The IRS has an alternative to TurboTax. But will that widen the racial wealth gap?
The Internal Revenue Service recently announced that it will begin a pilot program during the 2024 tax season to start preparing and filing Americans’ taxes in-house, relieving them of the need to use an accountant or tax preparation software such as TurboTax.
We have heard considerable discussion about artificial intelligence and its use in our society. I applaud the American Civil Liberties Union, the Leadership Conference on Civil and Human Rights, Upturn and the two dozen partner organizations that are calling on the Biden administration to take concrete steps to address the systemic racial harms of these technologies. Given that several Democratic members of Congress are already concerned about the IRS widening the racial wealth gap, it’s fair to ask if the agency’s new Direct File program will exacerbate this serious concern.
Just one day before the IRS announced its pilot program, its commissioner, Daniel Werfel, acknowledged racial disparities in the agency’s audit process. In a letter to members of the U.S. Senate, he stated that “while there is a need for further research, 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.”
This news is far from shocking given that a January Stanford University study found that the IRS audits Black taxpayers
3-5 times the rate of non-Black taxpayers. Yet, less than 24 hours after the IRS acknowledged the racial disparities in its audit process, it released its Direct
File pilot program, which may increase racial income inequality, exacerbating the racial inequalities the IRS currently faces.
Direct File advocates such as Code for America, a nonprofit focused on improving government services, say that it will ensure more people of color receive the tax credits they deserve. However, a July 2020 report by the Progressive Policy Institute, a public policy think tank, warned that an IRS Direct File system could fail to identify many of the Americans who qualify for the earned income tax credit, the tax credit that supplements the wages of lowto moderate-income families. That’s especially concerning for the African American community because the Brookings Institute found that this tax credit, which 21% of Black women receive per year, reduces racial income inequality by roughly 5%-10% annually.
While tax preparers and preparation services typically ask a series of questions to determine whether their clients qualify for the EITC, the IRS — which has traditionally only been a tax collector — won’t, which may cause thousands of working families to overpay.
The few taxpayers who would notice errors in the IRS-issued tax liability statements would find themselves relying on the communications department of an agency that, based on reports, appears to conduct a discriminatory audit process — one that picks up a mere 11% of the phone calls it receives — to correct the problem. That’s an unfair position that no one should have to face.
According to a 2017 United Kingdom government report, the U.K., which operates a tax system similar to Direct File, regularly issues tax estimation errors due to the country not having enough information on file. This problem has gotten so severe that one-third of British taxpayers now opt to self-assess their tax liabilities rather than use the tax agency’s “simplified” system because they perceive it to be working against, rather than for, their interests. What reason do we have to believe the Direct File system here would operate any better?
Black Americans already face a $220 billion annual wage gap due to myriad systemic inequalities in the private and public sectors. The last thing they need is for the IRS to accentuate this gap at a time when the agency is already in Congress’ crosshairs for governing inequitably. This problem has gotten so out of hand that Democratic U.S. Reps. Bill Pascrell, Suzan DelBene, Judy Chu and Gwen Moore recently had to resort to writing to the IRS to make it clear that “to the extent there is reprehensible racial discrimination built into the IRS’s audit selection algorithm, it must be eliminated.”
Now is not the time for the IRS to create more barriers. Now is the time for Congress to review, question and reform the agency so that it begins working effectively for all of America, not just the privileged few.