IRS to Leverage AI for Tax Compliance in High-Income Individuals and Large Corporations
The Internal Revenue Service (IRS) has announced plans to use artificial intelligence (AI) to identify patterns of noncompliance in large partnerships, as well as increase its examinations of high-income taxpayers and big corporations. This move comes with a need for caution due to growing concerns about the reliability of AI technology.
Mark Everson, a former commissioner of the IRS and currently a vice chairman at tax consulting firm Alliantgroup, stated that this approach aligns with the agenda set by the Biden administration. Everson also highlighted the challenges the IRS faces in adding and training personnel in enforcement areas.
Recent reports from the Treasury Inspector General for Tax Administration have drawn scrutiny to revenue officers not adhering to the requirement of working through taxpayer representatives. Everson also pointed out court cases on penalty approvals being backdated, emphasizing the need for careful handling of AI implementation.
Political ramifications are another significant aspect, as Everson noted the administration’s efforts to target big corporations and high-income individuals. He stressed the importance of caution, stating that any mistakes or improper targeting could lead to serious consequences for the IRS, as the entities they are pursuing have the resources to fight back.
Maintaining a balanced perspective, Everson expressed confidence in IRS Commissioner Daniel Werfel’s ability to execute the strategy appropriately, given his prior experience at the White House Office of Management and Budget and in the private sector. The use of AI technology could prove beneficial in auditing large and complex partnerships with their intricate tax returns.
Colin Walsh, a tax principal at accounting firm Baker Tilly, highlighted the potential for AI to revolutionize how the IRS selects tax returns for examination, particularly in the case of large partnerships. The Centralized Partnership Audit Regime launched in 2015 allows the IRS to streamline the assessment process using AI, making it easier to identify issues and make necessary adjustments.
However, there are potential pitfalls if the IRS is perceived as unfairly targeting taxpayers based solely on deviations from normal patterns. Walsh acknowledged that statistical anomalies can occur and reasonable explanations should be taken into account during audits.
It is worth noting that the IRS has long been exploring the use of AI, although primarily to detect identity theft in tax returns. The agency analyzes patterns in data to identify potentially fraudulent claims. While these efforts are appreciated, Walsh pointed out that AI is not without its flaws, leading to explainable anomalies in some cases.
One benefit of AI implementation is its potential to address workforce shortages at the IRS as it aims to increase enforcement efforts. The agency plans to focus on auditing 1,600 millionaires who owe at least $250,000 in taxes and 75 large partnerships with substantial assets.
Everson acknowledged the IRS’s need for a more adequate workforce to tackle the existing inventory of tax matters. By announcing their intentions, the IRS aims to serve as a warning to potential offenders while strengthening its defenses and protecting its budget and appropriations as Congress prepares for potential spending conflicts.
Ultimately, the IRS hopes to secure stable funding for the next few years, allowing for effective planning and training of personnel. Timely and efficient work is crucial to demonstrate to American taxpayers that their contributions to the IRS yield results.
While AI offers advantages in tax administration, careful protocols must be established for technology development and decision-making processes. The IRS is subject to greater scrutiny than individual taxpayers due to the nature of its work. It is essential to strike a balance between leveraging technology and respecting taxpayer privacy.
As the IRS moves forward with AI implementation, it must be cautious and mindful of potential challenges and criticisms. The success of this strategy hinges on careful execution, adherence to protocols, and ensuring that taxpayers’ rights are protected.