IRS chief acknowledges audits of black taxpayers may be unfairly high

The IRS may be auditing Black taxpayers at significantly higher rates than non-Black taxpayers, according to IRS Commissioner Danny Werfel. 

Werfel dedicates team to examine audit algorithms 

In a letter to Senate Finance Committee Chairman Ron Wyden (D-Ore.), Werfel said that the IRS is "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." 

As I wrote in February, a comprehensive study conducted by economists from Stanford University, the University of Michigan, the University of Chicago, and the Treasury Department resulted in a detailed report that concluded the IRS is about three times more likely to audit Black taxpayers compared to other taxpayers. 

The study states that "despite race-blind audit selection, Black taxpayers are audited at 2.9 to 4.7 times the rate of non-Black taxpayers."  

It found the most likely causes of this racial disparity are IRS algorithms that disproportionately flag returns that claim refundable tax credits like the Earned Income Tax Credit (EITC). 

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. 

The researchers found that 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.

Black taxpayers claiming the EITC more likely to be audited 

"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," the researchers wrote. "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." 

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. 

IRS Strategic Operating Plan emphasizes data processing and analytics 

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. 

Werfel writes the IRS is committed to treating all taxpayers fairly 

The IRS has not yet released any data on the racial makeup of taxpayers who have been audited since the Stanford study was released. However, the agency has said that it is committed to ensuring that all taxpayers are treated fairly. 

"The IRS is committed to ensuring that all taxpayers are treated fairly and with respect," Werfel said in his letter to Wyden. "We will continue to work to identify and address any disparities in our enforcement activities."