The IRS said Thursday that it has taken steps to address a wide disparity in audit rates between Black taxpayers and others filers, and is more closely examining the returns of larger numbers of wealthy people and major companies.
“We are overhauling compliance efforts to advance our commitment to fair, equitable, and effective tax administration and hold ourselves accountable to taxpayers we serve,” according to an annual update from the agency.
A study from January 2023 involving university researchers and the Treasury Department found that IRS data-driven algorithms selected Black taxpayers for auditing at up to 4.7 times the rate of non-Black taxpayers. The study said the IRS disproportionately audited people who claim the Earned Income Tax Credit, which is aimed at low- to moderate-income workers and families: While Black taxpayers accounted for 21% of the claims for that break, they were the focus of 43% of the audits concerning the credit.
“We have taken swift initial action to dramatically reduce the number of those audits. We have also made changes to the selection criteria for those audits,” IRS Commissioner Daniel Werfel said.
Werfel, who was sworn in a little more than a year ago, has testified before Congress about the issue and last September he wrote to the Senate Finance Committee that the IRS would make changes.
The discriminatory audits, he told reporters, “degrade trust in our tax system.”
Werfel and the IRS have tried over the past year to show how money from the Inflation Reduction Act, President Joe Biden’s big climate, health and tax law, has helped to modernize the agency and improve taxpayer services, and that people making less than $400,000 per year would not be subject to more audits due to the new funding.
Noting the promise to keep audit rates for people making $400,000 per year and less at 2018 levels, he said on Thursday that “we haven’t in any way exceeded that rate.”
He added: “There is no new wave of audits coming for middle and low income” taxpayers — “that is not in our plans in any way shape or form.”
The IRS is focusing the next year on using the funding boost to conduct higher rates of audits on suspected wealthy tax cheats after having collected hundreds of millions of back taxes this year.
Ensuring that people pay their taxes is one of the tax collection agency’s biggest challenges. The audit rate of millionaires fell by more than 70% from 2010 to 2019 and the rate on large corporations dropped by more than 50%.
The IRS plans to raise audit rates on companies with assets above $250 million to 22.6% in 2026, from an 8.8% rate in the tax year 2019. It also plans to increase audit rates by tenfold on large complex partnerships with assets over $10 million.
“While the IRS has accomplished a lot so far with IRA funding,” he said, “we need to do much more to make improvements and transform the IRS for the benefit of taxpayers.”