Does the IRS Audit Some Taxpayers More Than Others?

It’s no surprise that many people are distrustful of the IRS and of IRS audits. The often-confusing nature of tax laws, along with 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—particularly if they have relatively low income and worked hard to file an accurate tax return. When that happens, some people wonder: is the IRS unevenly targeting certain taxpayers for audits?

IRS audit racial disparities

A recently released 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, published at the end of January and 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.

“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.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

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, is $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.

Speaker of the House Kevin McCarthy (R-CA) and other lawmakers have claimed that the increased IRS funding means 87,000 IRS agents will be coming for the tax dollars of hard-working, middle-income Americans. That’s in part why in January of this 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 will 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 Department 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, lower-income taxpayers 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 audit rates for high-income taxpayers. Now, this newly released study confirms that Black taxpayers with low-to-moderate incomes are subject to higher IRS audit rates than other taxpayers.

So, what does all 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.