IRS Chief ‘Laser-Focused’ on Stamping Out ‘Racism’ in Tax Audits

There is 'substantial uncertainty' on the alleged bias

Internal Revenue Service (IRS) commissioner nominee Daniel Werfel testifies before the Senate Finance Committee during his nomination hearing in Washington, on Feb. 15, 2023. Kevin Dietsch/Getty Images

The Internal Revenue Service (IRS) is “laser-focused” on ensuring tax laws are enforced in a fair and impartial manner after reports emerged that the federal agency inadvertently audits black taxpayers at significantly higher rates than other Americans.

In a May 15 letter (pdf) to Senate Finance Committee chairman Ron Wyden (D-Ore.), IRS commissioner Daniel Werfel noted a recent joint study by researchers at Stanford University, the University of Michigan, the University of Chicago, and the Treasury Department which found that black taxpayers are audited at three to five times the rate of non-black taxpayers.

“When evidence of unfair treatment is presented, we must take immediate actions to address it,” Werfel wrote in his letter to Wyden. “It is also important to reiterate that we do not and will not consider race as part of our case selection and audit processes.”

Werfel said the IRS is “deeply concerned by these findings and committed to doing the work to understand and address any disparate impact of the actions we take,” adding that research into the matter remains ongoing.

Further time is needed to “yield a robust understanding of the drivers of this disparity and to thoroughly evaluate the right potential programmatic changes to address it,” he said.

However, Werfel stressed that “fairness in audit selection is a complex topic,” that the IRS “does not collect data on race,” and that there is “substantial uncertainty in any estimates of the audit rate by race or differences in audit rate by race.”

“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,” he said, adding that the agency will review audit algorithms used for the earned income tax credit (EITC) audit selection to search for systemic racial bias.

The Internal Revenue Service (IRS) building in Washington, on March 22, 2013. Susan Walsh/AP Photo

IRS Examining Disparities

“We are dedicating significant resources to quickly evaluating the extent to which IRS’s exam priorities and automated processes, and the data available to the IRS for use in exam selection, contribute to this disparity,” Werfel said.

Werfel vowed to remain “laser-focused” on ensuring that the agency identifies and implements any necessary changes prior to the next tax filing season.

He also noted that the IRS, which received $80 billion in funding last year as part of the Biden administration’s Inflation Reduction Act, will use its additional funding to focus more attention on “reaching underserved communities to provide education and real-time assistance in claiming available credits and incentives.”

“In summary, we are making broad efforts to advance our commitment to fair and equitable tax administration and evaluating the best ways to address bias within our audit program,” Werfel concluded.

The study Werfel referenced, which was published in January, analyzed data on more than 148 million tax returns and 780,000 audits starting in 2014.

Because the IRS does not require taxpayers to disclose their racial or ethnic identity, researchers relied on first names, last names, and geography (U.S. Census block groups) to predict the “probability” that a person identifies as black.

The study found that discrimination in the computer algorithms the agency uses to determine who is selected for an audit is the reason behind the racial disparity and that it is “unlikely to be intentional” on behalf of any staff at the IRS.

Sen. Ron Wyden (D-Ore.) on Capitol Hill in Washington, on Sept. 29, 2015. Lauren Victoria Burke/AP Photo

Democrats Praise Study Findings

Specifically, researchers found that the EITC—a tax benefit aimed at low- to moderate-income workers—plays a major role in the disparities. They noted that those tax returns are more likely to contain errors 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. Separate data from the Conservative Heritage Foundation found that 43–50 percent of tax returns claiming the EITC between 2006 to 2008 involved “erroneous ”overclaims.

In a statement on May 15, Wyden credited researchers in the January study for doing a “great service” and “spotting the racial bias in the algorithms that guide audit selection.”

He said the findings of the study were down to two main issues.

“First, 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.

“Second, over the previous decade, Republicans strategically gutted the IRS budget in a way that made it virtually impossible to enforce our tax laws fairly. Those cuts led to an exodus of the highly trained staff who know how to root out tax cheating by the wealthy and corporations and an overreliance on these flawed algorithms that we now know trigger a disproportionate number of audits on black Americans,” he said.

Wyden added that he plans to reintroduce his Algorithmic Accountability Act (pdf)—initially introduced in 2022—in the coming weeks.

Under that act, companies will be required to assess the impacts of the automated systems they use and sell and examine whether such systems allow for racial bias.

Wyden added that he believes government systems should be required to undergo similar assessments too.