By Fighting Audit Bias, Funding for Tax Enforcement Can Advance Racial Equity

As the new infusion of funding for tax enforcement as part of the Inflation Reduction Act remains under fire from leading lawmakers in the House of Representatives, a new study shows just how important that funding is.  

Black households are between 2.9 and 4.7 times more likely to be audited by the Internal Revenue Service than non-Black households, according to the study by a group of law professors and Treasury Department economists.  

This disparity is driven in part but not wholly by a lack of resources at the IRS, which itself is driven by years of budget cuts the agency has faced. The IRS has seen its enforcement budget cut by about a fourth between 2010 and 2021, after adjusting for inflation. This led to a 40 percent drop in revenue agents – the auditors uniquely qualified to examine the returns of high-income individuals and corporations – over the same time. The number of revenue agents is the lowest it’s been since 1953. 

As the new study notes, 70 percent of IRS audits happen through the mail and 50 percent involve people who claim the Earned Income Tax Credit. These audits are much cheaper and require less bandwidth than more labor-intensive audits of wealthy households or profitable corporations. As other studies have shown, audit rates have been declining much more precipitously for millionaires and big corporations than for the lowest wage earners. 

But even though the IRS disproportionately audits EITC recipients, the study found the largest source of racial disparity was among EITC recipients. Black households were the focus of 43 percent of EITC audits despite accounting for just 21 percent of all EITC claims. In other words, Black households claiming the EITC are between 2.9 and 4.4 times as likely to be audited as non-Black EITC claimants.   

This racial disparity holds whether EITC recipients are male or female, married or unmarried, raising children or childless. But it is most extreme for single Black men. Black men claiming dependents were audited more than twice as much as non-Black men, and Black men not claiming dependents were audited almost three times as frequently as their non-Black counterparts.  

The IRS also devotes fewer resources to auditing EITC recipients with business income, the study found. Again, this is partly because auditing EITC returns with business income is more expensive (approximately $385 per audit compared to $29 per audit for EITC claimants with no business income). This also has a disproportionate impact on Black households, since they make up 20 percent of EITC recipients who don’t report business income but only 10 percent of those who do. 

When considering their findings, the study authors suggest that the problem driving these disparities lies within the algorithm the IRS uses to trigger audit correspondence. While the algorithm is secret, the study hypothesizes that the crux of the issue may hinge on whether it focuses on the existence of underreported income or the magnitude of such underreported income. The study finds that an approach focused just on the likelihood that there’s underreporting of at least $100 would result in more Black households being audited (as was observed). On the other hand, a focus on the magnitude of underreporting (which translates into the amount of money unpaid by a taxpayer) would result in the opposite: More non-Black households would be audited than Black ones. 

The report has several recommendations for the IRS, including focusing on the magnitude of taxpayers’ underreported income rather than just the likelihood of it, viewing dollars as equal whether they are to be paid in refundable credits or received in taxes, and auditing more complex returns rather than focusing only on simpler, less expensive ones. All of these are laudable goals, and they all – but especially the last one – will take financial resources to achieve. That’s why the increased funding for the IRS passed in last year’s Inflation Reduction Act is so important, and why lawmakers must fight to preserve that funding in the face of ongoing threats.  

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