Black taxpayers are audited at least three times more than non-Black taxpayers, study finds
The IRS audits Black taxpayers at least three times more than non-Black taxpayers, according to a paper from Stanford University's RegLab.
Despite the IRS' use of "race-blind" auditing tactics, Black taxpayers are audited 2.9 to 4.7 times the rate of non-Black taxpayers, according to the study, which reviewed nearly 800,000 audits and about 148 million tax returns.
The IRS uses dated algorithms to select taxpayers for audits, and depleted resources have prevented the agency from doing more in-person audits for complex tax situations, the team said.
When asked about its practices, the U.S. Department of the Treasury said "equitable enforcement of our tax laws is a top priority for the Administration."
Most recently, the IRS received nearly $80 billion from the Inflation Reduction Act that will help the agency upgrade its technology and hire agents to go after tax evaders.
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How did the team do its analysis?
The team didn't have access to the exact methods the IRS uses to selects audits because the agency doesn't want to run the risk of reverse-engineering or taxpayers taking advantage of it, said one of the researchers, Daniel Ho.
The IRS did give the team access to "underlying data" used to select audits, he said.
The research team used more than 148 million tax returns and 780,000 audits from 2014 to find audit rates among Black and non-Black taxpayers.
The IRS doesn't collect information on taxpayer race and ethnicity, so the researchers used first names, last names and U.S. Census data to predict the likelihood that taxpayers identified as Black. To cross-check those predictions, the team used voter registration records from North Carolina, where citizens had been required to self-report race and ethnicity when they registered, Ho said.
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Drastic disparities in audits of those who claim Earned Income Tax Credit
Looking at the data, the team determined the IRS has focused largely on a specific set of mistakes taxpayers make, including mistakes that affect their eligibility for refundable credits.
These mistakes are common among Black taxpayers, despite Black taxpayers being less likely to make the highest dollar value mistakes overall.
"Refundable credit eligibility depends on complicated rules for claiming the right dependents, for example," Smith said. "These are the sorts of mistakes that the IRS has traditionally focused on in its audits."
One of the tax breaks the team examined is the Earned Income Tax Credit, which helps taxpayers reduce the taxes they owe and, in some cases, increase their refunds.
Black taxpayers made up 21% of Earned Income Tax Credit claims and accounted for 43% of EITC audits, the analysis found.
Single Black men with dependents who claim this tax credit are almost 20 times as likely to be audited as a non-Black married taxpayer claiming the EITC, the team found.
But why are Black taxpayers audited more?
The researchers wanted to dig into why this is happening.
Ho said there are two hypotheses:
The set of rules to select audits has focused on lower-dollar claims versus taxpayer returns with higher incomes.
The IRS' focus has largely been on eligibility for programs such as the Earned Income Tax Credit versus the dollar amount that is at stake.
They suspected part of the problem lies in algorithms the IRS uses, such as the Dependent Database. The program flags potential tax problems and creates audit letters that go to taxpayers.
The majority of the racial disparities the team found were linked to mailed audits versus in-person field audits.
The team also suspected the racial disparities in tax audits stems from concerns among government officials.
According to the researchers, people who claim tax credits can sometimes receive refunds even if they didn't pay any taxes. Some think it's more important to crack down on those who inappropriately claim money than collect tax dollars from those committing tax evasion, the team said.
"We're not treating the dollar that is going toward the Earned Income Tax Credit as the same dollar that might be evaded by a high-income taxpayer," Ho said. "If we treated those similarly, our evidence shows that the disparity would go down significantly."
Another theory the team tested is what would happen if the IRS focused audits on refundable credits such as the EITC and others like it.
The team found those specific adjustments create more disparity, but if the IRS were to broaden its focus to include adjustments such as misreporting outside of refundable credits, the audit disparities could be reduced, said Smith, who worked on the project.
What could also help reduce the disparities is training an algorithm to focus on the total dollar amount of underreporting, Smith said.
Sara LaLumia, a professor of economics at Williams College in Massachusetts, stressed that the IRS can choose different ways to audit taxpayers.
"There's not just one audit selection mechanism," LaLumia told USA TODAY. "Recognizing that there are different ways of going about this part of the process is, I think, a really important area ... of thought as we think about how policymakers might proceed."
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One contributing factor to such disparities is depleted resources over the past decade, the team said.
"Over a 10-plus-year period, IRS budgets were slashed," Ho said. "(The) IRS lost about 20% to 30% of its examiners, and the examiners that the agency lost were precisely the ones who had more expertise to audit taxpayers in the higher-income brackets."
But while the number of examiners has decreased, the audit rate among lower-income taxpayers hasn't, Ho said.
In January 2021, President Joe Biden signed an executive order requiring all federal agencies to complete equity impact assessments, Ho said.
He said the challenge is that many agencies like the IRS don't have access to race and ethnicity information, so it's hard for them to do those assessments.
"We think the study really provides a very nice model of how to do that going forward," Ho said.
Saleen Martin is a reporter on USA TODAY's NOW team. She is from Norfolk, Virginia – the 757 – and loves all things horror, witches, Christmas, and food. Follow her on Twitter at @Saleen_Martin or email her at sdmartin@usatoday.com.
This article originally appeared on USA TODAY: IRS audits Black American taxpayers disproportionately, study finds
