The IRS will review its processes to make sure it does not audit Black taxpayers at higher rates than others and will make any changes before the next filing season, the IRS commissioner said Monday in response to a university study that showed racial differences in audit rates.
"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," Commissioner Danny Werfel wrote in a letter to U.S. senators.
"I will stay laser-focused on this to ensure that we identify and implement changes prior to next tax filing season," he wrote.
Senate Finance Committee Chair Ron Wyden, D-Ore., had asked Werfel to respond to the study, led by Stanford University, which found that Black taxpayers were 2.9 to 4.7 times more likely to be audited than non-Black taxpayers. When researchers turned to the earned income tax credit (EITC) — which assists low- and moderate-income people — they found that Black taxpayers were the focus of 43% of EITC audits but accounted for just 21% of EITC claims.
The IRS is researching "potential systemic bias in compliance strategies and treatments," Werfel said. The ongoing evaluation of EITC audit selection algorithms is a top priority, he said.
The IRS needs more time to understand "the drivers of this disparity and to thoroughly evaluate the right potential programmatic changes to address it," Werfel wrote. "IRS does not collect data on race and there is substantial uncertainty in any estimates of the audit rate by race or differences in audit rate by race."
For the audit study, researchers analyzed data from about 148 million tax returns and 780,000 audits. The researchers validated their approach through voter registration records from North Carolina, which, until recently, required citizens to check a box for race and ethnicity when they registered to vote.
When he testified before the Senate Finance Committee, Werfel reaffirmed that the agency would use some of its $80 billion infusion over 10 years from the Inflation Reduction Act, P.L.117-169, to focus on high-wealth taxpayers, individuals, corporations, and partnerships and complex partnerships. It also will not increase audits on taxpayers earning less than $400,000 a year from the historic low rates of 2018, he said.
In his letter to senators, Werfel said the Inflation Reduction Act funding also will allow the IRS to reach out more to underserved communities, providing education and assistance in claiming credits and incentives.
Echoing an issue that Black CPAs discussed with the JofA, Werfel said the IRS will focus on
"unscrupulous return preparers who fail to exercise due diligence and disadvantage taxpayers through poor-quality advice." These include "ghost preparers" who are paid for their work but do not sign the tax returns.
"Initial evidence confirms that unscrupulous and ghost preparers disproportionately prepare returns in minority communities," Werfel wrote.
— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.