Sun Sentinel Palm Beach Edition
Study: Black Americans much more likely to face tax audits
WASHINGTON — Black taxpayers are at least three times as likely to be audited by the IRS as other taxpayers, even after accounting for the differences in the types of returns each group is most likely to file, a team of economists has concluded in one of the most detailed studies yet on race and the nation’s tax system.
The findings do not suggest bias from individual tax enforcement agents, who do not know the race of the people they are auditing. They also do not suggest any valid reason for the IRS to target Black Americans at such high rates; there is no evidence that group engages in more tax evasion than others.
Instead, the findings document discrimination in the computer algorithms the agency uses to determine who is selected for an audit, according to the study by economists from Stanford University, the University of Michigan, the University of Chicago and the Treasury Department.
Some of that discrimination appears to be rooted in decisions that IRS officials made over the past decade as they sought to maintain tax enforcement in the face of budget cuts, by relying on automated systems to select returns for audit.
Those decisions have produced an approach that disproportionately flags tax returns with potential errors in the claiming of certain tax credits, like the earned-income tax credit, which supplements low-income workers’ incomes in an effort to alleviate poverty. Those tax returns are more often selected for audits, regardless of how much in owed taxes the agency might recover.
The result is audit rates of Black Americans that are between three and five times the rate of other taxpayers, even when comparing that group to other taxpayers who also claim the EITC.
The IRS does not detail how it selects returns for audit. But the researchers were able to isolate several apparent explanations for why Black taxpayers are targeted so much more frequently. One is complexity: It is much harder for the agency to audit returns that include business income, because that process requires expertise from individual auditors.
Black taxpayers are far less likely than others to report business income. And Black taxpayers appear to disproportionately file returns with the sort of potential errors that are easy for IRS systems to identify, like underreporting certain income or claiming tax credits that the taxpayer does not qualify for, the authors find.
In effect, the researchers suggest that the IRS has focused on audits that are easier to conduct and as a result, finds itself disproportionately auditing a historically disadvantaged group rather than other taxpayers, including high net-worth individuals.
“What the IRS chooses to focus on when it conducts audits can either undercut or complement our progressive tax system,” said Daniel Ho, an author of the study who is the faculty director of Stanford’s Regulation, Evaluation and Governance Lab, known as RegLab, where the study originated.
The IRS could instead program its algorithms to target audits toward more complicated returns with higher potential dollar value to the government if an audit found errors. In that case, the discrimination in the system would vanish, the authors concluded.
On his first day in office, President Joe Biden signed a series of executive orders seeking to advance racial equity in the federal government and the nation. One of them included a directive to the White House budget office to “study methods for assessing whether agency policies and actions create or exacerbate barriers to full and equal participation by all eligible individuals.”
That order inspired researchers at the RegLab, which uses machine learning and other advanced techniques to help governments improve policies. It eventually yielded the study which researchers presented this week.