Every year on April 15, the Inner Income Service expects People to file their annual tax returns, and in doing so, People anticipate U.S. tax coverage to be administered pretty throughout demographic teams.
Whereas the IRS and the Division of the Treasury have dedicated to tax administration fairness, the Authorities Accountability Workplace
The GAO examined the IRS’s safeguards for making certain audits don’t goal filers primarily based on demographic traits and made suggestions to enhance the company’s audit choice course of and mitigate potential unintended biases. Such modifications to the audit choice course of might reduce the possibilities of the IRS inadvertently producing disparities in audits.
The IRS doesn’t gather info on the race and ethnicity of taxpayers; nevertheless, the GAO discovered that some audit choice standards and strategies might have completely different implications for taxpayers relying on their race or ethnicity. Current educational analysis estimated that Black taxpayers are audited at 3-7 instances the speed of taxpayers of different races. Moreover, returns claiming the Earned Revenue Tax Credit score appeared to account for greater than 70% of that disparity. IRS researchers confirmed there are disparities within the variety of audits of Black taxpayers in relation to taxpayers of different races.
The IRS’s audit choice course of focuses on areas with the best chance of noncompliance. As a part of this course of, it depends, partially, on a measure referred to as the no-change fee — the share of returns that can yield no further income after audit. The IRS seeks to realize a low no-change fee as a result of it signifies noncompliant taxpayers are being audited — those who had a “change” to their tax return.
The IRS’s calculation of the no-change fee contains default audits — audits closed as a “change” as a result of taxpayers didn’t reply or offered inadequate responses to the company’s notices — and analysis exhibits that Black taxpayers usually tend to not reply to IRS correspondence than taxpayers of different races. Default audits additionally could also be extra frequent amongst low-income and EITC taxpayers due to challenges that make speaking efficiently with the IRS tougher, equivalent to being transitory or not having financial institution accounts.
As a result of the IRS is counting on a no-change fee that’s doubtless lowered because of the inclusion of taxpayer non-response audit choices, the company may very well be disproportionately choosing returns which might be extra prone to be default audits. This choice course of might additionally result in inadvertently choosing taxpayers with sure demographic traits. The GAO has suggested the IRS to calculate a number of no-change charges, together with one with out default audits, to assist take away any unintended biases from its audit choice methodology.
After the IRS has decided the sort and quantity of refundable credit score returns that can be audited, it makes use of a system of algorithms to pick out particular returns for audit. The first system the IRS makes use of to pick out particular returns for audit is the Dependent Database program, an automatic system that flags returns for potential danger of noncompliance. The GAO discovered weaknesses within the IRS’s assessment and use of those algorithms. Whereas the IRS usually opinions this system, the assessment course of doesn’t comprehensively think about the info inputs and assumptions that would inform the company in regards to the demographic fairness of the audit choice course of. For instance, the GAO discovered that some danger scores contained in algorithms differ by intercourse, which might skew choice, and haven’t been up to date since 2001. This lack of assessment might create the potential for unintended bias in audit choice.
The IRS has begun work to research these points, together with implementing a brand new risk-scoring mannequin used for audit choice within the tax submitting season of 2024. Nevertheless, it doesn’t have steering for tips on how to think about its analysis on audit disparities whereas reviewing its automated audit choice processes. For instance, IRS analysis recognized outdated fashions and issues with the reliability of exterior information sources as potential contributors to disparities in audits, nevertheless it doesn’t have steering for implementing these findings. The IRS has additionally indicated plans to extend using synthetic intelligence strategies to pick out returns for audit. In doing so, it’s crucial the company have a complete and systematic course of for reviewing these methods that considers the potential for imbedding unintended biases in audit choice.
The GAO made six suggestions to the IRS to handle these points. This included calculating no-change charges with and with out default audits, growing steering for contemplating audit fairness analysis in growing audit workplans and assessing the DDB system’s potential to comprise algorithmic biases, and conducting extra complete opinions of its algorithms and the info sources these make the most of. The IRS concurred with the suggestions and is assembling a group of consultants throughout the company to implement these suggestions and tackle unintentional disparity in audit choice.
Sonya Phillips, assistant director, strategic points, and Jennifer Stratton, senior economist, strategic points, on the GAO, contributed to this text.
