IRS Purge of Bias in Low-Income Audits Threatened by GOP Cuts

Stung by research showing Black taxpayers may be audited at higher rates than their counterparts, the IRS efforts to correct any system bias now face a hairy future under a Republican administration and Congress.

While the IRS said it expects to give an update on its pilots of the earned income tax credit system in the near future, funding cuts promised after a Republican sweep of Congress and the White House could derail headway.

Tens of billions in extra funding from the 2022 tax-and-climate law known as the Inflation Reduction Act intended to help the IRS catch up after decades of underfunding, allowing it to focus on wealthy tax cheats, modernize technology, and improve customer service. Researching possible systemic bias in tax compliance also became a priority in the IRS spending plan.

The high-profile study—authored by researchers at the Treasury Department, Stanford University, the University of Michigan, and the University of Chicago—found that Black taxpayers are audited at about three to five times the rate of non-Black taxpayers. Several senators flagged the study at IRS Commissioner Danny Werfel’s confirmation hearing, asking him to report back on plans to fix it.

The timing of the study’s release and Werfel’s confirmation hearing was a “perfect storm,” Dorothy Brown, a Georgetown University law professor and author of “The Whiteness of Wealth,” said in a recent interview.

To revamp its audits of low-income taxpayers, the IRS is taking a “multipronged approach” expanding outreach, upgrading tech so it’s more accessible to taxpayers, and conducting research while it tests its audit selection processes, the agency said in a statement.

The changes are funded through annual appropriations and the extra cash, originally totaling $80 billion but since shrunk by $20 billion following Republican clawbacks. Danger of more cuts is also looming with this year’s lame duck session of Congress. Though the credit has garnered attention from both Republicans and Democrats over the years, the focus for each party has diverged: Republicans have pressured the IRS to cut back on incorrect payments of the credit whereas Democrats have zeroed in on narrowing the audits on the poor.

“Members of this committee think this is very, very serious,” Senate Finance Committee Chair Ron Wyden (D-Ore.) said at Werfel’s hearing.

‘No Perfect Solution’

It’s been over a year since the IRS pledged to fix how it audits refundable tax credits meant to help working families. The promise was fueled by pressure from lawmakers and advocates after the study last year found Black taxpayers claiming the earned income tax credit were audited at higher rates than non-Black taxpayers claiming the credit.

These audits are limited in scope, less time-consuming, and conducted by examiners with less training, which means they’re easier to complete compared to audits of wealthy individuals and complex companies. In fiscal year 2022, the IRS closed nearly 260,000 EITC audits.

The IRS doesn’t collect data on race, but other data like ZIP codes included on tax forms could lead to an unintended disparate impact on certain populations and, in this case, Black taxpayers.

For some agencies where they’ve made providing race data voluntary, they’ve seen the response rate plummet, said Daniel Ho, a Stanford law and political science professor and one of the study’s authors.

“You’re kind of stuck in many ways, between no perfect solution,” Ho said.

The IRS later told Wyden in September 2023 that the agency would substantially decrease audits of the earned income tax credit, and several others aimed at low-income taxpayers, including the additional child tax credit.

It also is piloting different approaches to its EITC case selection process, including adjusting how the agency considers information about where children live. Different familial arrangements will be more common in different racial and ethnic groups but it will raise flags at the IRS, Brown said. The IRS watchdog Treasury Inspector General for Tax Administration also is reviewing the IRS’s new EITC compliance strategy.

“The money is not in EITC taxpayers,” Brown said. “The money is in corporations not paying their fair share. It’s in millionaires and billionaires who haven’t paid taxes.”