IRS takes important step to increase accuracy and reduce racial disparities by addressing audits by mail

By The Tax Law Center

As the Tax Law Center and others have argued, the evidence is that audits by mail of recipients of refundable credits like the Earned Income Tax Credit (EITC) increase inaccuracy and inequity in tax administration — denying working families tax credits they’re truly eligible for just because they can’t make it through a confusing and burdensome audit process. This week, IRS Commissioner Werfel made a commitment that the IRS will substantially reduce correspondence audits for recipients of refundable credits. It is good to see IRS has grappled with these important findings and taken a critical step to increase accuracy and fairness in tax administration while reducing harmful racial disparities in audits.

To see why the Tax Law Center called for these changes, see below.

Additional analysis from the Tax Law Center

The Tax Law Center, Center for Taxpayer Rights and others have highlighted evidence of that audits-by-mail of working families result in inaccurate denials of tax credits to working families who are eligible for them. This means mail audits harm families and are a poor tool for improving tax compliance.

• Mail audits can end up denying tax credits like the EITC and CTC to families who do in fact meet the criteria to be eligible for these credits if, for example: a family has moved and never got the audit notification by mail; didn’t understand the complex instructions for what documents they have to compile; can’t afford a competent tax representative; doesn’t have access to stable internet to access online resources and guides; or lives in a rural area far away from an in-person Taxpayer Assistance Center.
• Mail audits of EITC filers are therefore not a sound method of ensuring tax compliance, because they result in inaccurate denials of tax benefits to eligible filers. The objectives of a tax examination are supposed to be to “determine if income, expenses and credits are being reported accurately,” but mail audits that deny tax credits to filers who are in fact eligible don’t meet that purpose.
• The experience of an audit itself can also discourage filers from claiming these credits in future years, even when the IRS has information suggesting that they are truly eligible for it, research shows.
• The Tax Law Center has also offered analysis and recommendations that addressing correspondence audits of EITC filers is a key part of addressing the stark and troubling racial disparities in audits.
• Research by academic and Treasury researchers shows that Black filers are 2.9 to 4.7 times as likely to be audited by the IRS as non-Black tax filers. The IRS has confirmed the existence of these harmful disparities.
• Research also shows that audit selection processes that effectively treat EITC error as “more important” than other types of tax non-compliance may be an important cause of such racial disparities. In turn, this may result from funding cuts that concentrate audits on those that are cheaper and easier to conduct, such as mail audits, and explicit choices to target refundable credit error above other kinds of error.
• Furthermore, policy choices and racial discrimination may mean that Black families are more likely to face administrative barriers to defending their EITC in a mail audit even when they’re truly eligible. This could lead to a doom loop — if over time the IRS audit selection algorithms “learn” from who is least likely to make it through an audit, they may concentrate more and more audits on eligible filers who simply face front-end barriers jump through audit hoops.

The IRS action on correspondence audits is a welcome response to the evidence, but more action will be needed to rebalance tax compliance efforts and address racial disparities. The IRS has acknowledged the need for additional work in these areas, and we look forward to more detail and action.

• We welcome the IRS stating that it will follow up with additional measures to ensure that more filers can get the guidance and help they need to file accurately and access their tax credits in the first place which is also needed to improve audit accuracy and address racial disparities in tax administration. As we have previously recommended: “Policymakers should seek to identify and remove barriers to accessing tax guidance and reliable tax preparation services, rather than allowing their effects to ripple through to choices about how to conduct compliance and audit activity.”
• The IRS has also stated that it will take further steps on analyzing and addressing unbalanced compliance and racial audit disparities; we will continue to look for the IRS to take action on the specific recommendations we have made in our previous reports.
• At the same time, we are looking forward to the IRS building on commitments to devote resources to the areas research shows make up a disproportionate share of the tax gap. This includes hiring and initiatives to expand enforcement work focusing on complex partnerships and large corporations.

Further analysis from the Tax Law Center

• Exclusionary Effects of the IRS Correspondence Audit Process Warrant Further Study (with the Center for Taxpayer Rights)
• New Evidence on Racial Disparities in IRS Audit Selection Calls for Immediate Action (Tax Law Center)
• Unanswered Questions Remain on Causes of Racial Disparities in Audit Selection and the IRS’s Plans for Further Evaluation (Tax Law Center)

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