Black Americans likely audited at higher rates, IRS says

IRS Commissioner Danny Werfel said Monday that Black taxpayers may be getting audited at significantly higher rates than non-Black taxpayers.

“Our initial findings support the conclusion that Black taxpayers may be audited at higher rates than would be expected given their share of the population,” Werfel wrote to Senate Finance Committee Chairman Ron Wyden (D-Ore.).

A study out of Stanford University found audit rates could be as much as five times higher for Black taxpayers than white taxpayers. Wyden asked Werfel to investigate the matter after the latter took the helm of the federal tax collection agency earlier this year.

“We are dedicating significant resources to quickly evaluating the extent to which IRS’s exam priorities and automated processes, and the data available to the IRS for use in exam selection, contribute to this disparity,” Werfel wrote to Wyden.

The Stanford study found the main reason for the unfair treatment to be the way audits are administered relating to a specific tax credit called the Earned Income Tax Credit (EITC).

The EITC gives people on the lower end of the income scale credits worth up to $7,430, depending on how many children they have.

The IRS doesn’t collect information on the race or ethnic background of individual taxpayers, but researchers at Stanford were able to infer racial information using statistical methods involving name data and Census block groups.

It’s not simply a matter of people who claim the EITC getting audited at higher rates that led to more Black people getting audited, the researchers found.

“The larger source of the disparity stems from the selection of taxpayers for audit within the population of EITC claimants: Black taxpayers claiming the EITC are between 2.9 and 4.4 times as likely to be audited as non-Black EITC claimants. In contrast, we observe a much smaller, though still statistically significant, difference in audit rates between Black and non-Black taxpayers who do not claim the EITC,” they wrote.

Specific features of the IRS algorithm that select EITC tax returns for audit may be leading to racial discrimination, including targeting for mistakenly received credits and only selecting simple returns for audit. The EITC costs about $75 billion annually, according to the Joint Committee on Taxation.

Asked whether the IRS should be sued for racially discriminatory practices, Howard University Law School associate professor Alice Thomas said, “Perhaps we should do that.”

“To be able to sue the IRS … we’ve got to get buy-in from the law firms to supply their associates to do pro bono cases,” she told The Hill in February after the release of the Stanford study.

“I’m not so interested in suing the IRS as I am in bringing this to their attention.”

Thomas said that unconscious biases, both within individuals and statistical processes, can lead to unfair and discriminatory practices.

“Behind the people doing the audits [can be] people who have unconscious bias, so we have to wake people up,” she added.

Werfel’s letter comes as the IRS is undergoing a large-scale refurbishment and systems modernization courtesy of an $80 billion funding boost provided last year by Congress.

The IRS is in the middle of hiring tens of thousands of new staff and is receiving an operational redesign that will centralize many aspects of its enforcement and collections protocols, potentially tweaking the systems that produce higher audit rates for Black taxpayers.

An operating plan put out by the agency in April emphasized the new role that data processing and analytics will play as the IRS seeks to diminish the amount of taxes the government fails to collect each year, a sum known as the “tax gap.”

The tax gap could be as large as $1 trillion, former IRS Commissioner Charles Rettig told Congress last year, though more comprehensive estimates put that number between $400 billion and $700 billion annually.