Internal Revenue Service commissioner Daniel Werfel is promising to fix a problem with the IRS’s methods of selecting taxpayers for tax examinations that seems to increase the likelihood of Black taxpayers being audited.
Werfel sent a letter Monday to Senate Finance Committee chairman Ron Wyden, D-Oregon, after hearing questions about the matter during his confirmation hearings this year. “When evidence of unfair treatment is presented, we must take immediate actions to address it,” he wrote. “It is also important to reiterate that we do not and will not consider race as part of our case selection and audit processes.”
He acknowledged the findings of a study released in February by Stanford University that found Black taxpayers are audited at 2.9 to 4.7 times the rate of non-Black taxpayers (see story). The research, which was carried out in cooperation with the Treasury Department, suggested that much of the disparity was driven by differences in correspondence audit rates among taxpayers claiming the Earned Income Tax Credit. Werfel has been meeting with IRS officials to determine ways to alleviate the bias in audit rates and hopes to have the matter resolved by next tax season.
“We are deeply concerned by these findings and committed to doing the work to understand and address any disparate impact of the actions we take,” said Werfel. “As soon as I was confirmed, I met with the IRS team that has been studying this issue. Their research is ongoing and additional time is needed to yield a robust understanding of the drivers of this disparity and to thoroughly evaluate the right potential programmatic changes to address it.”
He pointed out that the IRS doesn’t collect data on taxpayer race, and the study estimated probabilities that filers belong to particular racial and ethnic groups by comparing taxpayers’ names and addresses to public data on the racial composition of names and Census Block Groups. Despite the absence of firm data correlating race with audit rates, he agreed with the study’s conclusions.
“While there is a need for further research, our initial findings support the conclusion that Black taxpayers may be audited at higher rates than would be expected given their share of the population,” said Werfel. “We are dedicating significant resources to quickly evaluating the extent to which IRS’s exam priorities and automated processes, and the data available to the IRS for use in exam selection, contribute to this disparity.”
In addition to evaluating ways to address bias within the IRS audit program, he said the IRS would take steps to advance our commitment to fair and equitable tax administration more broadly. The agency is also looking at the role of so-called “ghost preparers” who exploit low-income taxpayers.
“The proposal outlined in the Fiscal Year 2024 Treasury Greenbook includes expanded and increased penalties for unscrupulous preparers,” Werfel wrote. “In addition, the IRS is accelerating an existing research effort that aims to detect and ensure compliance among ‘ghost preparers,’ i.e., individuals who receive compensation to prepare returns for others but do not identify themselves to the IRS. Initial evidence confirms that unscrupulous and ghost preparers disproportionately prepare returns in minority communities. In summary, we are making broad efforts to advance our commitment to fair and equitable tax administration and evaluating the best ways to address bias within our audit program.”
Wyden wants the IRS to provide regular public updates on its progress in addressing the bias. “The IRS is currently in the process of overhauling its approach to tax enforcement with the funding it received in the Inflation Reduction Act,” Wyden said in a statement Monday. “I’m going to ensure that as part of that overhaul, the IRS retools these algorithms to eliminate any racial bias. Commissioner Werfel has committed to implement changes to fix this issue before the next tax filing season begins, but it’s clear there’s more to learn and a lot of work to be done.”
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