May 7th 2024.
On May 2nd, the Internal Revenue Service made an important announcement regarding the audit rates of different groups of taxpayers. A study conducted by university researchers and the Treasury Department revealed that Black taxpayers were being selected for audits at a significantly higher rate than non-Black taxpayers. In fact, the data-driven algorithms used by the IRS were choosing Black taxpayers for audits at a rate 4.7 times higher than their non-Black counterparts. This disparity was also seen in the audits of individuals claiming the Earned Income Tax Credit, a credit designed to assist low- to moderate-income workers and families. Shockingly, 21% of these audits were accounted for by Black taxpayers, even though they only make up a small portion of the population. Additionally, Black taxpayers were the focus of 43% of all audits related to this credit.
In response to these concerning findings, IRS Commissioner Daniel Werfel, who has been in the position since 2023, testified before Congress in September 2023 and wrote a letter to the Senate Finance Committee outlining the steps the IRS would take to address this issue. He acknowledged that the agency's actions have contributed to a lack of trust in the tax system and promised to make changes. "We have taken swift initial action to significantly reduce the number of these audits. We have also revised our selection criteria to ensure that audits are not unfairly targeting certain groups," he stated.
The IRS is also shifting its focus to the returns of wealthy individuals and major companies. Thanks to additional funding from the Inflation Reduction Act, the agency now has the resources to keep a closer eye on those who may be trying to evade taxes. According to Fox 21 News, the IRS is cracking down on "non-compliant taxpayers who use clever tactics to hide or manipulate their income in order to avoid paying taxes."
Interestingly, the audit rates for millionaires have been consistently high between 2010 and 2019, with a rate of over 70%. However, the audit rate for large corporations has decreased by more than 50%. This has led to an estimated tax gap of $683 billion, which consists of individuals underreporting their income, not paying what they owe, or simply not filing their taxes at all.
In a joint effort between Commissioner Werfel and President Joe Biden, the Inflation Reduction Act has helped to improve taxpayer services and reduce audits for those making less than $400,000 per year. "We are making significant changes to our compliance efforts to uphold our commitment to fair, equitable, and effective tax administration, and to be accountable to the taxpayers we serve," stated the IRS in an annual update.
Commissioner Werfel also reassured middle- and low-income taxpayers that they will not be targeted for audits. "There is no plan to conduct a new wave of audits for these groups in any way, shape, or form," he stated. Instead, the IRS will be focusing on audits of wealthy individuals with incomes over $10 million, major corporations with assets exceeding $250 million, corporations and high-income taxpayers who have access to business aircraft, such as private jets, and complex partnerships with assets above $10 million.
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