The agency does not track the race of the people it examines, but predominantly black counties have higher exam rates than predominantly white ones.
Getty; The Atlantic
About the author: Dorothy A. Brown, Professor of Tax Law at Emory University, is the author of The Whiteness of Wealth: How the Tax System Impoverishes Black Americans – And How We Can Fix It.
Senate Republicans recently killed a proposed increase in funding for the IRS that would have helped pay the Biden government’s infrastructure bill. The beneficiaries of this omission will be wealthy taxpayers who regularly manage to keep their tax avoidance strategies just outside the reach of the law. It’s all too well known. As my research shows, wealthy white Americans tend to shape tax regulations to their advantage. The removal of funding that could have helped the IRS more aggressively pursue elite tax fraud is another example.
Without topping up the funding, the IRS will continue to target low-income taxpayers for exams, especially those claiming the income tax credit. The EITC is a wage subsidy for low-income workers. The typical EITC recipient makes less than $ 20,000 annually. In 2018, the EITC lifted approximately 3 million children out of poverty, according to the IRS.
But the EITC calculations are extremely complicated, with a high rate of error, in part because Congress decided in 1998 to increase exam funding rather than simplifying the EITC – a move that found the support of then-President Bill Clinton, who oversaw the increasing exams watched as the price to be paid to keep the EITC. Today, EITC applicants are screened at a rate roughly equivalent to top-earning Americans (1.4 percent versus 1.6 percent). The dollar amount of taxes owed by low-income Americans is negligible compared to those who make millions.
While almost half of all EITC-eligible applicants are white, an analysis by ProPublica found that the counties with the highest exam rates were “poor, rural, predominantly African-American and in the south”. Due to the large number of EITC applicants living there, predominantly black counties have higher examination rates than predominantly white ones.
Without the coverage of ProPublica and the research of a former economist at the IRS, we wouldn’t even know this information. Last year, IRS Commissioner Charles Rettig told the Senate Finance Committee that he did not tolerate racial discrimination, but later admitted that the IRS does not collect audit statistics by race. Research suggests employers discriminate against applicants with stereotypically black names and that the IRS has access to taxpayers’ names on tax returns. If Rettig doesn’t have the data, how can he be sure that the IRS is not discriminating on the basis of race during audits?
The IRS argues that EITC applicants are audited frequently because the audits are inexpensive to perform, can be done through the mail, and do not require a lot of time on the part of the IRS staff. Audits of wealthy taxpayers, by comparison, involve hand-to-hand battles with the best lawyers the wealthy can buy. It’s just easier for the IRS to track down the most vulnerable among us. The Office of Management and Budget, as mandated by Congress under the Improper Payments Information Act of 2002, has put the EITC on a kind of watch list of programs that are more prone to improper payments. But while this ultimately resulted in increased audits to determine the size of the payments in error, it didn’t control what the IRS could do with the rest of its audit budget.
Increasing the frequency with which the poorest Americans are audited, while not similarly increasing the rate of audits among the wealthier, is helping to exacerbate America’s racial and class inequality. And the recent expansion of the child tax credit to low-income EITC beneficiaries will result in even more black families facing audits if the IRS continues with its current practice.
As if all of this weren’t bad enough, these audits did little to contain alleged tax fraud, according to a recent report by the Treasury’s General Inspector for Tax Administration. The error rate for EITC claims remains high as the credit note is still very complex. The solution is for Congress to simplify the EITC instead of the IRS reviewing more people.
That the government took the opposite path is revealing. If you believe mistakes are unintentional, you reduce the complexity of the process. However, if you believe that mistakes are deliberate “welfare fraud,” increase the audit rate.
On January 20, President Joe Biden signed an executive order on racial equality requiring that records collected by the federal government be broken down by race. This order is the first step towards a solution: only when the government starts tracking audits by race will it be able to remove the prejudices in the system.
As I show in my book The Whiteness of Wealth: How the Tax System Impoverishes Black Americans — And How We Can Fix It, this is part of a much larger picture in which wealthy white Americans (and their allies in Congress) are writing tax regulations to Benefit for yourself and harm black taxpayers. When black and white Americans engage in the same activity – marriage, home ownership, tuition – tax policies mean white Americans pay less taxes and black Americans more.
The provision of increased funding for the IRS to conduct audits is a necessary step towards a fairer tax system. Rich white Americans should pay their fair share of taxes. The rich use the justice system to enforce contracts that benefit them at the expense of others, they use government-sponsored transportation systems, and they use a variety of other government services at disproportionate prices. But instead of paying, they urge Congressmen to manipulate the system in their favor, thereby escaping the auditors’ control. The ultimate lesson from the infrastructure package is that Republicans support defunding law enforcement – when wealthy, white taxpayers benefit.