Black taxpayers are audited by the IRS at a disproportionate rate, according to a new study that adds to the research on the uneven ways race-neutral tax provisions and enforcement play out across different communities.
“Despite race-blind audit selection, we find that Black taxpayers are audited at 2.9 to 4.7 times the rate of non-Black taxpayers,” wrote the authorswho included researchers at Stanford University and economists at the Treasury Department’s Office of Tax Analysis.
The “main source” for the disparity is the earned-income tax credit, a long-running credit geared at low- and moderate-income working households, the study said. Even among all EITC claimants, Black taxpayers had roughly three to four times the likelihood of being audited compared to EITC claimants who weren’t Black, the researchers said.
While tax returns do not ask for data on race or ethnicity, the researchers looked at more than 148 million tax returns and around 780,000 audits from tax year 2014. They built models that overlaid Census Bureau data and checked their probabilities for a portion against North Carolina voter registration records, which gave people the option of disclosing their race and ethnicity. That information allowed the researchers to check the accuracy of their projection methods.
The data puts the focus on the underlying algorithms and technology the IRS uses to determine who is getting audited. “Our results highlight how seemingly technocratic choices about algorithmic design can embed important policy values and trade-offs,” the authors said.
Around 70% of audits during recent years are “correspondence” audits done through the mail, instead of in-person field audits, the authors noted. These correspondence audits made up 94% of EITC audits during the tax year the researchers studied. They are also “substantially cheaper” because they rely on automation instead of staffing needs, the authors said.
Devising different audit selection models for people claiming the earned income tax credit, “we find that maximizing the detection of underreported taxes would not lead to Black taxpayers being audited at higher rates,” they added.
“The IRS should drill down to understand and modify its existing audit selection methods to mitigate the disparity we’ve documented,” Stanford Law School professor Daniel Ho said in a statement. “And we’ve shown they can do that without necessarily sacrificing tax revenue.”
A Treasury Department spokesperson told MarketWatch in an email, “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.”
The Inflation Reduction Act, the climate and tax package enacted in August, will devote $80 billion over a decade to the IRS. More than half of the earmarked money is meant to step up enforcement of corporations and rich households.
The IRS has a mid-February deadline to detail how it will use the money. The tax agency did not immediately respond to a request for comment.
In October, Treasury Department Deputy Secretary Wally Adeyemo wrote to then-IRS Commissioner Charles Rettig, noting the need to upgrade IRS operations and make “concerted efforts to improve compliance by those at the top.”
The tax agency has been constrained in its ability to scrutinize the returns of “high-end evaders,” Adeyemo said. “These historic challenges and underfunding have led to audit rates for those at the top of the distribution decreasing more than the correspondence audits of those at the bottom in the last decade, which should change,” he wrote.
The study follows another recent look at the intersection of race and taxes. In a report published last month, researchers at the Treasury Department’s Office of Tax Analysis projected which households were making the most use of different parts of the tax code.
When it came to the EITC, Black families represented 11% of all the studied households, but received 19% of the EITC’s benefits. Hispanic households made up 15% of families, but received 28% of the EITC’s benefits. Meanwhile, white households represented 67% of the families, but received 92% of the benefits from the lower, preferential tax rate on long-term capital gains.
Rep. Richard Neal of Massachusetts, the ranking Democrat on the House Ways and Means Committee, said Tuesday that the latest study offered new data on an old worry.
“For years, Ways and Means Democrats have raised alarms over audit rate disparities between low-income and wealthy taxpayers, and today’s findings confirm that stark racial disparities exist as well,” he said. “This is unacceptable, but a consequence of algorithmic tools that exacerbate racial biases in our institutions.”