Looking for Tax Money in All the Wrong Places: Structural Racism at the IRS

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Many of you likely just filed your taxes. Will you get audited? According to a study published earlier this year, if you are Black, the odds that you will are higher. How much higher? The study’s central finding: “Despite race-blind audit selection, we find that Black taxpayers are audited at 2.9 to 4.7 times the rate of non-Black taxpayers.”

That study, published by Stanford University, is authored by seven economists from Stanford, the University of Chicago, the University of Michigan, and the Office of Tax Analysis at the US Department of Treasury (“Stanford study”). And it confirms the racial disparity in audit rates that many advocates have complained about for years.

While the Stanford study focused on IRS audits, prior studies have shown that the very design of the tax code disadvantages Black people. For example, a 2020 report released by the Hamilton Project at the Brookings Institution found that low- and moderate-income households claiming the Earned Income Tax Credit are audited at roughly the same rate as the top one percent of filers, even though the top one percent of filers account for as much as 70 percent of an estimated annual $630 billion loss of tax revenue (322, 330).

In her book, The Whiteness of Wealth: How the Tax System Impoverishes Black Americans—And How We Can Fix It, Emory University professor and tax attorney Dorothy Brown details that even the seemingly neutral joint tax return filing rule disproportionately benefits White families, which tend to have more single-earner couples whereas in Black couples both individuals tend to be earners. Brown used her own parents as an example. She explained that because both of her parents worked, they paid more taxes over time than, say, a White couple with comparable income, as the White couple is more likely to have a head of household who is the sole earner or at least have one person who makes significantly more money than their partner.

 

The Best Tax System That Money Can Buy

The tax code favors wealth—things like investments, homes, and other assets accumulated over the course of one’s life—by charging a lower tax rate on income earned through investment than through wages. These provisions reinforce systemic racism and discrimination that have actively prevented Black people and other people of color from obtaining things like home and business loans—or benefitting from programs like the GI Bill that helped White people acquire homes, businesses, and land.

For these reasons, if a Black household and a White household have the same income, the White household is more likely to benefit from the tax code because the White household is far more likely to have inheritance income, have a tax-preferred retirement savings plan, own their home, and realize a higher value for their home.

 

Who Gets Audited—And Who Does Not

People with low incomes tend to file simple tax returns with few tax-schedule attachments, while people with more income and wealth typically file more complex returns with many attachments. The IRS has routinely complained that it does not have the resources to pursue filers with more complex returns.

This ostensibly means that IRS agents audit low-income filers just because, in collections terms, these returns offer low-hanging fruit. Indeed, a study by the Center on Budget and Policy Priorities found that between 2010 and 2018, audit rates of millionaires fell 61 percent. Yet the 2023 Stanford study illustrates that even after accounting for class, racial disparities are deeply embedded within the agency’s practices.

Black taxpayers account for 21 percent of EITC [Earned Income Tax Credit] claims but are the focus of 43 percent of EITC audits.

The Stanford study that exposed the racial disparities in IRS audits used data from 2014, which was the last year in which audits were complete and available. Of 148 million tax returns analyzed that year, 780,000 audits were initiated. The report found a significant disparity tied to the Earned Income Tax Credit.

The EITC is a refundable tax credit for low- and moderate-income workers that provides a reduction in taxes due—so long as one’s income is below a certain level. Even if you do not owe income tax, you can qualify and receive a refund check if you have paid payroll tax (that is, paid into Social Security). The credit amount depends on the individual’s tax-filing status, the number of children that they support, and income. For 2022, the credit ranged from $569 to $6,935.

Black taxpayers account for 21 percent of EITC claims but are the focus of 43 percent of EITC audits. A closer look at the way in which decisions about who is audited are made reveals that the algorithm used by the IRS is contributing to racially disparate audit outcomes. This occurs because the algorithm that the IRS is using selects tax returns based on where the chance of underpayment is highest rather than where the underpayments themselves are likely to be greatest.

High-income taxpayers are more likely to file returns where the underpayment is likely to be larger, while lower-income filers submit returns where the risk of underpayment is higher, even if the dollar amount of underpayment is considerably lower. It is also the case that Black people who received the EITC were far more likely than their non-Black counterparts to get audited. Indeed, 78 percent of the overall racial disparity found in the study is due to disproportionate auditing of EITC returns of Black households (27).

Beyond intervening to change the audit protocols, there is a desperate need to replace current regressive tax collection practices with a more just system.

There are several ways to address this disparity. Potential policy remedies include pushing the IRS to focus on more complex returns rather than simple returns, and using IRS resources to pursue wealthy tax evaders, who, as noted above, are responsible for over half of lost revenue.

In 2022, the Inflation Reduction Act committed $80 billion over the next decade in additional funding for the IRS to help the agency tackle wealthier tax dodgers. Nonetheless, while the IRS has used underfunding as an excuse for targeting low-income filers, advocates must press for transparency in how the new funds are used. Without accountability and transparency, more funds to the IRS could simply perpetuate current injustices.

 

Toward a More Just Tax System

Beyond intervening to change the audit protocols, there is a desperate need to replace current regressive tax collection practices with a more just system. As with most injustices in our economic and political systems, regressive taxation has hit BIPOC and low-income Americans the hardest.

The evidence is clear: the tax system as structured negatively affects Black people. 

Across the country, people of low incomes and disproportionately Black, Indigenous, and other people of color pay proportionally more in state and local taxes than the wealthy. In the states with the most regressive tax structures, the poorest fifth pay more than five times as much in state and local taxes and fees as the wealthiest residents as a percentage of their income.

Meanwhile, the wealth gap between White and Black households remains enormous, with the average White family now owning over six times as much wealth as the average Black family. That calculation involves mean wealth. In terms of median wealth (that is, wealth holdings at the 50th percentile), current projections show median Black wealth falling below zero by the midcentury. Specifically, according to a 2017 report by Prosperity Now and the Institute for Policy Studies, excluding durable goods such as cars, median household wealth (assets minus debts) for Black families in 2013 was a meager $1,300. That amount is expected to fall to $425 by 2043 and will reach zero by 2053.

The evidence is clear: the tax system as structured negatively affects Black people. The fundamental components of the nation’s tax code almost guarantee that not only are Black Americans less likely to benefit from tax credit programs, but they are more likely to be audited and penalized.

In a country in which local, state, and federal governments were—and, in many instances, continue to be—complicit in discrimination, it is essential that these harms are not exacerbated by the tax code and how tax enforcement is conducted.

Earlier this year, Richard E. Neal (D-MA), the ranking Democratic Party member on the US House of Representatives’ Ways and Means Committee, drawing on the Stanford study, noted in the New York Times that discrimination at the IRS continues today. Neal emphasized that algorithmic tools that “exacerbate racial biases in our institutions” must be corrected.

A major overhaul of the tax code—at the local, state, and federal levels—is necessary too. As a 2021 report published by the Institute for Tax and Economic Policy emphasized, “By enacting progressive income taxes with more brackets at the top, restoring estate or inheritance taxes, taxing earnings from wealth at least as much as earnings from work, and taxing wealth itself, policymakers can meaningfully address economic and racial inequality and create a more equitable nation.”

In recent years, states like Massachusetts have become battlegrounds where progressive income tax proposals have gotten wide attention and support. These fights have drawn out more outspoken critiques of the tax system broadly. Meanwhile, coalitions throughout the United States continue to push for transparency in IRS functions, data collection, and its programs and practices.

 

Toward a Broader Social Justice Vision

The Movement for Black Lives (M4BL), where I work, understands that tax policy is not the key to liberation, but an unjust tax system perpetuates the harms that Black people have faced in a country that has sanctioned racial discrimination. Therefore, the goal is to address and transform the current systems in place while working to build systems that reflect the values of dignity and justice.

In that vein, M4BL has convened Black accounting professionals who can help answer questions from those trying their best to navigate a complex and unwieldy agency. M4BL has been particularly focused on dispelling the common myth of the objectivity of taxes by holding teach-ins and webinars that expose the problems with the tax system and the ways that Black, Indigenous, and other people of color are harmed by that system.

M4BL has crafted its demands within a Vision for Black Lives policy agenda that centers the wellbeing of our communities and proposes policy alternatives to the current system. Creating more awareness through exposing the disparities in the tax system—for example, as perpetuated by seemingly objective algorithms—helps build a world where taxation can be a tool that advances economic justice, rather than the current reality of a system that preserves elite wealth and perpetuates inequality.