IRS chief says agency is 'deeply concerned' by higher audit rates for Black taxpayers

Black taxpayers are audited at higher rates than other racial groups, an internal IRS investigation has confirmed.

"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," IRS Commissioner Daniel Werfel told lawmakers.

In a letter to the Senate Finance Committee on Monday, Werfel said the agency would review its audit algorithms for specific anti-poverty tax credits to look for and address any racial biases.

"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 in the letter.

Werfel said the agency is "deeply concerned" by the findings from its investigation and is committed to doing the work to understand and address any disparities in its practices.

Senate Finance Committee Chairman Ron Wyden., D-Ore., echoed in a statement Monday that audit algorithms are the root of the problem of racial bias in audits.

"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," said Wyden, calling the racial bias "completely unacceptable."

The findings from the agency's internal investigation come after researchers from Stanford University, the University of Michigan, the University of Chicago and the Treasury Department in January reported findings from a study that Black Americans are three to five times more likely to have their federal tax returns audited than taxpayers of other races.

That study suggests the main reason behind the unfair treatment is the way audits are administered through the Earned Income Tax Credit (EITC) — a tax break designed to supplement the income of low-wage workers.

The IRS, which will receive nearly $80 billion in funding through the Inflation Reduction Act, says it plans to use some of the money to understand "any potential systemic bias" within its compliance strategies and treatments, according to the letter.

Daniel Ho, faculty director of the Regulation, Evaluation and Governance Lab at Stanford Law School, told NPR he's pleased to see that the agency has dedicated resources to better understand the disparities in tax audits.

"The letter was a very positive development, affirming what [researchers] initially found in our paper that showed that Black taxpayers were audited three to five times the rate of non-Black taxpayers — and that there really are meaningful ways in which to think about audit selection to improve that state of affairs," Ho said. [Copyright 2023 NPR]