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Black Taxpayers Are at Least 3 Times More Likely to Face Audits

New research suggests that underfunding of the IRS may be partially to blame for racial disparities in tax enforcement.

Black taxpayers are much more likely to face an audit by federal authorities than non-Black Americans — and the underfunding of the Internal Revenue Service (IRS) could be playing a significant role in driving that disparity, new research reveals.

A new study of IRS data published by the Stanford Institute for Economic Policy Research finds that Black taxpayers are audited at a rate three to five times higher than their non-Black counterparts, despite the fact that the IRS does not see the race of the person it is auditing and the fact that there is no evidence that Black people are more likely to evade taxes.

Rather, the research finds that the algorithm the IRS employs to select subjects of audits is largely driving the disparity.

The precise mechanism used by the IRS is kept secret. But the researchers tested several methods of audit selection and found that a method of targeting people who claim the Earned Income Tax Credit (EITC), a credit offered to workers with lower incomes, with less complex tax filings, or non-business filings, produced similar proportions of Black taxpayers being audited.

This suggests that a major reason that Black taxpayers are being audited at higher rates despite their race not being visible to the agency could be that they are both more likely to claim the EITC and less likely to report business income. Because underfunding of the IRS is causing the agency to choose to conduct audits that are less complicated to carry out, this could be putting Black taxpayers particularly at risk.

The research, by economists from the Treasury Department, University of Chicago, University of Michigan and Stanford University, showcases the levels of structural racism that are present in the U.S. government even when processes — in this case, tax reviewing — are designed to not take race into account. It also demonstrates how algorithmic choices, often sold by technocrats as new frontiers of equality, can in practice replicate and perpetuate existing inequalities.

“[W]e find that the objective of the predictive model underlying audit selection, as well as operational considerations relating to the complexity of audited tax returns, can be critical drivers of disparity,” the authors wrote.

While the IRS’s internal choices may be behind the disparity, the authors added that elements like IRS funding could be contributing to the problem.

“[S]ome of the factors we identify are shaped by forces outside the IRS’s control. For example, Congress determines the information reported to the IRS by third parties — which shapes the distribution of non-compliant taxpayers that classification models identify — the rules governing credit eligibility — which may contribute to more mistakes among Black taxpayers due to racial differences in family structure — and IRS funding levels — which shapes the ability of the agency to allocate resources to complex cases,” the report reads.

Indeed, the IRS, Democrats and government watchdog groups have been speaking out about the IRS budget, which has been steadily eroded by conservatives in recent years. Underfunding has caused the IRS to slash its staff, leaving it unable to target the demographic that dodges taxes the most: the wealthy.

Because wealthy taxpayers and large corporations are able to use complex accounting methods to hide their incomes from the government, the IRS audits the wealthy at a far lower rate than it audits low-income families. Though government officials are explicit in saying that this disparity is caused by budget cuts, conservatives have tried to paint the disparity as a reason to even further defund the IRS, perpetuating the right-wing cycle of using deficiencies caused by budget cuts to justify slashing agency budgets even further.

New IRS funding passed in last year’s Inflation Reduction Act — which House Republicans have already tried to revoke — is targeted specifically at recouping some of the budget cuts and targeting rich taxpayers. Proponents say this funding could help to alleviate disparities in tax enforcement.

“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,” said Rep. Richard Neal (Massachusetts), top Democrat in the House Ways and Means Committee.

“This is unacceptable, but a consequence of algorithmic tools that exacerbate racial biases in our institutions,” Neal said. “I look forward to working with Secretary Yellen to turn over a new page at the IRS, spurred by our multiyear investments from the Inflation Reduction Act.”

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