Biden’s Tax Enforcement Overhaul Would Be A Positive Step Toward Racial Equity

Getty/James Leynse
The IRS building, January 1997.

Despite the fact that the United States is losing an estimated $600 billion per year in unpaid taxes, IRS funding has fallen precipitously over the last decade, forcing the agency to shed a large share of its workforce, including 35 percent of revenue agents responsible for examining complex tax returns and conducting audits. Largely because of this steep drop in funding, the agency has dramatically reduced the audits that it conducts on high-income individuals and large corporations. Those trends have meant that a greater share of audits are of lower-income taxpayers, especially the low-wage workers who claim the Earned Income Tax Credit (EITC). These trends have had negative implications on communities of color, as a disproportionate share of EITC claimants are Black and Hispanic. In particular, some of the most heavily audited places in the country are predominantly Black communities.

For these reasons, many organizations dedicated to social, racial, and gender justice have demanded that the IRS dramatically refocus its audit priorities and that Congress provide it the tools to hold high-income and corporate tax dodgers accountable. President Joe Biden has outlined a plan to do so in his American Families Plan as well as in his budget proposal to Congress. The plan would provide substantial additional resources—about $80 billion over the next decade—to rebuild the IRS’ ability to enforce the tax laws upgrade its computer systems and provide better taxpayer service. The enforcement resources will be directed toward high-income individuals and corporations, with audit rates not increasing above the level of recent years for those with incomes under $400,000. By directing enforcement resources toward high-income people, business entities, trusts and estates, and large corporations, the Biden plan would take an important step in the direction of tax fairness and racial equity when it comes to tax enforcement.

Investments in IRS enforcement of the rich and corporations can help reverse audit disparities

The audit rates for the rich have fallen so steeply over the last decade that, in recent years, the agency has audited low-income filers who claim the EITC at close to the same rate as it audits the top 1 percent. This is despite the fact that EITC noncompliance or errors represent only a small share of the “tax gap,” while the top 1 percent is responsible for an estimated 36 percent of the individual tax gap, or $175 billion per year. The IRS has said bluntly that its recent audit priorities reflect that audits of low-income filers are cheaper and easier for the agency to conduct. Auditing low-income filers requires fewer resources and manpower than audits of wealthy individuals, who are able to employ batteries of tax lawyers and accountants to contest audits and litigate against the government. The IRS also has much more visibility into the incomes of wage earners, whose earnings employers report to the government on W-2 forms. Wealthy individuals, on the other hand, have much more complex tax returns and, often, opaque source of income. They are also able to employ sophisticated tax evasion schemes. In order to properly examine these returns, audits of the ultrawealthy require skilled agents with several years of training. The IRS has shed a very large share of these workers over the past decade due to funding cuts, a recent hiring freeze, and retirements.

The special focus on EITC recipients has created stark disparities in who gets audited. A 2019 study from former Senior IRS Economist Kim Bloomquist found that because of the IRS’ focus on the EITC, audit rates tend to be highest in low-income communities of color. And the 10 counties in the country with the highest audit rates were all predominantly African American. The manner of EITC audits also burdens low-income communities of color. Audits of EITC recipients are most often done by mail through correspondence examinations. Such audits are inexpensive for the IRS to conduct but burdensome on low-income taxpayers who often face obstacles in responding to them, including the inability to reach points of contact at the IRS lack of professional representation and language barriers. The National Taxpayer Advocate has emphasized that correspondence audits are not effective in improving future compliance, yet families are less likely to claim the EITC after being audited. Together, these problems disproportionately burden communities of color and undermine the anti-poverty goals of the EITC.