While the Internal Revenue Service sharpens its focus to find rich taxpayers and businesses sidestepping tax laws, it’s also changing how it approaches audits of working-class taxpayers in order to reduce racial disparities.
On Monday, IRS Commissioner Danny Werfel said the IRS in fiscal year 2024 will be “substantially reducing” the number of audits it mails out to question claims for refundable credits like the earned income tax credit and the child tax credit. The agency is also revising its internal models that guide which returns are picked for review, Werfel said in a letter to Sen. Ron Wyden, a Democrat from Oregon.
Black taxpayers were being audited around three to five times the rate of other taxpayers, according to a January study from Stanford University and Treasury Department economists. The root may lie in the IRS algorithms to pick cases for review, they said.
In March, Werfel acknowledged researchers could be right about the disproportionate impact.
The earned income tax credit is geared at low-income households and it’s been a longstanding anti-poverty measure.
The EITC and other refundable credits lifted 6.4 million people out of poverty in 2022, according to recent poverty statistics from the Census Bureau.
But the credit is complicated to administer and payout sizes can hinge on the number of children in living in a household for more than half the year. One change in IRS modeling will improve accuracy determining where a child lives, Werfel said Monday.
The IRS conducted more than 240,000 audits claiming the EITC for tax-year 2018 returns, according to the IRS. That’s 0.9% of more than 26 million EITC returns filed that year, according to the data. The IRS audited 0.3% of all individual returns that tax year, the most recent batch of finalized audit statistics.
The IRS is planning to improve taxpayer education on the EITC and take a closer look at “unscrupulous preparers” who may be turning in returns that low-ball income and inflate certain tax credit claims, Werfel noted.
“By revisiting the EITC audit selection process and focusing audit activity on the wealthiest taxpayers who are dodging taxes, rather than working people who are just trying to comply, the IRS is taking important steps to address the racial disparities in audit selection identified earlier this year,” Wyden said in a statement.
Wyden chairs the Senate Finance Committee.
The audits by mail denied many working families the tax money they were eligible for “just because they can’t make it through a confusing and burdensome audit process,” said Chye-Ching Huang, executive director at NYU School of Law’s Tax Law Center.
The IRS took a “critical step to increase accuracy and fairness in tax administration” with Monday’s announcement, she said.
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