Long-held suspicions among scholars about racial disparities in the way the IRS uses its audit authority were confirmed this week by a group of researchers who found Black taxpayers are disproportionately targeted by the agency's enforcement arm.
A Stanford University study released last month found that Black taxpayers are at least 2.9 times more likely to be audited as non-Black taxpayers. Secrecy surrounding tax returns and the IRS’s audit decisions make racial bias hard to assess, but new policies ushered in by the Biden administration now require agencies to review data concerning their programs’ impact on equity.
What the research says
- Economists at the U.S. Treasury Department teamed up with Stanford analysts to analyze more than 148 million tax returns and 780,000 audits from 2014.
- Because tax returns don’t require taxpayers to disclose their racial or ethnic identity, the team used first, name, last name and geography to predict whether a given taxpayer was Black.
- The results showed Black Americans received IRS audits 2.9 to 4.7 times more often than non-Black taxpayers.
- The earned income tax credit (EITC) plays a major role in the disparities: Low-income people who claim the EITC are also more likely to be the target of IRS audits. Black taxpayers accounted for 21% of overall EITC claims but were the focus of 43% of EITC audits.
According to Daniel E. Ho, one of the study’s authors, racial inequity in how the IRS makes audit decisions is probably unintentional. Instead, audit selection is determined by an undisclosed algorithm.
So what can the IRS can do to correct bias?
- Using alternative audit selection policies, researchers concluded that changes to the IRS’s algorithm can reduce its racial impact.
- Recommendations from the research team include predicting and focusing on the magnitude of taxpayers’ underreported income as opposed to only its likelihood.
“The IRS should drill down to understand and modify its existing audit selection methods to mitigate the disparity we’ve documented,” Ho said in a news release.