David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: audit selection bias. In 2019, retired IRS economist Kim Bloomquist published his findings of regional bias in the IRS's audit selection process in Tax Notes. He found that eight of the 10 counties with the highest audit intensity were located in Mississippi, and 51 percent of those taxpayers claimed the earned income tax credit, or EITC. In the two years since Bloomquist's report, it's garnered attention from across the nation, including from federal policymakers to most recently in the New York Times. Tax Notes senior reporter William Hoffman sat down with Bloomquist to discuss the findings of his report and what they mean today. Before we get to that interview, Bill, welcome back to the podcast.
William Hoffman: Thank you, David.
David Stewart: Can you give us a bit of background on Kim Bloomquist?
William Hoffman: Well, Mr. Bloomquist started his career in tax as senior economist at the Internal Revenue Service. He did some research projects improving compliance with federal income tax laws. He moved on to the tax gap, especially for large corporations and improving tax reporting compliance. After 20 years at the IRS, he moved over to the Taxpayer Advocate Service, where he was an operations research analyst working on developmental research, distinct from the operational problems that are shorter-term projects. In March of 2018, he officially retired and from what he told us, he's enjoying his retirement in Washington state.
David Stewart: Before we get to the interview, what did you talk about?
William Hoffman: We talked a little bit more in depth about some of the findings of his research on geographic bias. Specifically, I asked whether or not the geographic bias was also a class and race bias perhaps, involving people on low wages and implicit bias in favor of higher-income taxpayers, especially given the fact that the IRS's resources and enforcement are so constrained. I asked about the earned income tax credit as being the heart of the issue — the problem, if you will — and whether or not Congress had a role in fixing that. I also asked him about his definition of fairness, which he had mentioned the IRS is still trying to come up with a measure and a concept of. And finally, got some rather surprising suggestions about what the IRS leadership might need to be in the future to have a sustained and productive reform of the earned income tax credit.
David Stewart: All right, let's go to that interview.
William Hoffman: Welcome to Tax Notes, Kim Bloomquist.
Kim Bloomquist: Thank you for inviting me.
William Hoffman: You worked for the IRS for 20 years and then a few years at the Taxpayer Advocate Service. Correct?
Kim Bloomquist: That's correct. Yes. So about 20 years for the Office of Research, the first four of those in the Chicago office when they had a research office there. Then the other 16 or 17 so years in Washington, D.C. Yes.
William Hoffman: OK. Give us some highlights from that CV. What have you been doing since?
Kim Bloomquist: I retired in 2018 after my final three years with the National Taxpayer Advocate's office. And then basically like I said, I retired in 2018 and moved out here to Washington state where it's very rainy and nice most of the year.
William Hoffman: In a 2019 piece published in Tax Notes, you documented regional and racial bias in the IRS's audit selection. This report has been cited by many since its publication, including in the New York Times. Would you summarize for us just briefly what you found?
Kim Bloomquist: So what I showed in that article was the fact that many EITC claimants live in certain parts of the country. They're not all scattered randomly around the country. And I don't think IRS really historically has been that interested in looking at the geographic impacts of their enforcement policies for various reasons. I think because it's politically sensitive to highlight that. So that's one aspect of it. So basically by looking at the geographic location of EITC claimants, one gets an idea also of what the impact of the IRS audit policy is.
In recent years, IRS audits have dropped off dramatically because basically they've been affected by budget cuts imposed on them by Congress. But the one area where audits have not fallen as fast is with EITC filers, mainly because these audits are fairly low cost to conduct. They can be done by low-graded personnel. And if you want to look at it from a business perspective, they're fairly lucrative because they get a fairly good high probability of a tax change from these audits. IRS, I think, is somewhat reluctant to keep cutting EITC audits when they have other budget problems.
William Hoffman: Could your 2019 analysis on regional bias also be interpreted or reveal a class bias? I guess, on low-wage taxpayers who happen to reside disproportionately in those counties and an implicit bias in favor of high-income taxpayers who can afford to challenge the audit?
Kim Bloomquist: Yeah, I think one could, one could infer that. I don't think it's intentional on IRS's part — at least I don't think that's on their mind that they're trying to intentionally bias towards one ethnic group or class group based on income. I think it's just from a business point of view, it makes sense for them to continue auditing low-income taxpayers because it's reasonably lucrative. But yes, I think that there is an overlap between the types of taxpayers that we're targeting for this. It's like I say, mainly low-wage, working taxpayers. A lot of them are African American. A lot of them are Hispanic. What I also found in parts of the country where there's high Native American populations there's high audit rates, EITC audit rates in those counties as well.
So yes, any place where there is reasonably low-wage earners that have high EITC claim rate, the audit rate is also high. So that is not only a concern, I think, from a fairness perspective, but it's also a concern — and I think it's like you mentioned earlier, there was a lot of interest on the part of certain members of Congress to find out that many taxpayers in their districts, their states, were being targeted at much higher rates than other parts of the country.
William Hoffman: You also wrote in March 2019 that the purpose of your report is to "show that willfully ignoring geographic location in audit case selection does not ensure balanced regional coverage." What is the goal of balanced regional coverage?
Kim Bloomquist: Well, just a little bit of context: The IRS says that they're not biased in the way they select audits because, of course, they don't take a geographic location into account. They don't take other racial or ethnic characteristics into account, so they somewhat exonerate themselves by saying, "We're not being biased because we don't do these things." But, unfortunately, that doesn't really address the issue. Clearly there is a regional bias in the way they selected audits here. It just doesn't show up in their audit policies. So there's some somewhat of an implicit bias based in the way that their system selects cases for audit. So I think that this is something that IRS needs to address in the future. At least they need to be aware of it. And I think members of Congress need to be aware of it and need to periodically remind IRS that they shouldn't be focusing all of their enforcement efforts in certain parts of the country to the exclusion, to a large extent, to other parts of the country.
William Hoffman: I guess I'm wondering how balanced regional coverage relates to audit selection fairness, to promote equitable coverage across both regions and income classes and levels.
Kim Bloomquist: I would say that because IRS is a national agency, right? And therefore they should apply their enforcement actions more or less equally across the country. They don't have to be exactly equally, of course, because I mean, there's certain parts of the country that specialize in certain things like agriculture or finance or what have you, and perhaps they run certain special programs that focus on those industries, those particular activities. So there needs to be some flexibility, I think in the way audits are conducted, the kinds of programs are conducted.
Nevertheless, for the broad number of taxpayers out there, IRS should really try to spread their audit activities more or less evenly across the country when they can. I mean, certainly it needs to be some exception, but I think they need to focus on that as a goal, as one of their fairness goals. I mean, this is something they really haven't defined what fairness really is. But I think if they really are trying to uphold a particular mission statement, then they should try to focus on making audits more evenly dispersed around the country than they have to this point.
William Hoffman: Well, you also did notice in your research the 2016 GAO report that criticized the IRS for not clearly defining the concept of the measures for audit selection fairness. Recognizing that fairness, so to speak, is a subjective standard, how would you define audit selection fairness?
Kim Bloomquist: Well, I just think what you need to do is to at least monitor the impacts of your audit policies. And if you're not doing that, and IRS to my knowledge doesn't really do that, then there's no way you can get a clear indication of who you're impacting, where these people live, and whether or not you should be doing something different. Whether it can be perceived as being unfair, whether you think it's unfair or not.
So I think it's important for an agency like IRS to be perceived as being fair. And when so many of their audits are focused on relatively low-income taxpayers concentrated in certain areas of the country, then I think IRS needs to be aware of it and to take into account potentially their perception that they're not being fair, however that's defined. But at least I think most reasonable people would agree that an over-weighting of selecting audits from low-income taxpayers — for example, roughly in tax year 2015, about 40 percent of all audits were conducted on EITC claimants. And that didn't make up much less than that, of course, of all filers. I mean, they're probably closer to 15 percent of all filers. So they're being selected at three or four times more than their representation in the population. Perhaps that could be perceived as unfair by many people.
William Hoffman: What elements precisely would a fairness measure include? Balanced regional coverage and what else? What measures of fairness would be both realistic to implement and helpful to taxpayers?
Kim Bloomquist: I would say that, you know, again, a relatively even distribution of audits among income classes, regionally ought to be a consideration, not necessarily that it has to be exactly the same across the country, because what I mentioned earlier about certain types of activities being specialized in certain regions of the country. So there should be a regional assessment of audit impacts. There should be an assessment of audits by category of AGI, adjusted gross income. So those are probably the two main areas. Again, I would say because IRS has conducted tax gap studies over the years, they're aware of where the majority of unpaid tax originates from. And that's primarily in the top 10 to 20 percent of the income distribution and primarily from business taxpayers within that category as well.
I mean, I would think that if IRS was focused on the tax gap, which has always been their agency's mission, then they should really be focusing on more business oriented taxpayers, which I know are more expensive to audit, but IRS should be taking this into account as well as Congress in terms of advising an audit policy that actually addresses the problem of underpaid tax.
William Hoffman: Well, you kind of touched on my next question, which is that the earned income tax credit seems to be at the heart of your analysis. You advise the IRS to institute broader audit selection criteria, and maybe a bigger enforcement budget from Congress. But isn't a big part of the problem with the EITC, the law itself?
Kim Bloomquist: I wouldn't dispute that at all. I think it's a very complex law for both taxpayers to follow and for IRS to enforce. One of my first projects when I started with the Office of Research in 1999 was one of the initial EITC compliance studies. And we found — I'd have to go back and look at the numbers — but roughly a third or so, maybe 30 percent of overclaims of the EITC were happening in the mid-1990s. A decade later, they did another study. IRS did another study at the EITC noncompliance and it was basically the same.
So over a decade of auditing and other enforcement activities had little impact on EITC compliance, largely because it's complex. IRS does not have access to the data right away that it needs particularly. I mean, that's changed recently, but for many years they did not have access to the data on eligible children, for example. It's also difficult for IRS to ascertain business income sort of in real time. I would say, nearly two decades, IRS has really had made little progress in terms of compliance among EITC taxpayers and to a large extent, because it's a very complex and difficult area of the tax code to enforce.
There's been some changes recently with the PATH Act of 2015, that requires refunds that are related to EITC and the additional child tax credit to be held until mid-February before they're paid out. And so that gives the IRS a greater opportunity to match reported incomes to any third-party reporting documents that they would receive. We won't know the results of this for several more years until IRS does another tax gap study specific to tax year 2016 and later.
So it could be several more years before we hear about that. But I would say because of two decades of poor progress that IRS has made, not for lack of trying, it's just really impossible for the IRS to do much about enforcement in this area. It might be time for IRS to even consider or for Congress to consider removing programs like EITC from the tax code and giving it over to other agencies like perhaps even Social Security, who's in charge of administering social support programs for decades and could probably do a good job with this as well. I mean, we'd have to require an increase in budget for Social Security to administer this. You know, we'd have to think through how to handle it, but I think it would be probably something that would be good for both the IRS and for the taxpayers involved because you wouldn't be requiring audits of these folks anymore. People could go into their local Social Security office and file for EITC, just like they do for Social Security and stuff.
William Hoffman: It's an interesting idea, especially with the emerging social justice movement and the Democrats now looking at a Congress and a White House of their own. Do you anticipate any movement by policymakers to address the issues that you have identified with the EITC?
Kim Bloomquist: I certainly hope so. I know that following some of these congressional hearings on this issue back in 2019 that IRS Commissioner Rettig came out with a very abbreviated audit plan, or he said it was best to increase audits of high-income, high-wealth taxpayers. But it's only fairly minuscule effort there because of budget constraints are still more or less imposed. Perhaps with the new Congress, the new administration that will change and they will be able to make much greater progress and maybe IRS can get back to where it was over a decade ago, where it was auditing about 1 percent of all tax returns as opposed to like less than 1 percent. Now I think that will be good progress, particularly if they can target most of any increase in budget or again, the main source of the tax cap, which is the high-income and business tax filers.
The EITC I think again, I really think Congress needs to, because Congress has been actually talking about expanding EITC and other programs like this. They need to be aware that doing so under the current approach is only going to exacerbate, I think, the number of filers who are caught up in this compliance web. And I think they really need to consider that if you're going to greatly expand the number of EITC claimants out there, you're also going to greatly expand the number of — or likely IRS will be tempted to expand the number of EITC audits. So Congress needs to be aware of that and they need to probably think about telling IRS that this is something they don't want to do or restructure the EITC in such a way, like I say, to remove it from the tax code entirely and try to administer it in some other way,
William Hoffman: Does the incoming Biden administration need a new IRS commissioner to accomplish any of these goals?
Kim Bloomquist: You know, I would say I leave that up to the new Biden administration. I suspect they probably will be looking for somebody to replace the current commissioner. It may not be high on their list of things to do as they seem to have lots of other priorities at the moment as well. It may be less important. The commissioner role may be less important than increasing the budget for IRS and then hiring people that they need to hire to do a better job of assisting taxpayers and modernizing the IRS. I know when I worked there, we had always issues trying to modernize the computer systems and so forth. I mean, that's certainly where their focus needs to be. I think the commissioner probably won't be concerned or as much a concern in the short run as the budget situation will be.
William Hoffman: Have you been in contact with anyone from the incoming Biden administration?
Kim Bloomquist: No, I can't say that I have.
William Hoffman: OK. What's the first advice you'd offer about the IRS and tax administration generally, if they did contact you?
Kim Bloomquist: Basically I would just reiterate what I've more or less told you today, which is that if we're going to focus on the EITC, then I think they need to really consider what the enforcement implications will be by expanding EITC. Which may be a good idea from a social perspective, because certainly, I mean, with the growing inequality in this country, much more needs to be done to help out low-income taxpayers, low-income households from further sliding down into poverty here. And this is something we need to address dramatically in this country. EITC might be part of that. But I think there needs to be some further thought as to what the implications are from an enforcement perspective.
So I would recommend — if I had the opportunity to say something to the incoming Biden administration — I would say consider restructuring EITC and related credits so that the people who we're trying to help out with these things are not disadvantaged by IRS in terms of way they feel compelled to enforce the tax code.
William Hoffman: Would you be available to serve in the Biden administration if asked?
Kim Bloomquist: No, I don't think so. Currently, my health would preclude that, I think. I'm permanently retired.
William Hoffman: Fair enough. Good for you. Thank you very much for taking time for us.
Kim Bloomquist: Well, thank you again very much for inviting me. My pleasure.
David Stewart: Now, coming attractions. Each week, we highlight new and interesting commentary in our magazines. Joining me now from his home is Executive Editor for Commentary Jasper Smith. Jasper, what will you have for us?
Jasper Smith: Thanks, Dave. In Tax Notes State, Walter Hellerstein and Andrew Appleby examine issues arising from the IRS’s approval of state and local tax cap workarounds for passthrough entities. Jeffrey Friedman and Peter Hull explore states’ attempts to tax digital advertising and the problems associated with doing so. In Tax Notes International, Michael Kandev and Olivia Khazam examine Montreal’s generous provincial tax incentives for video game industry developers and investors. Giulia Letizia examines Italian tax rulings on conflicts of qualifications. On the Opinions page, Marie Sapirie explores recently released proposed regulations on the low-income housing tax credit that are likely to be finalized by the Biden administration. Martin Sullivan argues that if President-elect Joe Biden’s corporate tax increases are enacted, the most likely unintended effect would be to reduce tax incentives for domestic capital formation and job creation. And now for a closer look at what’s new and noteworthy in our magazines, here is Tax Notes Federal Editor in Chief Ariel Greenblum.
Ariel Greenblum: Thanks, Jasper. I'm here with Scott St. Amand, an attorney with a law firm Fisher, Tousey, Leas & Ball. We're going to discuss his upcoming January 18 piece in Tax Notes Federal called, “Prior Supervisory Approval: The Tax Penalty Poison Pill.” Welcome to the podcast, Scott.
Scott St. Amand: Oh, thanks so much for having me, Ariel.
Ariel Greenblum: Can you tell us a little bit about your article?
Scott St. Amand: Absolutely. The IRS used to threaten penalties against taxpayers to kind of strong arm them into settling. And in 1998, Congress tried to change the practice by enacting section 6751(b)(1) of the code. That section requires that IRS employees obtain supervisory approval before the IRS makes an initial determination to assert a penalty against the taxpayer. Usually that comes in the form of an IRS letter or notice. In 2020, there was a flood of decisions that the Tax Court put out on section 6751(b)(1), and suffice it to say the IRS did not fare very well in those decisions.
The article itself examines the six full Tax Court opinions and the multiple other memorandum opinions and highlights the elements of each one that I thought practitioners might need to understand to be able to use 6751(b)(1) as a defense against the penalties. What's interesting is each case builds upon the prior one. And so the article looks at the nuances of each one and kind of holistically gives the practitioners a better idea of how to use it in practice.
Ariel Greenblum: What led you to write about this topic?
Scott St. Amand: So I began kind of a pet project in June of 2020 called Briefly Taxing. It combines my three true loves in life, aside from my wife and kids: tax, writing, and sarcasm. The website offers a humorous and sometimes irreverent analysis of the trends and topics in tax law. So when I started it, I had the grandiose idea that I would summarize each Tax Court opinion that came out in 2020. And as I was doing that, I kept running into opinion after opinion that the Tax Court published on section 6751(b)(1). And in the back of my mind, I wondered if I'd ever be able to use it in one of my cases.
And so sure enough, we had a case a couple months back where the IRS just refused to give up on penalties. So we got a copy of the administrative file and found that the supervisor approval wasn't obtained in time and after politely citing some of the 2020 cases that I summarized, the IRS finally, albeit a bit begrudgingly, gave up on the penalties. And so after that, I thought that other practitioners might benefit from understanding how 6751(b)(1) works in practice. And that really was the genesis of the article.
Ariel Greenblum: Thanks, Scott. Where can listeners find you online?
Scott St. Amand: Sure. You can find me through my firm's website, which is fishertousey.com. And also as I mentioned, in my infinite free time, I run a website called Briefly Taxing, which can be found that brieflytaxing.com. I'm also on Facebook at facebook.com/brieflytaxing and on Twitter at twitter.com/brieflytaxing. I try to post a new case or article or snarky tax-related observation at least once a day, but being a full-time attorney and a full-time dad sometimes, albeit often, gets in the way, but I would love to hear from anyone. And again, thank you so much for having me on.
Ariel Greenblum: You can find Scott's article online at taxnotes.com. And be sure to subscribe to our YouTube channel Tax Analysts for more in-depth discussions on what's new and noteworthy in Tax Notes. Again, that's Tax Analysts with an S. Back to you, Dave.
David Stewart: You can read all that, and a lot more in the pages of Tax Notes Federal, State, and International. And just before we go this week, we're saying farewell to a member of our team. Acquisitions and Engagement Editor in Chief, and the main voice of the coming attraction segment, Faye McCray will be leaving us to pursue a new opportunity. We thank her for what she's done to help build up this podcast, and we wish her well in her new job. That's it for this week. You can follow me online @TaxStew, that's S-T-E-W, And be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.
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