Artificial intelligence among tools IRS will use for enforcement push

Artificial intelligence is among the tools the Internal Revenue Service will use in a new enforcement push designed to shift more attention to high-income earners, partnerships, large corporations and scams that abuse tax laws.

Some municipal bond market leaders believe that a combination of boosted IRS enforcement combined with raising the tax rate on carried interest could drive more investment into tax-exempt securities. Others believe the added enforcement will play no role.

“Investors are generally motivated by after-tax rate of return,” said Michael Decker, SVP research and public policy at the Bond Dealers of America.

The agency announced Friday “a sweeping, historic effort to restore fairness in tax compliance.”

The announced targets of the new emphasis include the “wealthy, partnerships and other high earners that have seen sharp drops in audit rates for these taxpayer segments during the past decade,” the IRS said. 

The IRS announcement also said it would use artificial intelligence technology to “help IRS compliance teams better detect tax cheating, identify emerging compliance threats, and improve case selection tools to avoid burdening taxpayers with needless “no-change” audits.”

The agency hopes that combining data science and tax enforcement will enable machine learning “to identify potential compliance risk in the areas of partnership tax, general income tax and accounting, and international tax.” 

By the end of the month the IRS says it will be conducting open examinations on seventy-five of the largest partnerships in the U.S. representing a cross section of industries having more than $10 billion in assets including hedge funds, real estate investment partnerships, publicly traded partnerships, and large law firms. 

The examinations are based on balance sheet discrepancies of $10 million or more in assets.

“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,” said IRS Commissioner Danny Werfel. “The years of underfunding that predated the Inflation Reduction Act led to the lowest audit rate of wealthy filers in our history. I am committed to reversing this trend.” 

The act increased the IRS budget by $80 billion over 10 years, an effort cheered by muni tax lawyers. In addition to enforcement, $25 billion was marked for operations and $4.8 billion for business system modernization efforts. 

House Republicans have been trying to claw the money back ever since. They partially succeeded during the debt ceiling negotiations by rescinding $20 billion of the planned IRS funding.    

Other areas of emphasis being tackled per the announcement include adding new fairness guidelines for the Earned Income Tax Credit, expanding compliance efforts aimed at digital currency records reporting, following up on violations of Foreign Bank and Financial Accounts filings, and legal issues involving 1099 forms for contractors. The IRS is also trying to cut down on scams targeted at taxpayers and identity theft, while improving equity in audits.