Does the IRS Audit Some Taxpayers More Than Others?

It’s no surprise that many people distrust the IRS and IRS audits. The confusing nature of tax laws and the IRS potentially reexamining your federal income tax return, can be daunting. 

So, it’s not uncommon for taxpayers to wonder why their tax return was selected for an IRS audit in the first place. This is particularly true if they have relatively low income and work hard to file an accurate tax return. When that happens, some wonder: is the IRS unevenly targeting certain taxpayers for audits?

IRS audit racial disparities

A recent study of IRS audits from Stanford University’s Institute for Economic Policy Research says that in some cases, the answer to that question is yes. Specifically, the study, produced with input from other university researchers, and the U.S. Treasury Department, finds that the IRS audits Black taxpayers at about three to five times higher rates than the agency audits other taxpayers.

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“Despite race blind audit selection [i.e., the IRS doesn’t have information about taxpayer race when tax returns are identified for audit], we find that Black taxpayers are audited at 2.9 to 4.7 times the rate of non-Black taxpayers,” the report states.

The study findings are based on Treasury Department data from 148 million tax returns and 780,000 IRS audits. That data points to a particular refundable tax credit as the main source of the racial disparity in audit rates. That credit, i.e., the earned income tax credit (EITC), is designed to benefit workers with low-to-moderate incomes. If eligible, those taxpayers receive a credit that can lower their tax liability or a refund that gives them cash back.

• Last year, the average earned income tax credit nationwide was a little over $2,000. 
• For the 2022 tax year, though, the maximum EITC amount, which depends on several factors, was $6,935. 
• According to the study, Black taxpayers are not more likely to claim the EITC than non-Blacks (e.g., Hispanics and Whites), so the finding of higher audit rates for Black taxpayers is significant.

Evelyn Smith, one of the authors of the study from the University of Michigan, told NPR that the IRS’ focus on refundable credits is part of the problem. Claiming the EITC can be confusing, but the IRS tends to examine aspects of tax returns like claims for dependents and qualifying children — where taxpayers often make inadvertent mistakes.

Another key finding from the study is that IRS audit selection models increase the audit rates of Black taxpayers. According to the study, the IRS could lessen the racial disparity in its audit rates by changing its algorithms. 

For example, the study says that instead of focusing on whether a taxpayer claimed the EITC, the IRS audit model could target the total amount of under-reported income on tax returns.

IRS enforcement

The Stanford study comes as 80 billion dollars has been allocated to the IRS from the Inflation Reduction Act — massive climate, energy, tax, and healthcare legislation signed by President Biden in August. Those funds, most of which are designated for IRS enforcement, are expected to be used to hire additional IRS agents, and to modernize IRS technology, among other things.

Former Speaker of the House Kevin McCarthy (R-CA) and other lawmakers have claimed that the increased IRS funding means 87,000 IRS agents would be coming for the tax dollars of hard-working, middle-income Americans. That’s partly why last year, House Republicans voted to rescind much (i.e., $72 billion) of the $80 billion in IRS funding from the Inflation Reduction Act. That vote was largely symbolic however since Democrats control the U.S. Senate, but the fact remains that increased IRS enforcement could eventually lead to more audits. 

Because of that, a common question even before the Stanford study was released, has been whether those audits will focus on low and middle-income earners rather than high-earning taxpayers. (The Treasury and the IRS have said that increased IRS enforcement activity under the Inflation Reduction Act will focus on high earners.)

• However, a Government Accountability Office report found that in the past, taxpayers with lower incomes have seen higher-than-average IRS audit rates. 
• Other FY 2021 data show that IRS audit rates for people with less than $25,000 a year in income were five times higher than for high-income taxpayers. 
• Now, this study confirms that Black taxpayers with low-to-moderate incomes are subject to higher IRS audit rates than other taxpayers.

So, what does this mean for you? If you, or someone you know, plans to claim the EITC, keep in mind that algorithms that the IRS traditionally uses to identify tax returns for audit could focus in part, on that credit. 

Consult a professional if you’re worried or confused about how to claim qualifying children for the EITC. Depending on your income, you may be able to get free assistance with preparing your tax return.

If you are not claiming the EITC, but are worried about being audited by the IRS, be careful to report all taxable income. Also, double-check the credits claimed on your return and be aware of some common IRS audit red flags.

Related

• Can the EITC Help You?
• IRS Has Its Eye on Millionaire Tax Evaders
• Types of Income the IRS Doesn't Tax