Abstract

Excerpted From: Diane Kemker, Do Black Taxpayers Matter? A Critical Tax Analysis of IRS Audit Practices, 20 S Stanford Journal of Civil Rights & Civil Liberties 133 (April, 2024) (230 Footnotes) (Full Document)

The Earned Income Tax Credit is a half-century-old anti-poverty program administered through the federal tax system. It currently provides low-income taxpayers with a "refundable credit" (a payment in excess of tax liability) of up to $560 for taxpayers with no dependents, and a maximum of nearly $7000 for those with three or more dependents. Its complex eligibility rules produce persistently high error rates, which are in turn used to justify high audit rates. Because of the small dollar amounts involved, EITC audits are not lucrative for the IRS, although they are also not terribly costly (as most are conducted by correspondence and not contested). EITC audits are pre-refund, forcing poor taxpayers to wait months even for the undisputed portion of what they claim. Those who are audited are deterred from claiming it again; some mistakes can disqualify taxpayers from receiving it in future years. Given all this, perhaps it is not surprising that the EITC is underclaimed (about 20% of the eligible do not claim it).

This state of affairs provokes many questions. Why is the EITC still so complicated that it generates such a high error rate? Why are the uncontested portion of refunds withheld from poor taxpayers, who unquestionably need and are entitled to the money? Why does a government cash "giveaway" have only an 80% uptake rate? Why does the IRS devote greater resources to policing alleged overclaims at the bottom of the tax table, where there is little to be gained for the fisc, instead of at the top, where billions go uncollected?

The answer to these questions may come from an unexpected direction. For decades, civil rights scholars have drawn attention to the anti-Black racism of the American criminal justice system, from police and prosecutors to the mass incarceration of young men of color, especially Black men. What has only lately begun to draw significant scholarly attention, however, is the persistence of racially disparate treatment by an entirely different arm of the government: the Internal Revenue Service.

Recent painstaking empirical work by economists has confirmed what many antidiscrimination and intersectional tax law scholars have long suspected: IRS audit practices, especially of EITC claimants, affect Black taxpayers in profoundly racially disparate ways. The Blackest counties in the United States are among the most heavily audited, despite being among the poorest; poor Black EITC claimants are audited at rates far in excess of any other group in America; single poor Black working fathers are audited at the very highest rates of all - despite the fact that the IRS does not collect race-based information about taxpayers. In sum, what this research has revealed is that the same systematic racial disparities long identified and decried in the allegedly race-blind criminal justice system also afflict the tax enforcement system.

This Article uses insights from Michel Foucault, Critical Race Theory, and intersectionality to help understand and interpret empirical data about the EITC and IRS EITC audit practices that otherwise defy explanation. With an intersectional approach that encompasses not just race, but also gender and class, the Article demonstrates that the best explanation for the unfair and punitive treatment of poor Black taxpayers by the IRS lies in the very same persistent anti-Black stereotypes that have distorted both criminal justice and American welfare policy: myths about Black laziness, criminality, violence, promiscuity, and family dysfunction. The pernicious influence these deeply rooted, mutually reinforcing, and profoundly biased ideas have exerted on formally race-neutral tax law and tax enforcement policy can hardly be overstated.

Making matters worse, most tax law casebooks do little to improve, critique, or even reveal this situation. This may be because they generally devote so little space to the EITC or audit policy, a couple of paragraphs or perhaps a few pages at most. At best, these findings appear in the supplementary Teacher's Manual; at worst, the casebook traffics in the very same stereotypes that contribute to the problem. Whatever prior justifications may have been offered for giving this topic such short shrift are no longer acceptable. Tax law enforcement and tax law casebooks must recognize that the lives of poor Black taxpayers matter.

Part I introduces the Earned Income Tax Credit, including its history, statutory basis, and statistics important for understanding this benefit. Part II presents information and data about audits, including of EITC claimants, together with recent empirical findings about racial disparities in audit practices. Part III contains the critical tax analysis of EITC overaudits, including an explanation drawn primarily from Critical Race Theory and its analysis of anti-Black stereotypes, that enables us to better understand the otherwise-inexplicable racially disparate audit practices of a formally race-neutral agency enforcing formally race-neutral tax laws. Part III also demonstrates that even the best of several leading tax law casebooks come up importantly short in their coverage of these issues, while the worst perpetuate the very same stereotypes that have contributed to this ongoing injustice in tax administration. Part IV draws conclusions and makes recommendations.

[. . .]

Because of the enforcement patterns identified above, and their deep causes, it is not enough simply to recommend that the IRS or IRS enforcement be fully funded or given different priorities. Or, as Commissioner Werfel states, that the IRS be "laser focused" on "evaluat[ing] ways to address any bias that exists within our audit program." Rather, we must start to understand how an allegedly raceneutral regime became racially discriminatory in the first place. Until we confront these causes, greater funding for IRS enforcement is no guarantee that those resources will not be used for even more punitive "enforcement" against Black EITC recipients, just as increased criminal justice funding has exacerbated, not ameliorated, racial disparities. Elzayn et al. do provide a number of approaches that would yield more for the IRS and simultaneously reduce audit rates of Black taxpayers; for example, "The random forest regressor model detects roughly twice as much underreporting as the status quo at the same audit rate; in so doing it audits Black taxpayers at a lower rate than non-Black taxpayers."

But sophisticated changes like this are not yet in the practical conversation. In 2022, former Secretary of the Treasury Janet Yellen directed that "any additional resources--including any new personnel or auditors that are hired--shall not be used to increase the share of small business or households below the $400,000 threshold that are audited relative to historical levels." Instead, Phillip Swagel of the Congressional Budget Office wrote, "enforcement resources will focus on ... high-end noncompliance." If adopted, this would simply maintain EITC audits at current, unacceptable levels. However, the Senate rejected an amendment to the proposed IRS funding bill that provided that "[n]one of the funds appropriated under subsection (a)(1) may be used to audit taxpayers with taxable incomes below $400,000."" According to the Congressional Budget Office, "the change would have imposed restrictions on the use of appropriations by the IRS, which would have caused the agency to shift to less productive enforcement activities and to incur increased administrative costs."

The claim that auditing high-income taxpayers is "less productive" is squarely contradicted by other research, including by the Department of Treasury itself, whose Deputy Assistant Secretary for Economic Policy, Natasha Sarin, has recommended a "robust attack on the tax gap." A much more dramatic commitment needs to be made than that proposed by the defeated amendment. Although it may not be politically viable, what is needed, as has been recommended by so many analysts, is an intensive focus on the "tax gap" and the returns of taxpayers most likely to be responsible for it. A commitment to audit 100% of all millionaire tax returns would not only ""pay for itself," but could significantly reduce uncollected taxes.

Meanwhile, the IRS ought simply to cease auditing EITC claimant returns unless there are affirmative indicia of fraud (not mere mistake). This change would cost the fisc very little and would significantly improve the lives and material circumstances of millions of poor working Americans. This change would end audits that inflict real economic hardship despite being economically inconsequential to the government, end the harms caused by refund "freezes," and perhaps better carry out the purpose of the EITC by increasing claim rates. As important as any of this, it would begin to change the IRS and its enforcement activities into an instrument of racial tax justice, instead of exacerbating economic inequality and furthering economic White supremacy.

Visiting Professor of Law, Southern University Law Center. Harvard College (A.B.), UCLA School of Law (J.D.), University of San Francisco School of Law (LL.M. (taxation), summa cum laude).