IRS Up to 4.7 Times More Likely to Audit Black Taxpayers

A new study by Stanford University, which analyzed data from the IRS from 2014 to 2018 found that the IRS is up to 4.7 times more likely to audit Black taxpayers than non-Black taxpayers. When researchers turned to the earned income tax credit (EITC) — which assists low- and moderate-income people — they found that Black taxpayers were the focus of 43% of EITC audits but accounted for just 21% of EITC claims.

The study’s authors say that the disparity in audit rates is likely due to a number of factors, including racial bias among IRS employees, the use of outdated algorithms to select taxpayers for audit, and the fact that Black taxpayers are more likely to file for certain tax credits that are more likely to be audited.

The study’s findings have drawn criticism from civil rights groups, who say that the IRS’s audit practices are discriminatory and unfair. The IRS has said that it is committed to fair and impartial enforcement of the tax laws, and that it is working to address the racial disparities in its audit rates.

Black CPAs were not surprised at the results of the study; they already knew that from their work with clients.  Kimi Ellen, CPA, a firm partner in a CPA firm in Chicago who is also chairman of the Diverse Organization of Firms, a board member of the National Association of Black Accountants, and a founder of the National Society of Black CPAs, agreed.  “If you’re auditing one group of people twice as much or more, but they’re not twice the population, then clearly there’s a problem,” she said.

The audit study began from an executive order that President Joe Biden issued on his first day in office that required all federal agencies to review the effect of their programs on equity issues (Executive Order 13985). That order led to Treasury’s collaborating with Stanford to analyze over 148 million tax returns and about 780,000 audits for tax year 2014, which is an audit rate of 0.54%.  In February, less than a month after the Stanford study was released, Biden issued an executive order on racial equity that included an instruction for agencies to focus on “protecting the public from algorithmic discrimination” (Executive Order 14901).

The researchers analyzed data from about 148 million tax returns and 780,000 audits. The IRS does not collect information on race and ethnicity on tax returns, so the researchers’ approach was validated through voter registration records from North Carolina, which, until recently, required citizens to check a box for race and ethnicity when they registered to vote.

Black CPAs said they understand why Black families might draw the attention of the IRS. James E. Heyward, CPA, owner of Heyward CPA PLLC in Durham, N.C., said it is common in Black communities for people with no experience or credentials to advertise how much of a refund they can get someone.

“There is a huge — I cannot understate it — subculture of nonprofessional people who ‘do taxes,'” Heyward said. “They prepare returns with no due diligence or care and submit returns that can trigger audits. They are charging a lot of money and don’t even sign the returns. They’re anonymous.”  These preparers take risks on returns that tax professionals would not take, he said.

Also, Heyward said, the “path of least resistance” for the IRS is refundable credits. “More attention is paid to taxpayers receiving refundable credits like the EITC than people who owe money,” he said.

Underfunding of the IRS is also an issue. It is easier and cheaper to do a correspondence audit of a simple return than to audit a complex return that might have tens of thousands of pages.

Regardless of the reason for higher audit rates of low-income taxpayers, auditing the poor will not accomplish a goal of closing the tax gap, which averaged $496 billion a year for tax years 2014 through 2016.  Jean Wells, CPA, a tax attorney and associate professor in the Howard University School of Business pointed out that while “there might be some fraud with the EITC, but we’re not talking tens of thousands of dollars,” she said. “If you do a cost/benefit analysis, wouldn’t it be better for you to consider netting possibly millions from high-wealth and self-reporting taxpayers with income from passthrough entities as opposed to a couple of thousand dollars from some poor people?”

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