The Internal Revenue Service (IRS) is set on promoting “fairness and accuracy” and has taken steps to reduce audit rate disparities after reports emerged that the federal agency inadvertently audits black taxpayers at significantly higher rates than non-black Americans.
The agency received $80 billion in funding last year as part of the Biden administration’s Inflation Reduction Act (IRA).
“The investment of resources under the IRA represents a generational opportunity for the IRS to refocus our energy on closing the tax gap by ensuring efficient and effective tax administration,” Mr. Werfel wrote.
“This rebalancing effort centers around high-income and high-wealth individuals, complex partnerships, and large corporations who are not paying the taxes they legally owe, as well as any bad actors who victimize taxpayers,” he continued.
The study, which was published in January, analyzed data on more than 148 million tax returns and 780,000 audits starting in 2014.
Researchers found that discrimination in the computer algorithms the agency uses to determine who is selected for an audit was the main culprit for the racial disparity and stressed that it is “unlikely to be intentional” on behalf of any staff at the IRS.
IRS Probe ‘Validates’ Study Findings
Specifically, the study found that recipients of the earned-income tax credit (EITC)—a tax benefit aimed at low- to moderate-income workers—play a major role in the disparities.They noted that those tax returns are more likely to contain mistakes and will thus be flagged by the computer algorithms used by the agency.
According to researchers, black taxpayers accounted for 21 percent of EITC claims but were the focus of 43 percent of EITC audits.
In his letter to Mr. Wyden on Monday, Mr. Werfel said the agency’s own internal investigations had “validated” the findings of the study and “demonstrated that the volume of exams focused on the EITC that the IRS performs is a major driver of overall disparity.”
“The realignment to focus on high-end tax evasion and any bad actors who contribute significantly to the tax gap will therefore help reduce this disparity, in addition to its other beneficial effects for tax administration, by achieving greater balance in our examination of different sources of non-compliance,” the IRS commissioner wrote.
“We are taking additional steps to reduce audit rate disparities as well,” he continued, noting that the agency has implemented an initial round of changes to EITC case selection processes that testing which the agency believes will “increase the expected return on investment for cases selected while simultaneously reducing disparities.”
Watchdog Issues Warning Over IRS Clampdown on High Earners
Additionally, the agency is directing more resources to help taxpayers fix errors in their filings, and “closely examining potential non-compliance among large, complex partnerships,” including 75 of the largest partnerships in the United States identified as higher risk for tax compliance with the help of artificial intelligence tools.Mr. Wyden welcomed the IRS overhaul in a statement on Monday and said he was encouraged by the agency’s actions.
“I’m pleased to see the IRS using the enforcement funding from the Inflation Reduction Act to help lower-income taxpayers catch mistakes from the start and identify credits they are eligible for while reserving enforcement resources to crack down on wealthy tax cheats and those who prey on vulnerable filers,” the lawmaker said. “This is exactly why Congress boosted funding for the IRS.”
The lawmaker noted he will continue to “watchdog” the agency amid its overhaul of tax enforcement to ensure it completely eliminates racial bias in its audit selection methods.
However, the Treasury Inspector General for Tax Administration, a watchdog overseeing the IRS, has warned that Americans making less than $400,000 could be subject to the increased scrutiny under the clampdown, given that the agency has not clearly defined “high-income” earners.
