By Casey Murray | OBSERVER Staff Writer
Valerie Williams doesn’t need to read any research to know there’s bias in the tax system. She has seen it with her own eyes.
Williams has been a tax preparer and bookkeeper off and on for the last 23 years, and her Sacramento business, In the Black Tax and Bookkeeping Services, just completed its fifth year.
“People should know that there is a racial makeup to our tax code,” she said. “It is written by the people that it favors.”
But of course, there is research that points out how the tax system is biased against Black people, the newest of which examines bias in how the IRS audits taxpayers.
A Stanford study found that Black taxpayers were more likely to be audited, specifically Black fathers claiming the earned income tax credit, a credit designed to send money back to low- and middle-income working parents.
The disparity is one more example of the ways the tax system treats Black people differently. Williams is among those in Sacramento discussing what Black families can do in response.
Why The Bias Exists
The bias facing Black claimants of the EITC is significant.
“Black taxpayers were 2.9 to 4.7 times more likely to be audited than non-Black taxpayers,” said an article from Stanford describing the research. But the largest disparity came down to the EITC. “Black taxpayers accounted for 21% of EITC claims, but were the focus of 43% of EITC audits.”
This bias is even more extreme for Black single fathers claiming the EITC, who the study found were “nearly 20 times as likely to be audited as a non-Black jointly filing [married] taxpayer claiming the EITC.”
The IRS doesn’t comb through the millions of tax returns it receives by hand. That means the problem is likely with the algorithms it has designed to flag returns with possible issues.
Hadi Elzayn led the racial bias analysis as a postdoctoral fellow at Stanford.
“As [artificial intelligence] has been used more and more, people have started to look into whether there’s a possibility that it could create fairness problems,” he said. “The fact that these are being used in increasingly high-stakes settings means that these mistakes can affect people’s lives.”
He said that was part of the inspiration for the research – to check if IRS models were designed in a way that created disparities for different groups.
He said they can’t know exactly why such different outcomes are created because the IRS keeps its exact models secret, but the work he and his colleagues did pointed to several possibilities. One was that the IRS needs more money to properly update its technology, but the other comes down to a policy choice.
“Certain issues are a lot easier to audit than others,” Elzayn said. “Would you rather focus on high-certainty claims, even if they’re a bit smaller? Or would you rather focus on high average value, but maybe there’s a little bit more uncertainty around how it’ll materialize?”
Essentially, Elzayn said the research indicates the IRS may be focusing on auditing issues that are easier to investigate and are more likely to result in higher payment, as opposed to the types of audits that are more difficult to carry out and prove.
He can only hypothesize, but if true, it could partly explain why Black taxpayers are more frequently audited, as are low-income taxpayers in general.
In a related paper by Stanford, research found that “due to differing audit costs to the IRS by income, return-on-investment focused audit selection results in an allocation which overwhelmingly targets low-income taxpayers.”
In response to such research, members of the Senate requested that IRS Commissioner Daniel Werfel explain and address the racial bias in auditing. He sent a letter to the Senate saying that internal research supports Stanford’s findings and that they “continue to evaluate ways to address any bias that exists within our audit program.”
What An Audit Is – And What To Do If You Face One
Elzayn pointed out that audits can be important for several reasons.
“Dealing with the IRS can be stressful in general, but audits are particularly stressful. They can be time consuming. They can be costly if you have to use a preparer,” he said. “With the earned income tax credit in particular, or families that are lower income, it can be a significant chunk of their income.”
If a family or person has applied for the EITC and is audited, it means those funds are delayed. It also means some who are eligible for the credit may get scared and give up if they don’t understand the audit.
Williams said she sees this in her business.
“People call me in panic mode all the time,” she said.
There are several types of audits, Williams said. The most common is through mail and is called a “correspondence” audit, when the IRS asks for documentation to prove something on a return.
“Those cases don’t actually appear in front of someone,” she said. But there’s another, more serious type of audit that can require in-person appearances, which Williams referred to as “audit court.”
“It’s similar to going to court for a traffic ticket or anything else, it’s just a little bit more personal because it’s you and it’s more examination of your documents,” she said.
This type of audit is more common for business expenses.
Though the bias in tax auditing can’t be blamed on any specific choice made by an individual, especially for single fathers, Williams did say that Black parents sometimes are audited because of complicated family situations. If a child’s last name is different from the person caring for them, or if the address they live at is different from the one registered with a school, it can raise a flag.
Williams said an audit usually just means the IRS needs clarifying documents. But if it’s complicated or a person doesn’t understand what they might have done wrong, they can talk to a tax preparer.
“Work with a tax professional that knows and understands all of the tax laws because they change every year, and that understands how to apply them to their situation,” she said.
She also said if the kind of audit that requires in-person meetings is received, one can work with an enrolled agent, or a person qualified to represent clients before the IRS.
She said living in the Sacramento area can ease things because the IRS has an office locally where taxpayers can ask questions.
Especially if you’re Black, you might be audited because of bias in the system, not because there’s something wrong with your taxes.