The Internal Revenue Service audits Black taxpayers at significantly higher rates than other Americans, Commissioner Daniel Werfel told lawmakers Monday, confirming earlier findings by researchers at leading universities and the Treasury Department.
Tax examiners do not know the race of the people they are auditing, but the algorithms the IRS uses to monitor fraud around the earned income tax credit — one of the U.S.'s largest social safety net programs — target filers that make errors on their returns and do not report business income. The result, the researchers found, is that the algorithms are more likely to identify Black taxpayers for audits.
There is no evidence that Black taxpayers perpetrate fraud at a higher rate than any other demographic.
Researchers from Stanford University, University of Michigan, University of Chicago and the Treasury Department in January found that the IRS was at least three times as likely to audit Black taxpayers than other demographic groups.
“While there is a need for further research, our initial findings support the conclusion that Black taxpayers may be audited at higher rates than would be expected given their share of the population,” Werfel wrote.
The chair of the Senate Finance Committee, Sen. Ron Wyden (D-Ore.), also cited audit algorithms as a problem.
“The racial discrimination that has plagued American society for centuries routinely shows up in algorithms that governments and private organizations put in place, even when those algorithms are intended to be race-neutral,” Wyden said in a statement. “This bias is completely unacceptable regardless of where it occurs, and we have an obligation to stamp it out.”
The IRS will devote “significant resources” to determine the scope of the problem, Werfel wrote.
The algorithmic shortcomings may have been a result of more than a decade of IRS budget cuts, some tax experts have suggested. Between 2010 and 2019, the IRS’s annual appropriation from Congress fell by an inflation adjusted $3 billion.
That led IRS leaders to consolidate resources and prioritize audits that are easy to complete. The IRS in recent years has grown more dependent on correspondence audits, or exams completed almost exclusively by mail. They are relatively inexpensive to conduct, according to the Taxpayer Advocate Service, the IRS’s internal watchdog, and produce lucrative results.
But they also mostly fall on taxpayers who can’t afford to fight back by spending hours on the phone with the tax agency or hiring lawyers, turning the IRS’s prolific enforcement capabilities on the most economically vulnerable taxpayers.
“It’s not like it’s a conscious choice by the agency, it’s a resource driven constraint,” said Natasha Sarin, an assistant professor at Yale Law School and former deputy assistant treasury secretary in the Biden administration. “They couldn’t do the other work for more complicated audits.”
That doesn’t eliminate the possibility, Sarin said, that the IRS’s algorithms could have been intentionally designed in ways that harm Black filers.
The study also found a smaller but still statistically significant audit disparity between Black taxpayers and others who do not claim the earned income credit. That suggests there are other biases in the IRS’s audit criteria, said Dorothy A. Brown, a professor of law at Georgetown University Law Center.
“There are all kinds of choices that the IRS made that don’t necessarily make sense,” Brown said. “The fact that Black non-earned income tax credit claimants are more likely to be audited refutes the correspondence audit argument.”
Last year’s Inflation Reduction Act, one of President Biden’s chief legislative victories, included $80 billion for the IRS over 10 years to increase its audit rate of high-income individuals and business, and modernize its operations to better serve low- and middle-income taxpayers.
Administration officials in April said the IRS aimed to increase audits tenfold on taxpayers earning more than $400,000 per year.