IRS more likely to audit black Americans’ taxes, study finds

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Black Americans are about three to five times more likely to face an IRS audit than other taxpayers, according to a new study.

Although there is no evidence of explicit discrimination by the IRS or its tax agents, the results show that the disparity stems from a flawed software algorithm used by the agency to choose who is audited.

Based on microdata from about 148 million tax returns and 780,000 audits, the study was conducted by economists from Stanford University, the University of Michigan, the US Department of Treasury and the University from Chicago.

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“The fair application of our tax laws is a top priority for the administration, and the resources provided by the Cut Inflation Act will allow the IRS to upgrade technology and hire top talent. to prosecute wealthy tax evaders,” a Treasury Department spokesperson told CNBC. E-mail.

Focus on ‘low cost, high certainty cases’

Study co-author Evelyn Smith, a graduate student in economics at the University of Michigan and a visiting scholar at Stanford University’s RegLab, said the differences in audit rates appear to be driven by the the agency’s emphasis on “low-cost, high-certainty cases.” “

Specifically, the study examines audits of filers claiming the Earned Income Tax Credit, a tax relief for low-to-moderate earners. The credit is refundable, which means eligible filers can receive it even without any tax owing.

The results show that black filers claiming the earned income tax credit were more likely to be audited than non-black filers claiming the same credit.

“It’s a type of audit that the IRS does a lot,” she said. “It’s cheap, it’s easy to do, and black taxpayers are taken disproportionately compared to non-black taxpayers.”

Focusing on these problems at the individual level rather than on the total amount of under-reporting seems to be at the root of these differences.

Evelyn Smith

Study co-author

Smith said the IRS focused on specific errors in claiming the earned income tax credit, such as missing dependents or erroneous tax returns, which are required for eligibility.

“Focusing on these issues at the individual level rather than the total amount of under-reporting appears to be driving these differences,” she said, noting that a shift to tax credit filers on self-employment income would help solve the problem.

Cuts created ‘distorted prioritization of audits’

The study comes amid the ongoing debate over the nearly $80 billion in IRS funding, including enforcement, approved by Congress in August.

Chuck Marr, vice president for federal tax policy at the Center on Budget and Policy Priorities, said the findings were “very troubling” and speak to the agency’s staffing needs. “The app division has been decimated by budget cuts over the past decade,” he said. “And one of the results of that has been this distorted prioritization of audits.”

The IRS is expected to present a funding allocation plan to Treasury Secretary Janet Yellen in February.

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