IRS acts to address wide disparity in audit rates between Black taxpayers and other filers

WASHINGTON – The IRS said Thursday it has taken steps to address a wide disparity in audit rates between Black taxpayers and other filers, and is taking a closer look at returns from a greater number of wealthy people and large businesses.

“We are reviewing compliance efforts to advance our commitment to fair, equitable and effective tax administration and to hold ourselves accountable to the taxpayers we serve,” according to an annual update from the agency.

A January 2023 study involving university researchers and the Treasury Department found that algorithms based on IRS data selected Black taxpayers for audit at a rate up to 4.7 times the rate of non-Black taxpayers. The study states that the IRS disproportionately audited people claiming the Earned Income Tax Credit, which is intended for low- to moderate-income workers and families: Although black taxpayers accounted for 21% of requests for this reduction, they were the focus of 43% of credit-related audits.

“We took quick initial steps to drastically reduce the number of these audits. We have also made changes to the selection criteria for these audits,” said IRS Commissioner Daniel Werfel.

Werfel, who took office just over a year ago, testified before Congress on the issue and last September wrote to the Senate Finance Committee that the IRS would make changes.

Discriminatory audits, he told journalists, “degrade confidence in our tax system.”

Werfel and the IRS tried last year to show how money from the Reducing Inflation Act, President Joe Biden’s big climate, health care and tax law, helped modernize the agency and improve taxpayer services, and that People earning less than $400,000 per year would not be subject to further audits due to the new funding.

Noting a pledge to keep audit fees for people earning $400,000 a year or less at 2018 levels, he said Thursday that “we have in no way exceeded that rate.”

He added: “There is no new wave of audits for low- and middle-income taxpayers” – “that is not in our plans at all.”

The IRS is focusing next year on using increased funding to conduct higher rates of audits of suspected tax fraud for the wealthy, after collecting hundreds of millions in back taxes this year.

Ensuring that people pay their taxes is one of the biggest challenges for tax collection agencies. The audit rate for millionaires fell by more than 70% between 2010 and 2019 and the rate for large corporations fell by more than 50%.

The IRS plans to increase audit fees on companies with assets over $250 million to 22.6% in 2026, from a rate of 8.8% in tax year 2019. It also plans to increase audit fees tenfold in large complex partnerships with assets exceeding 10 million dollars.

“While the IRS has accomplished a lot so far with IRA funding,” he said, “we need to do much more to make improvements and transform the IRS to the benefit of taxpayers.”