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Study Finds IRS Audits Black Taxpayers at Higher Rate

S.J. Steinhardt
Published Date:
Feb 6, 2023

The IRS audits Black taxpayers at 2.9 to 4.7 times the rate of non-Black taxpayers, a Stanford University study found.

Despite tax audits being race-blind, the study attributed the main source of the disparity between Black and non-Black taxpayers audit rates to "differing audit rates by race among taxpayers claiming the Earned Income Tax Credit (EITC)." This is mainly due to automated algorithms that flag discrepancies in claims for tax credits, the working paper by Stanford’s Institute for Economic Policy Research (IERP) determined.

Certain policies tend to increase the audit rate of Black taxpayers, the study found. They are: designing audit selection algorithms to minimize the "no-change rate"; targeting erroneously claimed refundable credits rather than total under-reporting; and limiting the share of more complex EITC returns that can be selected for audit.

"Our results highlight how seemingly technocratic choices about algorithmic design can embed important policy values and trade-offs," the report said.

Partnering with the U.S. Treasury Department, the researchers analyzed comprehensive microdata on approximately 148 million tax returns and 780,000 audits, mostly from 2014, but ranging from 2010 to 2018. They found the audit rate for returns filed by Black taxpayers is between 0.81 and 1.34 percentage points higher than the audit rate for non-Black taxpayers. The base audit rate of for the overall U.S. population is 0.54 percent. 

In finding that the difference in audit rates for Black and non-Black taxpayers is due to their claiming the EITC in higher numbers, the researchers found that Black taxpayers claiming the EITC are between 2.9 and 4.4 times as likely to be audited as non-Black EITC claimants. They also observed a much smaller, though still statistically significant, difference in audit rates between Black and non-Black taxpayers who do not claim the EITC.

The researchers were able to determine the race of the audited taxpayers by using their first and last names, and census demographics of their neighborhoods. Black Americans are disproportionately concentrated in low-wage jobs and are more likely than whites to claim the EITC, according to The New York Times.

"We have no reason to think that this is a result of intentional discrimination, as the IRS does not observe race and the vast majority of these audits are conducted by mail,"  Daniel Ho, a law professor and director of Stanford's Regulation, Evaluation, and Governance Lab, where the study originated, wrote in an email to Accounting Today. "While we do not have access to IRS's exact selection protocols, we show that a focus on refundable credits can in fact drive this disparity. Our models show that if the IRS treated dollars evaded equally—regardless of whether from eligibility for refundable credits or underreporting of high income—the disparity would reduce substantially."

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