IRS to Use Artificial Intelligence to Enforce Tax Compliance

Posted by on September 11, 2023 3:04 am

The Internal Revenue Service (IRS) intends to expand a pilot program that utilizes artificial intelligence to target the largest partnerships in the United States.

The program is part of funding provided by the Inflation Reduction Act.

“Capitalizing on Inflation Reduction Act funding and following a top-to-bottom review of enforcement efforts, the Internal Revenue Service announced today the start of a sweeping, historic effort to restore fairness in tax compliance by shifting more attention onto high-income earners, partnerships, large corporations and promoters abusing the nation’s tax laws,” the IRS wrote in a statement.

“The effort, building off work following last August’s IRA funding, will center on adding more attention on wealthy, partnerships and other high earners that have seen sharp drops in audit rates for these taxpayer segments during the past decade,” the statement continued.

“The changes will be driven with the help of improved technology as well as Artificial Intelligence that will help IRS compliance teams better detect tax cheating, identify emerging compliance threats and improve case selection tools to avoid burdening taxpayers with needless ‘no-change’ audits.”

“This new compliance push makes good on the promise of the Inflation Reduction Act to ensure the IRS holds our wealthiest filers accountable to pay the full amount of what they owe,” said IRS Commissioner Danny Werfel.

“The years of underfunding that predated the Inflation Reduction Act led to the lowest audit rate of wealthy filers in our history. I am committed to reversing this trend, making sure that new funding will mean more effective compliance efforts on the wealthy, while middle- and low-income filers will continue to see no change in historically low pre-IRA audit rates for years to come.”

From the IRS:

Expansion of pilot focused on largest partnerships leveraging Artificial Intelligence (AI). The complex structures and tax issues present in large partnerships require a focused approach to best identify the highest risk issues and apply resources accordingly. In 2021, the IRS launched the first stage of its Large Partnership Compliance (LPC) program with examinations of some of the largest and most complex partnership returns in the filing population. The IRS is now expanding the LPC program to additional large partnerships. With the help of AI, the selection of these returns is the result of groundbreaking collaboration among experts in data science and tax enforcement, who have been working side-by-side to apply cutting-edge machine learning technology to identify potential compliance risk in the areas of partnership tax, general income tax and accounting, and international tax in a taxpayer segment that historically has been subject to limited examination coverage. By the end of the month, the IRS will open examinations of 75 of the largest partnerships in the U.S. that represent a cross section of industries including hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms and other industries. On average, these partnerships each have more than $10 billion in assets.

Axios reports:

The announcement is part of the Biden administration’s effort to increase revenue by billions of dollars over the next decade through new tax compliance measures.

The effort, and additional funding for the IRS, has been heavily criticized by Republicans, who claim it will use the extra resources to harass small business and average taxpayers.

Earlier this year, Republicans clawed back $20 billion from the IRS over the next two years in exchange for increasing the nation’s borrowing limit and avoiding a default.

Treasury Secretary Janet Yellen directed the IRS to avoid using any new funding to increase audits on small business or households earning $400,000 per year or less.