The Internal Revenue Service (IRS) is taking steps to address racial disparities in its audit practices while focusing on cracking down on wealthy taxpayers and businesses who dodge tax laws.
In a recent letter to Senator Ron Wyden of Oregon, IRS Commissioner Danny Werfel announced that the agency intends to significantly reduce the number of audits targeting refundable credits such as the earned income tax credit and the child tax credit in the fiscal year 2024. Additionally, the IRS plans to revise its internal selection models for auditing tax returns.
A study conducted by Stanford University and Treasury Department economists found that black taxpayers were audited at a rate three to five times higher than other taxpayers. It is suspected that the root cause of this disparity lies in the IRS algorithms used for selecting cases for review.
Commissioner Werfel admitted in March that these researchers may be correct in their assessment of the disproportionate impact on black taxpayers.
The earned income tax credit has long been recognized as an effective tool in combating poverty among low-income households. In fact, recent poverty statistics from the Census Bureau reveal that this credit, along with other refundable credits, lifted 6.4 million people out of poverty in 2022.
However, administering and calculating the EITC can be complex, as the size of the credit depends on the number of children residing in a household for more than half of the year. To enhance accuracy in determining a child’s primary residence, the IRS is making adjustments to its modeling systems.
By taking these measures, the IRS aims to ensure fairness in its audit process and reduce racial disparities among working-class taxpayers while simultaneously targeting tax evaders among wealthier individuals and businesses.
Enhanced IRS Audits: A Closer Look
In tax-year 2018, the IRS conducted over 240,000 audits specifically targeting claims for the Earned Income Tax Credit (EITC), as reported by the IRS themselves. This accounted for only 0.9% of the more than 26 million EITC returns that were filed that year, according to available data. Additionally, the IRS audited a mere 0.3% of all individual returns for that tax year, making this the latest statistics snapshot from the agency.
With an aim to enhance taxpayer education on the EITC and root out unscrupulous preparers who may be submitting misleading returns that understate income and inflate certain tax credit claims, the IRS is planning a comprehensive strategy. Former IRS Acting Commissioner, Danny Werfel, emphasized the importance of this initiative.
Addressing the issue of audit disparities, Senator Wyden expressed his support for the IRS’s decision to review their EITC audit selection process and concentrate their efforts on auditing wealthy individuals who evade taxes, rather than burdening hardworking individuals who are genuinely striving to comply. It is an important step towards rectifying the racial disparities previously identified in the audit selection process, according to Wyden’s statement. Senator Wyden is also the chair of the Senate Finance Committee.
Many working families have been denied their rightful tax refunds due to audits conducted by mail. These comprehensive audits have often imposed a daunting and ambiguous process on these families, leading to the denial of their eligibility for deserving tax credits. Chye-Ching Huang, the Executive Director of NYU School of Law’s Tax Law Center, regards the IRS’s recent announcement as a crucial step towards boosting accuracy and equity in tax administration.
It is evident that the IRS is actively working towards improving the audit selection process for EITC claims while addressing racial disparities and supporting working families in their pursuit of accurate tax returns. This comprehensive strategy, coupled with taxpayer education, will pave the way for a fairer and more reliable tax system.