A new study found that black tax filers are several times more likely to be audited by the IRS than other tax filers, a revelation that comes as the agency prepares to double headcount and receive a deluge of funds to increase audit activity.
Stanford University law professor Daniel Ho partnered with other researchers, as well as economists in the Treasury Department’s Office of Tax Analysis, to examine more than 148 million tax returns. Though filers do not identify their race on their returns, the team was able to predict the probability that a given filer identified as black based on geography and their first and last names. The research concluded that black filers are between 2.9 and 4.7 times more likely to experience audits than non-black counterparts.
“The IRS should drill down to understand and modify its existing audit selection methods to mitigate the disparity we’ve documented,” Ho said in a news release. “And we’ve shown they can do that without necessarily sacrificing tax revenue.”
Audits from the agency disproportionately impact taxpayers who collect the Earned Income Tax Credit, which offers tax breaks to low and moderate income households. Black filers accounted for 21% of EITC claims but were impacted by 43% of the EITC audits.
Some 94% of audits among EITC claimants occurred via correspondence audit, which the IRS executes by mail, rather than a field audit, which requires the IRS to use more extensive resources. The agency feeds a “completely secret” algorithm with information from the Dependent Database to automatically generate audit letters to EITC claimants.
“Compared with labor-intensive field audits, correspondence audits of EITC claimants are easy to trigger, cost very little, and require minimal effort by IRS personnel,” the news release continued. “The burden of correspondence audits on EITC claimants is more likely to fall on lower income individuals whose tax returns are less complex and less likely to lead to litigation.”
Considering the magnitude of underreported income rather than the likelihood of underreported income would have resulted in more non-black filers receiving audits than black filers, according to the researchers. Evelyn Smith, a doctoral candidate at the University of Michigan who aided with the research, claimed that “the choice to focus on whether there is underreporting, as opposed to magnitude of underreporting, is connected to broader structural sources of economic inequality and racial justice.”
Whether the disparity in audit rates is ultimately attributable to purported inequities, the study comes as the IRS prepares to expand operations using $80 billion provided by President Joe Biden’s Inflation Reduction Act. The Treasury Inspector General for Tax Administration recently noted that the agency’s budget for enforcement activity will increase 69% over the next decade, while the budget for taxpayer services will increase 9%.
Treasury Secretary Janet Yellen has vowed that the resources will not be utilized to increase audit rates for American households earning less than $400,000 per year “relative to historical levels.” She failed to clarify that “historical levels” of enforcement were far higher as recently as one decade ago: audit rates for Americans earning between $25,000 and $200,000 decreased 76% between 2010 and 2019, according to data from the Government Accountability Office.