The IRS’s Problem With Minorities

Is the Internal Revenue Service targeting African-American and Hispanic taxpayers? That’s the conclusion of a new study provided exclusively to Fortune titled “IRS Enforcement’s Impact on Minority Communities,” conducted by Thomas M. Evans, CEO of TaxLifeboat, a firm that advises taxpayers on resolving their problems with the IRS.

Evans stresses strongly that the disproportionate number of IRS actions against minorities isn’t intentional. Rather, he charges, it’s the result of overly rigid, highly-automated enforcement policies that waste taxpayer money by pursuing low-earners who either can’t pay, or owe virtually nothing.

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The IRS doesn’t specify the ethnic background of Americans it hits with enforcement actions. To explore the issue, Evans examined the 1,000 zip codes where the IRS had filed the largest number of liens from July 2009 to July 2010. He then mined the 2000 Census, the most recent source available, to determine the racial makeup of those areas. Evans found that, on average, the populations of those 1,000 locales with the nation’s highest level of tax enforcement were 22% African-American and 24% Hispanic. That’s approximately double the proportion of those minorities in entire country.

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Hiding in plain sight

Why do IRS actions fall so heavily on minorities? The principal reason is that low-earners, including an outsized number of blacks and Hispanics according to Evans’ findings, commit the violations that are easiest to detect. The IRS’s powerful computers screen the W-2 forms from employers against the returns filed by individuals. If the worker didn’t file a return at all, or if they claim too many exemptions, the IRS automatically launches an “examination.” That step frequently leads to an enforcement action, which can trigger severe penalties–garnishing wages, seizing homes, freezing bank accounts or the filing of tax liens that ruin credit ratings.

According to Evans, who advises thousands of low-income clients a year, many workers are so uninformed about the tax system that they think the amount withheld from their paychecks is sufficient payment. Hence, they don’t file returns at all.

Others, he says, don’t intentionally cheat, but “don’t think that it’s a priority to be tax compliant.” They may neglect to report such items as credit card debt forgiveness, which is classified as income under the tax code. And, says Evans, they simply can’t afford the $100 to $300 for an advisor to prepare their returns.

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Remarkably, many of the low-earners with IRS problems don’t owe anything. Evans recently worked with a truck driver who hadn’t filed a return in seven years, and faced a bill for $60,000. “He’d been paying through withholding,” says Evans. “When we finally filed all the returns, and included his deductions, he owed $400.”

When the IRS garnishes their wages, many former factory workers or security guards stop looking for higher-paying jobs, or quit their jobs altogether in favor of work in businesses where they’re paid in cash. {snip}

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