Racial Economic Inequality

New Study Finds Significant Racial Bias in IRS Tax Audits

A new study led by a laboratory at Stanford that found that there is significant racial bias in audits. It founds that Black taxpayers receive IRS audit notices at least 2.9 times (and perhaps as much as 4.7 times) more often than non-Black taxpayers. It was done by staff of the Stanford Law School, Stanford RegLab, Stanford Institute for Human-Centered Artificial Intelligence, Stanford Institute for Economic Policy Research, University of Chicago, and the U.S. Department of the Treasury’s Office of Tax Analysis.

They found that the main source of the disparity is differing audit rates by race among taxpayers claiming the Earned Income Tax Credit (EITC). Also, it is shown that maximizing the detection of underreported taxes would not lead to Black taxpayers being audited at higher rates. In contrast, certain policies tend to increase the audit rate of Black taxpayers: (1) designing audit selection algorithms to minimize the "no-change rate"; (2) targeting erroneously claimed refundable credits rather than total under-reporting; and (3) limiting the share of more complex EITC returns that can be selected for audit. 

Because the IRS does not collect data by race, the authors had to develop a sophisticated model to identify and analyze racial differences. This absence of IRS data is why such an analysis of audits has not been possible before this. Tax policy expert Dorothy A. Brown opposes having a racial identifier on IRS form 1040, because she "believes unconscious and conscious biases on the part of our tax administrators could unfairly target black taxpayers for audits, could subject black Americans to even worse treatment than they're already receiving. So I completely oppose any racial identifier on the face of the tax return, but there's more many ways to collect the information. So, not having it on the 10 40 doesn't mean you can't get it. The IRS statistics of income, um, division, which publishes statistics, they do surveys. They could ask information on their surveys. They could cross check the tax return data with social security race." 

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Sources:

Read the February 14, 2023 Forbes article.

https://siepr.stanford.edu/publications/measuring-and-mitigating-racial-disparities-tax-audits.

https://taxjustice.net/wp-content/uploads/2021/04/TaxcastExtraScript0421.pdf.