FAQ: How the IRS is using AI to crack down on tax evasion

(NewsNation) — The IRS last week announced it’s using artificial intelligence to crack down on people and businesses they say owe hundreds of millions of dollars in back taxes.

In a news release, the IRS said this comes after a “top-to-bottom” review of enforcement efforts, and they will focus on wealthy partnerships and “other high earners” in their compliance checks.

“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,” IRS Commissioner Danny Werfel said in a statement Friday.

Those making less than $40,000 don’t have to worry, according to the IRS — their audit rates won’t change. But here’s who it will affect.

What does the new crackdown mean?

Werfel said there is a “sea change taking place at the IRS in every aspect of our operations.”

In the IRS’ announcement, it said this means deploying new resources towards technology meant to increase its visibility on where the wealthy “shield their income,” and focus attention on where people are abusing the tax system the most.

Using artificial intelligence, the IRS can discover patterns and identify wealthy tax dodgers, Werfel said in a call with reporters previewing the announcement of the crackdown.

“New tools are helping us see patterns and trends that we could not see before, and as a result, we have higher confidence on where to look and find where large partnerships are shielding income,” he said on the call, according to the Associated Press.

Dozens of revenue officers will now be focused on high-end collection cases in fiscal year 2024, Werfel said.

Who will the IRS target?

The IRS says it will prioritize high-income cases, meaning those with a total positive income above $1 million with more than $250,000 in recognized tax debt. About 1,600 taxpayers and 75 partnerships representing a “cross-section of industries,” are set to be targeted in new compliance efforts, according to the agency. Hedge funds, real estate investment partnerships, publicly traded partnerships, and large law firms are included in these industries.

On average, the IRS says, these partnerships each have more than $10 billion in assets.

Other “priority areas” identified for heightened compliance work in FY 2024 include:

FBAR Violators

High-income taxpayers who use Foreign Bank Accounts, and fail to file a Report of Foreign Bank and Financial Accounts, will be more heavily scrutinized after IRS analysis of multi-year filing patterns identified hundreds of possible non-filers whose account balances average over $1.4 million.

Digital Assets

An initial review of records showed a potential 75% non-compliance rate among taxpayers with digital assets such as cryptocurrency, so the IRS anticipates these will be tapped for further compliance work in Fiscal Year 2024. This expansion includes work through the John Doe summons effort and last month’s release of proposed regulations of broker reporting, the IRS said.

Labor Brokers

Some construction contracts, the IRS said, have been making Form 1099-MISC/1099-NEC payments to subcontractors that just end up being “shell companies” that have no legitimate business with the contractor. Any money given to this shell company either goes to accounts in their name or is exchanged at Money Service Businesses. These funds are then given to the original contractor.

Both civil audits and criminal investigations will be used to find these violations, which have already been seen in Texas and Florida, the IRS says.

“Work in this area is critical to improve compliance, and it will also help level the playing field for contractors playing by the rules as well as ensuring proper employment tax withholding for vulnerable workers,” the IRS said.

How will the AI work?

The IRS says it plans to leverage Artificial Intelligence to expand its Large Partnership Compliance program. Under the LPC program, the IRS aimed to develop “improved methods” to identify and assess compliance risk. It focused on the characteristics of the largest Form 1065 filers.

Artificial intelligence, the IRS said, will help compliance teams better detect “tax cheating, identify emerging compliance threats and improve case selection tools” to avoid “no-change” audits. Experts in data science and tax enforcement have been working “side by side” to apply matching learning technology to identify these compliance risks in areas that have previously only been given limited examination coverage such as: partnership tax, general income tax and accounting, and international tax, the IRS said.

John Koskinen, a former IRS commissioner during the Obama and Trump administrations, told The New York Times that the IRS already uses technology that allows it to spot issues with tax returns. The IRS being able to train computers to sift through thousands of concerning tax returns would make the agency better able to determine who to audit, Koskinen added.

However, Grover Norquist, founder and president of Americans for Tax Reform, said in the newspaper that the IRS’ use of artificial intelligence is just a way for it to separate itself from accusations of political bias, or unequal enforcement practices.

“This is one more way for them to put some distance in their decision-making,” Norquist said to The New York Times. “They can say, ‘Oh, we’re not auditing people we don’t like. This is science.’”

Where is the money for this coming from?

With the Inflation Reduction Act, the IRS is set to get almost $80 billion in funding over the next decade, with about $45.6 billion slated to go to tax enforcement efforts.

The new compliance efforts by the IRS capitalize on this after “years of underfunding” led to the lowest audit rate of wealthy filers in the agency’s history, Werfel said.

“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,” Werfel said.

When does the IRS plan to start the crackdown?

The IRS plans to open its examination of 75 large partnerships by the end of September. Starting in early October, it will start mailing about 500 partnerships, and depending on their response, these partnerships could be added to the IRS audit stream for additional work.

The Associated Press contributed to this report.


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