The Internal Revenue Service (IRS) is employing artificial intelligence (AI) to combat tax evasion among large partnerships, including hedge funds, private equity groups, real estate investors, and major law firms. This development highlights the IRS’s efforts to strengthen its enforcement capabilities and target complex cases that were previously challenging to handle.
To support its mission of cracking down on tax cheats and individuals using sophisticated accounting tactics to avoid paying taxes, the IRS received $80 billion in funding from the Inflation Reduction Act last year. This allocation has faced political criticism, with Republicans expressing concerns about potential targeting of small businesses and middle-class taxpayers. As a result, $20 billion was revoked earlier this year when the nation’s borrowing cap was raised.
To prove that the funding primarily benefits efforts to target the wealthy, Democrats and the Biden administration are emphasizing the IRS’s focus on high-income individuals.
According to Daniel Werfel, the IRS Commissioner, investigating partnerships has been challenging due to complexity and resource limitations. However, AI is now assisting the IRS in identifying patterns and trends, providing insights to uncover income shielding in large partnerships. This has led to an increase in major audits that were previously difficult to conduct.
The IRS plans to initiate examinations of 75 of the country’s largest partnerships by the end of the month. These partnerships, with assets over $10 billion, have been identified with the help of AI and will receive audit notices soon. Additionally, the IRS will send 500 compliance alerts to other significant partnerships in October, potentially leading to further audits if discrepancies in their balance sheets are not adequately explained.
The IRS’s focus on partnerships aligns with its broader strategy to prioritize wealthier taxpayers in 2024. The agency has assigned numerous revenue officers to pursue 1,600 millionaires who owe at least $250,000 in unpaid taxes.
In the upcoming year, the IRS aims to intensify its scrutiny of digital assets for potential tax evasion and investigate the use of foreign bank accounts by high-income individuals to conceal financial information.
The IRS has revealed limited details about how it plans to utilize AI to combat tax evasion. However, Mr. Werfel mentioned that AI would help identify challenging “compliance threats” and reduce unnecessary audits. To support this goal, the IRS is recruiting data scientists to develop in-house AI tools and collaborating with external experts on the project.
While the IRS has increased its full-time staff to nearly 90,000, Mr. Werfel cautioned about ongoing threats to the agency’s budget, citing the $20 billion clawback. If further cuts occur, funds allocated for vital upgrades and modernization may need to be diverted, ultimately impacting taxpayers.
Mr. Werfel emphasized the importance of securing adequate funding from Congress to support the IRS’s operations and modernization efforts for the benefit of all taxpayers.
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