The Internal Revenue Service (IRS) is coming clean about discriminatory audit processes it has allowed for years.
In May of this year, IRS Commissioner Daniel Werfel communicated with the U.S. Senate about discriminatory IRS audit practices involving Black taxpayers. Responding to a request from the Senate about its practices, Mr. Werfel reported “a recent study estimated, using imputed race values, that Black taxpayers are audited at three to five times the rate of non-Black taxpayers.” The correspondence went on to associate the audit disparities with taxpayers who claimed Earned Income Tax Credits (EITC).
While tax credits can be a boon to those who qualify for them, they are also an incentive for those who wish to profit from them. The EITC is not only targeted by scammers who underreport their income in order to qualify—but tax returns that include the credits are frequently the subject of extra review by the IRS simply because of the EITC.
In recent years, the skimpy budget of the IRS did not allow it to take a deep dive into complex business and partnership tax frauds. Instead, the agency used resources to audit returns that did not require business analysts and specially trained agents knowledgeable about corporate malfeasance. Thus, the IRS focused on those claiming the EITC, for which audit rates have always been higher. The audit rate for Black taxpayers was greater than for other taxpayers with the principal reason being the EITC tax credit.
With the passage of the Inflation Reduction Act (IRA) and adequate funding flowing again to the IRS, Mr. Wefel points out in a September 2023 letter to the Senate Finance Committee, that the agency is gainfully putting to use the funding it received through the IRA. Mr. Werfel connects the influx of money as a “benefit [for] all Americans by promoting fairness and accuracy.”
Or, to put it another way, now that the IRS is well-funded, the agency can focus on “high-end tax evasion and any bad actors who contribute significantly to the tax gap.” More money means more fairness—cold comfort to the taxpayers who have borne the brunt of unfair tax practices in the last decade.
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Robert J. Fedor, Esq., LLC offers strategic legal guidance to clients throughout the U.S. and abroad on IRS audits, criminal tax investigations, and payroll tax issues. When you have questions about individual or business tax compliance, call us at 800-579-0997 or contact us. We have offices in Cleveland and Chicago.
