In 2021, taxpayers filed 164 million individual income tax returns and the IRS audited 626,204 of them. The IRS might flag a return for review based on random selection and computer screening or if it involves “issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit.”
But are audits discriminatory, with one group of taxpayers being audited more frequently than others?
A 2023 Stanford Institute for Economic Policy Research report suggests they may be. The study analyzed microdata on roughly 148 million tax returns and 780,000 audits starting in 2014, and discovered that Black taxpayers were audited at 2.9 to 4.7 times the rate of non-Black taxpayers.
The IRS Doesn’t Know a Taxpayer’s Race
The SIEPR report notes that the IRS does not know a taxpayer’s race, nor are agents privy to their race when they’re auditing the returns.
“Having looked at the report, the disproportionate number of audits on African Americans is surprising,” Josh England, partner and tax attorney at AAFCPAs, says. “There is nothing in a tax return that indicates race or ethnicity.”
So if audits are race-blind, why would Black taxpayers be audited at 2.9 to 4.7 times the rate of non-Black taxpayers?
“If it’s a fact, then it might be something based on socioeconomic issues,” England says.
Black Income Disadvantage Could Mean More Audits
More complicated tax returns — including those for business owners, partnerships and high-income earners — require experienced auditors’ attention. The IRS, however, has had to contend with a dramatically pared down workforce. For this reason, fewer complex returns have been flagged for review, leaving simpler ones subject to the auditing process.
Overall, Black Americans remain at a financial disadvantage. The U.S Department of Labor reports significant earnings disparities by race and ethnicity, with Black workers earning an average of 76 cents compared to white workers’ $1.
The SIEPR study also noted that Black taxpayers are far less likely to report business income than taxpayers of other races.
The study found that the IRS focused on low hanging fruit, meaning those returns that are easier to audit and adjust. Consequently, while high-income taxpayers returns were audited at a lower rate, low-income taxpayers were statistically more at risk of having their returns audited.
“And because Black people have been excluded from wealth creation and financial education historically in this country, then it’s more likely than not that the returns are incorrect,” Shiloh Johnson, certified public accountant and founder and CEO of the tax compliance platform ComplYant, says.
Many Returns Flagged for Claiming Earned Income Tax Credit
SIEPR identified the earned income tax credit as a primary trigger for the disproportionate audit rate. The IRS relies on a computer algorithm to identify tax returns that contain errors, particularly when taxpayers claim certain tax credits like the EITC.
The EITC was developed to help low- to moderate-income workers and families reduce their tax liability, which can result in a higher income tax refund.
According to U.S. Department of Treasury 2023 research, Black and Hispanic families represent a larger share of low-wage workers, so they comprise a higher percentage of taxpayers who benefit from the EITC.
[Read: How to Get the Biggest Tax Refund This Year.]
Mistakes on Tax Returns Matter
The SIEPR study also noted that Black taxpayers may disproportionately file returns with the type of mistakes that the IRS can swiftly identify with its software programs. In addition to calling out tax credit qualification issues, it can quickly detect underreporting income.
“People in lower income brackets are more likely to prepare their own tax returns than high net worth individuals,” England says. “The IRS is probably focusing on self-prepared tax returns, and if so, I would suspect they are more likely to have errors. Therefore, there is a higher chance for an audit.”
Filing taxes can be complicated, particularly when people aren’t accustomed to preparing their own returns. And that means mistakes are common, England says.
“It’s important to understand the context around why Black people are audited more heavily,” Johnson says. “I’d be willing to bet that some of that has a lot to do with financial literacy.”
[Read: How to File Taxes.]
What to Do if You’re Audited
If you receive a notice that you’ll be audited, there’s usually no reason to panic.
“The first letter means the computer has determined something isn’t matching up,” England says. “Often a letter back to the IRS will clear it up and, if not, in most cases a small payment may be owed.”
Responding to the letter as soon as possible is the critical.
“Don’t stick it under the mattress and hope it will go away,” England says. “It won’t.”
If you need assistance drafting your response to the letter, ask a qualified tax preparer, such as a CPA, to help.
“Just don’t expect an immediate response from the IRS,” England says. “They could take months to get back to you.”
[READ: What Really Happens During an IRS Tax Audit]
Consider Hiring a Professional
Acknowledging that an overabundance of wealthy people with more complicated tax issues have not faced audits, the IRS is in the middle of a hiring blitz. With an $80 billion investment plan, the agency aims to improve customer service and increase tax enforcement, bringing on nearly 20,000 new employees over the next two years.
Although the intention is to focus on taxpayers with annual incomes of $400,000 and more, lower-earning taxpayers may be caught up in the sweep.
“Note that when e-filing, the entire process is algorithmic,” Johnson says. “There is no person reviewing your tax return, and making a decision to audit you is all done digitally. So, if you make a decision like grossly inflating or deflating your income relative to prior years, that will cause a red flag and you will likely be audited.”
Getting qualified tax guidance when preparing your tax forms is a good idea. This isn’t the time to ask a friend for help unless they have the proper training. The good news is that there are plenty of free tax resources available to U.S. taxpayers.
More from U.S. News
How to Survive an IRS Tax Audit
What Is the Earned Income Tax Credit and Who Qualifies?
How to Mentally — and Financially — Prepare for a Disappointing Tax Refund
Study Shows IRS Audits Black Taxpayers at Much Higher Rate originally appeared on usnews.com
