Now that Tax Day is behind us, audit season has begun. The IRS will flag some tax returns for closer scrutiny. And, as a recent study by researchers at Stanford University, University of Michigan, University of Chicago and the Treasury Department revealed, you’re more likely to be on the receiving end of an audit if you’re Black.
This groundbreaking study sought to understand why this disparity exists even when the IRS does not collect information on race – so an auditor could not know the race of the tax filer. The researchers used a subset of taxpayer data using a methodology that could predict the race of the tax filer, to analyze the agency’s automated audit system.
The study found that Black Americans get selected for audits at rates three to five times higher than the rate of other taxpayers. They also get selected at higher rates compared to non-Black taxpayers who also file for the earned income tax credit (EITC) or are otherwise in similar economic conditions. As the New York Times explained, it “flags tax returns with potential errors in the claiming of certain tax credits, like the earned-income tax credit… Those tax returns are more often selected for audits, regardless of how much in owed taxes the agency might recover.”
Because the algorithm used by the IRS to run its automated audit system is secret, researchers can’t know exactly what’s driving the disparate audit rates. Nevertheless, they surmise that the problem lies in the design of the algorithm, which is structured to focus on even relatively small amounts of underreported income.
The study is timely in several ways. For one, it highlights the damage caused by years of underfunding of the IRS. From 2010 to 2021, Congress cut about one-fifth of the agency’s funding, adjusted for inflation. The IRS now has a smaller staff to handle more, and more complex, tax returns. Last year Congress increased funding for the IRS by $80 billion over a 10-year period as part of the Inflation Reduction Act. However, in its first act after taking power, the Republican-controlled House passed a bill to reduce the new funding by almost 90 percent. This, of course, would reduce tax collections and add more than $114 billion to the national deficit, according to the Congressional Budget Office.
The defunding of the IRS appears to be a key factor in why Black Americans get audited more heavily. The study suggests that insufficient funding has precluded the IRS from having the kind of in-house expertise that could audit the large and complex tax returns filed by rich, and overwhelmingly white, people – you know, the folks that hire tax lawyers to find every possible tax loophole.
Furthermore, the study is important now because there is a debate taking place in our country about the role race has played in shaping the laws that govern our society. In many ways, the debate is not whether systemic racism is good or bad, or whether there’s a way to change policies so as to eliminate unintended, racially disparate consequences. Instead, the debate is mostly about whether systemic racism exists at all.
But the study is clear evidence of how the systems we create – in this case, the IRS automated auditing system – can lead to unintentional, disparate effects on some racial groups. Hopefully, the $80 billion in new funding to the IRS over 10 years from the Inflation Reduction Act of 2022 will help the agency shore up audits, particularly for complex tax returns filed by higher-income earners, removing the incentive to rely on an algorithm that produces inequitable results.
The study shows that an honest assessment of our systems is essential if we are to eliminate racially disparate outcomes.