I.R.S. Changes Audit Practice That Discriminated Against Black Taxpayers

by Pelican Press
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The Internal Revenue Service is overhauling how it scrutinizes the tax returns of lower-income Americans as part of an effort to reduce enforcement disparities that have made Black taxpayers far more likely than anyone else to be audited.

At the center of this effort is a major change to how the I.R.S. conducts audits of recipients of the earned-income tax credit, a special tax refund that was created to help low-income workers.

Tax returns that claim the E.I.T.C. have historically been more likely to be selected for audits, even if those investigations tend to yield little in taxes that are owed. Research has shown that audit rates for Black Americans are three to five times higher than for other taxpayers, with audits focused on the tax credit being a major driver of the disparity.

The I.R.S. has pledged to use the $80 billion that it received through the Inflation Reduction Act of 2022 to target wealthy taxpayers and make the tax system more equitable by ensuring that taxpayers are not disproportionately scrutinized because of their race.

“We are making broad efforts to overhaul compliance efforts in a manner that robustly advances our commitment to fair, equitable, and effective tax administration,” Daniel Werfel, the I.R.S. commissioner, wrote in a letter to Senator Ron Wyden of Oregon, the Democratic chairman of the Senate Finance Committee, on Monday.

The earned-income tax credit, which was first introduced in 1975, is available for lower-income taxpayers. The size of the credit depends on how many children a person or household can claim as dependents. According to the I.R.S., at the end of last year 31 million workers and families received credits; the average amount was $2,043.

The letter acknowledged that its internal research has validated academic studies that have shown that scrutiny of the earned-income tax credit claims have propelled the disparity in how the tax code is enforced and made it far more likely for Black taxpayers to be audited.

The I.R.S. has focused its attention on tax filings with erroneous earned-income tax credit claims because those cases are easier to audit than the tax returns of wealthy taxpayers with complicated tax returns.

As part of its revamped focus on scrutinizing wealthy taxpayers, the I.R.S. is deploying more revenue agents and artificial intelligence technology to target hedge funds, law firms, private equity groups and other types of complex partnerships.

The changes to oversight of earned-income tax credit filings will include adjusting how the I.R.S. considers information about where children live in its “automated risk scoring” process. The agency is also testing additional changes to its case selection process and is dedicating more resources to helping taxpayers fix mistakes.

Reducing racial disparities in tax enforcement is challenging because the I.R.S. does not collect information about race as part of the tax-filing process.

Mr. Werfel said in the letter that it could take several months after the next tax filing season for the I.R.S. to know if the changes have been successful. He said that the agency will also be scaling back audits related to the American Opportunity Tax Credit, Health Insurance Premium Tax Credit and Additional Child Tax Credit.

The I.R.S. did not specify how sharply audit rates for the tax credits would decline, but said that they would be “substantially” reduced.



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