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How will AI boost the IRS’s scrutiny of various taxpayer groups? What benefits and hurdles might taxpayers encounter as the IRS ramps up the use of AI?
The IRS is using artificial intelligence to improve tax compliance and customer service this tax season. New AI-powered systems aim to curb tax evasion, improve audit precision, and help close a $688 billion tax gap.
Here’s how the IRS is using AI and what the benefits and challenges are.
The IRS Steps Into the Future
Powered by an $80 billion infusion from Congress, the IRS is stepping into the future this tax season, employing the power of artificial intelligence to fight tax evasion and transform customer service. Here’s how the IRS is using AI.
Background
Tasked with overseeing tax laws and processing over 260 million tax returns amounting to $4 trillion annually, the Internal Revenue Service (IRS) has long grappled with challenges posed by chronic underfunding and antiquated systems.
However, the tide turned with the 2022 Inflation Reduction Act, which granted the agency $80 billion over 10 years to upgrade its operations. The sizable allocation remains a catalyst in implementing cutting-edge technologies like AI to overhaul IRS operations.
AI Implementation
This tax season, the IRS is using AI to improve efficiency, compliance, and auditing, homing in on high-value tax evaders, anticipating noncompliance threats, and advancing audit precision.
- Identifying high-value tax evaders. The IRS is harnessing AI’s ability to detect intricate tax evasion schemes by wealthy individuals, large corporations, hedge funds, private equity groups, real estate investors, and large law firms.
- Detecting emerging noncompliance areas will enable the agency to reduce unnecessary audits.
- Improving audit targeting and efficiency. The agency is employing AI to analyze massive data sets, uncovering patterns for smarter, more effective audits. AI detects financial discrepancies and suggests audits in areas where violations may have occurred.
Increased AI Scrutiny
Experts say that several key groups of taxpayers can expect increased scrutiny from an AI-augmented IRS this year, including:
- Wealthy individuals earning over $1 million who have a recognized tax debt exceeding $250,000. The IRS has identified 1,600 of such individuals who owe hundreds of millions in taxes.
- Digital asset exchange users (cryptocurrency traders), 75% of whom don’t comply with tax laws.
- Individuals who claimed Covid relief credits like the Employee Retention Credit (ERC). The IRS received billions in questionable ERC claims, leading it to shift its focus from helping businesses obtain these credits to cracking down on abuse.
Improved Customer Service
The IRS is also using AI to improve customer service this year. The agency’s English and Spanish-speaking conversational AI chatbots have already responded to millions of taxpayer inquiries, and the IRS says it’s seen major improvements in speed and customer satisfaction.
- Since 2022, the IRS’s 10 chatbots and nine voice bots have addressed over 13 million tax issues.
- The bots, available during extended hours unlike traditional IRS phone lines, are freeing IRS staff to address more complex taxpayer issues.
AI-Related Concerns
Tax experts warn that the IRS’s use of AI this year also comes with risks—including that their algorithms may discriminate against certain taxpayer groups. One 2023 study found that the algorithms led the IRS to audit Black taxpayers at 2.9 to 4.7 times the rate of other Americans.
Another concern is the IRS’s lack of transparency over the logic and processes guiding its algorithms’ decisions. Absent an understanding of these factors, taxpayers won’t be able to tell whether a machine lacking sufficient human oversight dictated their outcomes.
Finally, some worry that AI may target taxpayers for audits simply because their returns don’t follow conventional patterns.
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