The IRS Will Use AI to Investigate Sophisticated Tax Evasions

IBL News | New York

The IRS (Internal Revenue Service) has deployed AI to investigate tax evasion and open examinations into large hedge funds, private equity groups, real estate investors, and law firms.

The federal agency this Friday announced that it will use some of the $80 billion allocated through last year’s Inflation Reduction Act to target the wealthiest Americans who use sophisticated accounting maneuvers to avoid paying taxes.

This agency’s new funding has generated a political fight between Republicans and Democrats.

Republicans claim that the IRS will use the funding to harass small businesses and middle-class taxpayers while Democrats say that the funding is primarily enabling the IRS to target wealthy Americans and corporations who may have engaged in tax evasion.

“These are complex cases for IRS teams to unpack,” Daniel Werfel, the IRS Commissioner, said. “The IRS has simply not had enough resources or staffing to address partnerships; in a real sense, we’ve been overwhelmed in this area for years.”

Mr. Werfel explained that artificial intelligence is helping the IRS identify patterns and trends, giving the agency greater confidence that it can find where larger partnerships are shielding income. This is leading to the kinds of major audits that the IRS might not have previously tackled.

The agency said it would open examinations into 75 of the nation’s largest partnerships, which were identified with the help of artificial intelligence, by the end of the month. The partnerships all have more than $10 billion in assets and will receive audit notices in the coming weeks.

More audits are likely to come, according to The New York Times. In October, the IRS will send 500 notifications, known as compliance alerts, to other large partnerships indicating that the agency has found discrepancies in their balance sheets. These partnerships could also face audits if they cannot explain the differences in their balances from the end of one year to the start of the next.

The focus on partnerships is part of a broader push by the IRS to scrutinize wealthier taxpayers in 2024. Mr. Werfel said that the agency is dedicating dozens of revenue officers to pursue 1,600 millionaires who the IRS believes owe at least $250,000 in unpaid taxes.

In the coming year, the IRS said it plans to increase scrutiny of digital assets as a vehicle for tax evasion and investigate how high-income taxpayers are using foreign bank accounts to avoid disclosing their financial information.

As part of its recruiting strategy, the IRS has been looking to hire data scientists to develop new in-house artificial intelligence tools. Mr. Werfel said that the agency is also collaborating with outside experts and contractors on the project.