National Public Radio recently aired a story looking at why the Internal Revenue Service audits more Blacks than other taxpayers.
That finding is based on research from Stanford Law School Professor Daniel Ho and his colleagues.
NPR reporter Scott Horsley explains: “Ho says the disparity doesn't appear to be deliberate. The IRS doesn't ask taxpayers about their race, and most of the audits are conducted by mail. But something in the way the agency decides who to audit results in Blacks being disproportionately targeted.”
That’s an important point. Any disparity is not deliberate. It’s not based on IRS efforts to target Blacks or a discriminatory computer algorithm. Rather, the disparity is based on tax breaks that are used by low-income filers, many of whom tend to be disproportionately Black.
Horsley continues: “Nina Olson, who was a longtime National Taxpayer Advocate at the IRS, says the agency often seems more interested in policing people who receive payments from the government—through the earned income tax credit, for example—than finding those who fail to pay what they owe.”
And there is a reason why the IRS historically has focused on tax credits, especially refundable tax credits, rather than tax deductions.
A tax deduction reduces the amount of income an individual pays taxes on. So, someone with a $50,000 income who can claim, say, a $5,000 deduction will pay income taxes on $45,000, saving the taxpayer perhaps $500 or $750, depending on other factors.
A tax credit, by contrast, reduces a person’s tax obligation dollar for dollar. And a refundable tax credit will give the taxpayer the difference if the tax credit is more than the taxpayer owes. So, if the taxpayer has a $4,000 refundable tax credit coming, but only owes, say, $500 in income taxes, he or she won't pay any tax and will receive a check from the government for $3,500.
Tax deductions do not give cash to the taxpayer, no matter how large the deduction; refundable tax credits do.
The story mentions the earned income tax credit (EITC), which is refundable. It has one of the highest fraud rates among federal programs. According to the IRS: “IRS estimates that between 21 percent to 26 percent of EITC claims are paid in error. Some of the errors are unintentional caused by the complexity of the law, but some of the claims are intentional disregard of the law.”
The point is that tax policy experts know—and generally dislike—refundable tax credits because they create an economic incentive to game or cheat the system.
Democrats have given the IRS $80 billion to, in part, hire more IRS auditors. Ironically, it is a virtual certainty that more Black taxpayers will be caught up in the Democrats’ enhanced enforcement.
May 9, 2023