The Internal Revenue Service (IRS) has embarked on a “sweeping, historic” tax enforcement initiative using artificial intelligence (AI) and other advanced technologies to more effectively identify tax evaders.
The new technology-driven enforcement is aimed at higher-earning Americans and large corporations, with a promise not to increase audit rates for those earning less than $400,000 per year. The IRS’s new enforcement thrust will focus on cases involving taxpayers earning over $1 million with a recognized tax debt of more than $250,000.
IRS Commissioner Danny Werfel stated that these changes would be driven by improved technology and AI, helping IRS compliance teams better detect tax cheating and identify emerging compliance threats. He added that the use of AI and complex computer algorithms has already enabled the agency to flag and open investigations into 75 of the largest partnerships in the United States, each with over $10 billion in assets on average.
This new IRS strategy has been enabled by the Inflation Reduction Act, which included around $80 billion to expand the IRS’s budget over a decade. However, due to a debt-ceiling deal between Biden and House Majority Leader Kevin McCarthy, the additional IRS funding has been reduced to around $60 billion.
Apart from enforcement, the funding will also be used to improve the taxpayer experience by introducing chatbots, online portals, and electronic notice responses. The IRS believes its technology-driven enforcement will boost tax collections and revenue for government programs.
Addressing the tax gap, the difference between what is owed to the IRS and what is actually paid, is a critical part of the initiative. IRS estimates show the annual tax gap was around $496 billion between 2014 and 2016. To address this, the IRS plans to scrutinize digital assets to ensure they are not used to hide taxable income. Initial reviews of taxpayer compliance in the digital currency sector have raised concerns, with a potential non-compliance rate as high as 75 percent.
The IRS is also focusing on FBAR violations, particularly among high-income taxpayers. U.S. individuals with a financial interest in foreign financial accounts exceeding $10,000 must file an FBAR to disclose their holdings and related taxes. Recent IRS analysis has identified hundreds of potential FBAR non-filers, many of whom maintain account balances averaging over $1.4 million.
Another area of concern for the IRS is the construction industry, where some contractors make payments to apparent subcontractors through “shell” companies that lack legitimate business relationships. To tackle this issue, the IRS plans to expand its scrutiny in this area with a combination of civil audits and criminal investigations.
To support these initiatives, the IRS plans to hire 20,000 people over the next two years, with around one-third of them earmarked for tax enforcement.
