Este post aparece en español debajo de la versión en ingles.
Taxes for thee, but not for me: A look at the unequal enforcement of the US tax code
It’s tax time again in the United States, where individual citizens are responsible for figuring out what we owe to our federal and local governments and filing our returns by April 15. And, as Ramón Luzárraga has just argued in a Forum post last month, Catholic ethics is overdue for a more thoughtful engagement with taxation as a subject. With this in mind, this post takes up Luzárraga’s charge, by reflecting on the justice of the US tax system. Instead of addressing the content of our tax code, however, the focus here will be on its enforcement, and what this says about American society.
Who gets audited?
Let’s jump right in: Black US taxpayers are between three and five times more likely to be audited than other taxpayers, according to a recent study of 148 million tax returns and 780,000 audits—despite not underreporting their taxes owed any more than the rest of the population.[1] On the face of it, this is unjust. It is even more so, however, when we consider what a burden audits can impose. The US uses the tax system to administer its largest cash-based welfare program—the Earned Income Tax Credit (EITC), which transferred about $64 billion to individual workers and families in 2022 in the form of refunds.[2] Refunds are typically frozen for the duration of an audit, which now regularly drag on—in 2022, audits of taxpayers earning less than $50,000 took an average of 340 days.[3] Moreover, every year roughly 40% of taxpayers claiming the EITC who are audited do not respond to the audit correspondence (whether due to a changed address, language barrier, or not understanding that a response is required, etc.), leading the IRS (Internal Revenue Service) to automatically close the audit by disallowing the EITC benefit altogether.[4] In addition, studies indicate that audits have a discouraging effect on subsequent filings, leading taxpayers to forgo legitimate claims in order to avoid further delays of their refunds.[5] In short, audits place significant financial strain on families in need, and we now know this is disproportionately borne by African Americans.
Although this is the first study of this scale to identify a racial disparity, this is not the first we are hearing that the burden of audits is not shared equitably. In 2019, ProPublica made headlines with a story identifying a rural and predominantly African American county in the Mississippi Delta with more than a third of its residents living below the federal poverty line as “the most heavily audited county in America.”[6] Counties with lower average incomes and more EITC recipients tend to receive a disproportionate share of audits, because EITC recipients overall are much more likely to be audited than all other taxpayers save the absolute wealthiest.[7] Indeed, those making $20,000 a year are now more likely to come under the scrutiny of the IRS than those making $400,000.[8]
On first glance, a policy of auditing the poor more than nearly everyone else and African Americans most of all does not make sense. EITC audits do not seem like an efficient way for the IRS to recover the estimated $600 billion in taxes that go unpaid each year, mostly from higher income returns.[9] Indeed, research suggests that nearly a third of this revenue is lost to tax evasion and noncompliance in the top 1% of returns. Targeting low-income taxpayers will do little to close our massive “tax gap,” which amounts to roughly 3% of the US’s GDP.[10] Besides, the IRS does not collect information on race or ethnicity, and audit selection is done by algorithm, so the problem cannot be reduced to auditor bias. So, what gives?
The H. Richard Niebuhr/ Marvin Gaye question: What’s going on?[11]
Part of the problem is undoubtedly the complexity of the EITC; the IRS itself has repeatedly urged Congress to simplify the credit to prevent erroneous claims and reduce the burden on both taxpayers and the IRS.[12] Since alternatives are available, the byzantine nature of the tax code around this credit—which is meant to help the working poor, not penalize them—is itself unjust.
Perhaps a greater issue, however, is how unequipped the IRS is to enforce that code, regardless of its complexity. Although the number of returns filed increases each year, after a decade of budget cuts in 2020 the IRS’s auditor workforce was down by a third.[13] This attrition in the face of hiring freezes has especially impacted its staff of senior auditors with the specialized training and expertise to review complex returns.[14]
This intersects in tragic ways with the fact that auditing poor taxpayers is simply easier, since it can be done via correspondence and by employees without accounting experience. In contrast, auditing the rich is more time consuming and expensive: while the IRS estimates that the average audit by mail (which describes EITC audits) takes 5 hours and costs $150, auditing returns with income in excess of $10 million requires somewhere between 61 to 251 hours from senior examiners.[15] In a sense, auditing the poor is “more efficient.” This explains why audit rates overall have dropped since 2010, but rates for those in higher income brackets have dropped much more precipitously: while audits of EITC recipients have declined by 34%, audits of Americans making more than $200,000 are down by roughly 80%.[16]
“Efficiency” appears to be a factor driving racial disparities within income brackets, as well. This most recent study found that even “among unmarried men with children, Black EITC claimants are audited at more than twice the rate of their non-Black counterparts.”[17] Why? Among other issues, returns with non-wage income (such as self-employment income) are more time-consuming to review, so returns without these are prioritized. In theory, this approach may seem neutral. In practice, it is racially unjust, given that African Americans are less likely than others to report non-wage income.
Seeing, and then judging: Who is to blame?
Some responsibility lies with the IRS, which needs to adjust its audit algorithms so Black taxpayers are not disproportionately targeted. Fortunately, this recent study suggests a number of ways to do this.
Unfortunately, the problem is even more political (and thus cultural) than it is logistical. The misguided concern for audit efficiency is driven by the agency’s incapacitation due to politically motivated budget cuts. In response to a 2019 inquiry into the disproportionate auditing of EITC recipients, the IRS explained that it simply lacks the resources to audit more complex returns. Indeed, the IRS has repeatedly requested that Congress restore its funding to a level that would enable it to administer tax laws more justly. This is urgent, many have argued, to avoid a two-tiered tax system where the poor pay (more than) their fair share while the wealthy escape scot-free.
How this problem illustrates key dynamics in social life today
This is obviously not a specifically Catholic problem, nor one where Catholics can offer unique solutions. It does, however, serve as a stark illustration of three important dynamics of contemporary social life on which Catholic ethics may shed light.
The first of these is the sheer power of “seemingly technocratic choices about algorithmic design” to shape the worlds we inhabit.[18] This calls to mind Francis’ warnings about the “new and often anonymous forms of power” that can dominate in knowledge economies—in this case, the power of bureaucratic choices about policy implementation to subvert the very goal of those policies, and entrench existing disparities.[19] To the extent that we can, ethicists ought to scrutinize the implementation of the laws we examine alongside their content.
Noticing racial disparities in tax audits also reminds us of precisely the kind of public truth-telling around race that America needs. We are amidst an overdue reckoning with the legacy of slavery and racism in American life. Collectively acknowledging the regressive and unequal enforcement of our tax code could be helpful in this, insofar as it gives us further tools to dismantle what Bryan Massingale has called “the ‘comfortable fictions’—the deliberate distortions, misleading euphemisms, selective recollections, and self-serving presentations—that societies employ to mask the presence of injustice or make its existence tolerable.”[20] In the US, these comfortable fictions have included the idea that America is a meritocracy where everyone “plays by the same rules,” regardless of race or class. History and current data show many arenas where this is not the case, from homeownership access to criminal sentencing; now we can add taxes to the list of games Black Americans have been playing under harsher rules than others.[21] It behooves us as a society to admit this frankly—or, in more theological parlance, to confess and lament this injustice.
Finally and on a more hopeful note, perhaps we can take the scholarship and news commentary on this injustice as itself a positive sign. If this latest research proves that America still needs more truth-telling around race, it also shows that we are taking up the task, even if slowly and belatedly. Just as the widespread outrage and lament fueling the Black Lives Matter movement is a sign of progress insofar as it indicates that the conscience of (white) America is finally troubled, so it is good that our current administration has called federal agencies to review how existing policies and programs affect racial equity.[22] As one response to that call, this study (which was a collaboration of academics and Treasury Department employees) helps us see more clearly some of the injustices hidden behind our comfortable fictions. The question now is whether we can muster the political will to finally do something about them—or, again speaking more theologically, to repent and make amends.
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[1] Hadi Elzayn and Evelyn Smith et al., “Measuring and Mitigating Racial Disparities in Tax Audits,” Stanford Institute for Economic Policy Research working paper, January 30, 2023. See also Jim Tankersley, “Black Americans Are Much More Likely to Face Tax Audits, Study Finds,” The New York Times, January 31, 2023.
[2] IRS, Statistics for Tax Returns With the Earned Income Tax Credit (2022).
[3] Taxpayer Advocate Service, Annual Report to Congress, Prologue: Taxpayer Rights and Service Assessment: IRS Performance Measures and Data Relating to Taxpayer Rights and Service, 2021.
[4] National Taxpayer Advocate Blog, “EITC Audits Will Once Again Begin; Proactively Responding to an EITC Audit is Crucial,” March 23, 2022.
[5] E.g., John Guyton et al., “The Effects of EITC Correspondence Audits on Low-Income Earners,” May 2019.
[6] Paul Kiel and Hannah Fresques, “Where in the US Are You Most Likely to be Audited by the IRS?” ProPublica, April 1, 2019.
[7] Kim Bloomquist, “Regional Bias in IRS Audit Selection” TaxNotes (2019) 987-991.
[8] Paul Kiel and Jesse Eisinger, “Who’s More Likely to be Audited: A Person Making $20,000—or $400,000?” ProPublica, December 12, 2018.
[9] Natasha Sarin, “The Case for A Robust Attack on the Tax Gap,” US Department of the Treasury, Featured Stories, September 7, 2021.
[10] Sarin, “The Tax Gap.”
[11] H. Richard Niebuhr, The Responsible Self (Harper & Row, 1963).
[12] E.g. see Taxpayer Advocate Service (IRS), Report to Congress (volume 3), 2020; and National Taxpayer Advocate Blog, “EITC Audits Will Once Again Begin.”
[13] Internal Revenue Service, IRS Budget and Workforce, irs.gov.
[14] A separate, but also critically important, factor sustaining the tax gap is the information to which the IRS is given access. While reporting on wage income (which is automatically shared with the IRS) is 99% compliant, reporting on less visible forms of income such as business income and capital gains (and which tend to accrue disproportionately to white households) hovers at 45%. (IRS, 2019. “Federal Tax Compliance Research: Tax Gap Estimates for Tax Years 2011–2013.” Publication 1415 (Rev. 9-2019). New tax reporting and compliance measures that would address this are currently being discussed; for more on these and this issue, see Chuck Marr and Samantha Jacoby, “Reducing the Tax Gap: 5 Key Points on Information Reporting,” Center on Budget and Policy Priorities (September 14, 2021).
[15] Letter from Charles Rettig (Commissioner of the IRS) to Ron Wyden, US Senate Committee on Finance, and attached report, September 6, 2019.
[16] Paul Kiel, “It’s Getting Worse: The IRS Now Audits Poor Americans at About the Same Rate as the Top 1%,” ProPublica, May 30, 2019.
[17] Elzayn and Smith et al., “Racial Disparities in Tax Audits,” 4.
[18] https://siepr.stanford.edu/publications/measuring-and-mitigating-racial-disparities-tax-audits
[19] Francis, Evangelii Gaudium (2013), 52.
[20] Bryan Massingale, Racial Justice and the Catholic Church (Maryknoll: Orbis, 2010), 100.
[21] On sentencing, e.g., see “Racial Disparities in Sentencing in the United States,” report of the American Civil Liberties Union and The Sentencing Project to the UN Committee on the Elimination of Racial Discrimination, August 2022. Available at: https://www.sentencingproject.org/app/uploads/2022/10/07-14-2022_CERD-Shadow-Report-Draft_with-endnotes.pdf. On the factors contributing and sustaining racial disparities in homeownership, see The Urban Institute’s Reducing the Racial Homeownership Gap project, at https://www.urban.org/policy-centers/housing-finance-policy-center/projects/reducing-racial-homeownership-gap.
[22] E.g., Executive Order 13985 (January 20, 2021), which requires federal agencies to identify and address inequitable impacts of their programs and policies.