Study on Racial Disparities in Audits Fuels Push for IRS Fix

A high-profile study finding racial disparities in IRS audit rates is fueling a push among Democratic lawmakers, professors, and others for the IRS to use some of its new funds to help address the issue.

That 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.

Black taxpayers claiming the earned income tax credit are more likely to be audited than other taxpayers claiming the credit, the study also found. The IRS conducts a sizable number of audits each year of returns claiming the EITC, a refundable tax credit for lower-income households.

The study raised alarm bells among many who follow tax issues closely, with multiple senators bringing up the issue during the Feb. 15 confirmation hearing for IRS Commissioner nominee Danny Werfel.

“Members of this committee think this is very, very serious,” Senate Finance Committee Chairman Ron Wyden (D-Ore.) said.

Wyden requested that Werfel report back to lawmakers about the reasons for the disparities and what he plans to do to fix it within 60 days of confirmation. Werfel said he was troubled by the study’s findings and would “talk to those individuals that are working this issue and report back to you on what we’re finding.”

The release of the research paper comes after the IRS was provided with roughly $80 billion in last year’s tax-and-climate law. Lawmakers and academics, as well as the administration itself, think the additional resources for technology and enforcement could be helpful in reducing racial disparities in audits.

“The IRS will be putting a lot more resources into auditing those at the top, instead of those with the lowest incomes, and that’s a part of equity across the board,” Sen. Elizabeth Warren (D-Mass.) said one day after the hearing with Werfel.

The researchers used IRS data on about 148 million tax returns and 780,000 audits, as well as data about roughly 72,000 returns selected for National Research Program audits, in their study.

Algorithms, Funding Constrains

The authors of the study said in their paper that because the IRS doesn’t collect information about taxpayers’ race and because the agency largely uses automated processes to select returns claiming the EITC for audit, it’s unlikely that IRS employees are deliberately treating taxpayers differently because of their race.

Instead, the study suggests that the IRS might be able to address the racial disparities if it makes changes to its audit-selection algorithms. The study also suggests that resource constraints that limit the number of more complex returns that are audited may be a factor.

The IRS saw funding declines prior to the enactment of the Inflation Reduction Act that led to decreases in the number of employees with the expertise to do complex audits of higher-income taxpayers, noted Daniel Ho, a Stanford law and political science professor and one of the authors of the study. He also said that the IRS may be able to improve the programming of its audit systems if it updates its aging technology.

The funding could help develop expertise among IRS auditors and “really ensure that audits are selected when there really is a really good reason to think that there has been tax evasion,” he said.

Ho’s comments were echoed by lawmakers and the Biden administration.

“Equitable enforcement of our tax laws is a top priority for the Administration, and resources provided by the Inflation Reduction Act will enable the IRS to upgrade technology and hire top talent to go after wealthy tax evaders,” Treasury spokesperson Ashley Schapitl said in a statement shortly after the release of the study.

Shortly before the Stanford paper was released, Treasury released an analysis finding that white taxpayers disproportionately benefit from a number of tax preferences. President Joe Biden on Feb. 16 issued an executive order advancing racial equity that directs federal agencies to consider opportunities to “prevent and remedy discrimination, including by protecting the public from algorithmic discrimination.”

Not Just Auditors

Tax professionals and others say there is more the agency can do to make audits more equitable than just hiring more auditors and improving technology.

Kimi Ellen, a member of the board of directors of the National Association of Black Accountants, said she’d like to see the IRS use some of its funds to educate taxpayers about unscrupulous tax preparers. That could help to reduce the EITC error rate that prompts the agency to audit many returns claiming the credit.

“Education would be huge,” Ellen said.

Nina Olson, a former National Taxpayer Advocate who is now executive director of the Center for Taxpayer Rights, said the IRS should be using Inflation Reduction Act funds to hire new employees such as data scientists, data ethicists, and mathematicians so that the IRS could conduct the type of research that academics did in this study.

The IRS should hire people who can “do the kind of work that the academics did, right, in this study, but do it as part of their job at the IRS so that that becomes part of what the IRS is looking at.”

More Research Needed

The IRS should also do more to examine and monitor the impact of its audit policies, several observers said.

Steven Dean, a professor at Brooklyn Law School, suggested that the IRS or another entity could use testers, similarly to how testing is used elsewhere in the federal government to investigate housing discrimination.

To fix the IRS’s algorithms, not only does there need to be “big-picture data” such as the recent studies, “but you also have to understand how it’s happening on the ground,” he said.

Dorothy Brown, a Georgetown University law professor and author of “The Whiteness of Wealth,” said the IRS should reexamine is algorithms and also broadly assess its enforcement powers to ensure the agency is not targeting Black taxpayers.

“One thing they could do is to make sure as they put new processes and procedures in place, to do a racial equity analysis, to make sure that they’re not systematically discriminating against taxpayers based upon their race,” Brown said.