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New research finds that low-income taxpayers who receive the earned-income tax credit are more likely to be audited than wealthier Americans.
Eight of the top 10 most-audited counties in the country are poor, rural areas in Mississippi where taxpayers disproportionately receive earned-income tax credits, according to new research from a former economist with the Internal Revenue Service.
The high number of residents receiving the earned-income tax credit, or EITC—meant to help working people with low incomes—is precisely why those areas are hit hardest with audits, according to the research. The IRS audits those recipients at higher rates than all but the wealthiest taxpayers, shifting limited resources to ensure that people who claim the tax credit are doing so correctly. The tax agency purposely ignores geographic information when deciding who to audit to “balance coverage across the country,” but that practice often has the opposite effect, wrote Kim Bloomquist, author of the study, first published on the tax news website TaxNotes.
“A predictable consequence of this realignment of IRS enforcement is a growing regional bias in audit case selection,” he wrote. “This is because EITC taxpayers are not randomly distributed throughout the country.”
Bloomquist mapped the distribution of IRS audits using federal tax return and enforcement data. The results showed that places with a higher percentage of taxpayers receiving the EITC also had a higher distribution of audits—largely poor, rural and predominantly African-American parts of the country, particularly in the South.
“Audit intensity is generally highest in the Southern states and some counties in the Northern Plains, Mountain and Western states,” he wrote. “Audit intensity is generally lower in the upper Midwest, Mid-Atlantic and New England states.”
From 2012 to 2015, eight of the most-audited counties were in Mississippi (Humphreys, Tunica, Coahoma, Noxubee, Holmes, Quitman, Sharkey and Claiborne), with Louisiana (East Carroll Parish) and Alabama (Greene) rounding out the top 10. Slightly more than half of taxpayers in those counties claimed the EITC, and according to 2017 census data, the “population of these 10 counties is 79 percent nonwhite (nearly all black or African-American),” Bloomquist wrote.
The 10 least-audited counties are concentrated mostly in the Midwest—Ohio (Mercer, Putnam), North Dakota (Sargent), Wisconsin (Washington, Calumet) and Minnesota (Sherburne)—where just 10 percent of taxpayers claimed the tax credit, and only 7 percent of the 2017 population was nonwhite.
Nationwide, Humphreys County, Mississippi is the most audited, a rural area with a median household income of $26,188. The least-audited, according to the data, is Delani Burough, Alaska, with a median household income of $83,295.
Bloomquist offers several fixes to the problem, beginning with the most obvious answer of increasing the IRS budget to facilitate more audits of wealthier taxpayers. In the absence of additional funding, the agency could “broaden its audit selection criteria to include other significant areas of compliance risk and not focus so narrowly on EITC claimants,” he wrote.
“Lastly, the IRS should explicitly take into consideration any regional bias of its audit selection criteria, intentional or otherwise, by ensuring the audit coverage rate for each state does not vary substantially from the national average," he wrote. "While regional equity is not the sole factor the IRS ought to consider in achieving fairness for all taxpayers, the main point raised by this report is that the current policy of ignoring geography in selecting tax audits does not achieve the balanced coverage the IRS claims.”
Kate Elizabeth Queram is a Staff Correspondent for Route Fifty and is based in Washington, D.C.