers,” i.e., individuals who receive compensation to prepare returns for others but do not identify themselves to the IRS. Initial evidence confirms that unscrupulous and ghost preparers disproportionately prepare returns in minority communities.

In summary, we are making broad efforts to advance our commitment to fair and equitable tax administration and evaluating the best ways to address bias within our audit program. I expect to be able to update you and the committee on a regular basis on our progress on these initiatives. I hope this information is helpful and look forward to discussing any questions or concerns you may have regarding our plan to address this important and challenging problem.


Daniel I. Werfel

Wyden Statement on IRS Letter on Racial Bias in Audits

MAY 15, 2023

Washington, D.C. — Senate Finance Committee Chair Ron Wyden, D-Ore., today issued the following statement on IRS Commissioner Werfel's letter regarding racial bias in audits:

“Researchers did a great service spotting the racial bias in the algorithms that guide audit selection, and even before Commissioner Werfel was confirmed by the Senate, he pledged that he'd get to the bottom of it.

“In my view this was a shameful consequence of two main issues. First, the racial discrimination that has plagued American society for centuries routinely shows up in algorithms that governments and private organizations put in place, even when those algorithms are intended to be race-neutral. This bias is completely unacceptable regardless of where it occurs, and we have an obligation to stamp it out. You cannot have equality in society if algorithms and other automated systems that affect people's lives treat them differently based on the color of their skin. This is an issue I've worked on solving for years, both in the context of government agencies and in the private sector. In the coming weeks I'm going to reintroduce my Algorithmic Accountability Act to require audits of private sector algorithms for racial bias, and I'm interested in requiring similar protections against bias in government systems.

“Second, over the previous decade, Republicans strategically gutted the IRS budget in a way that made it virtually impossible to enforce our tax laws fairly. Those cuts led to an exodus of the highly-trained staff who know how to root out tax cheating by the wealthy and corporations and an overreliance on these flawed algorithms that we now know trigger a disproportionate number of audits on Black Americans.

“The IRS is currently in the process of overhauling its approach to tax enforcement with the funding it received in the Inflation Reduction Act. I'm going to ensure that as part of that overhaul, the IRS retools these algorithms to eliminate any racial bias. Commissioner Werfel has committed to implement changes to fix this issue before the next tax filing season begins, but it's clear there's more to learn and a lot of work to be done. As Chairman of the Senate Finance Committee I expect the IRS to provide regular, public updates on their progress.”


1Elzayn et al (2023). “Measuring and Mitigating Racial Disparities in Tax Audits.” Stanford University, SIEPR WP 23-02 (January). The IRS does not collect data on taxpayer race. Elzayn et al (2023) estimated probabilities that filers belong to particular race/ethnicity groups by comparing taxpayers' names and addresses to public data on the racial composition of names and Census Block Groups. These probabilities have been used in retrospective analyses of audit outcomes, to help us understand the drivers of disparity. They have not been and will not be used in the operational selection of individual taxpayers for audit.


Copy RID