IRS partners with AI to crack down on taxpayers

The Internal Revenue Service (IRS) Friday announced a “sweeping, historic effort” to crack down on taxpayers which will involve the use of AI technology.

“The changes will be driven with the help of improved technology as well as Artificial Intelligence that will 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 said in a press release last week.

Funding for the technology will come from a $60 billion cash infusion — originally $80 billion — allocated in last year’s Inflation Reduction Act. The AI programs will include complex algorithms able to more effectively weed out tax evaders.

The IRS claims this “cutting-edge machine learning technology” will be used to pursue wealthier Americans and large partnerships.

“With the help of AI, the selection of these returns is the result of groundbreaking collaboration among experts in data science and tax enforcement, who have been working side-by-side to apply cutting-edge machine learning technology to identify potential compliance risk in the areas of partnership tax, general income tax and accounting, and international tax in a taxpayer segment that historically has been subject to limited examination coverage.”

But despite repeated promises to crack down on wealthy taxpayers, the IRS has been targeting mostly low-income families for audits while largely steering clear of high-income earners.

According to a report from Syracuse University’s Transactional Records Access Clearinghouse (TRAC), the IRS subjected low-income taxpayers to “unbelievably high” audit rates — over five times more than nearly everyone else. On the other hand, just 1.1% of millionaires — those who earned a million dollars or more in positive income — were audited. 

Despite its large cash infusion from the Inflation Reduction Act, the IRS found it easier to conduct correspondence audits through the mail, which is more feasible with lower income tax returns. Such audits are automated and usually begin with a letter from the IRS asking the taxpayer for more documentation. In FY 2022, 85% of all 1040 audits began with such a letter, as did 48% of millionaire audits. 

The report explained that lower-income wage-earners “are easy marks in an era when the IRS increasingly relies upon correspondence audits yet doesn’t have the resources to assist taxpayers or answer their questions.” 

While the chance of a millionaire being audited increased to 2.8% last year, this still left nearly 700,000 millionaires who escaped scrutiny. 

Furthermore, while the Biden administration has repeatedly vowed to only increase taxes for those making $400,000 or more, a corporate tax embedded in the Inflation Reduction Act is expected to hit the lower-income class hard.

“As a result of the policy, those with incomes below $200,000 would pay almost $17 billion in combined additional tax in 2023, according to a Joint Committee on Taxation analysis published July 29,” reported CNBC. According to the analysis, only 4%–9% of tax revenue from the Act’s $80 billion investment will come from businesses making above $500,000. 

National Taxpayers Union Foundation Executive Vice President Joe Hinchman told the New York Post why Biden’s IRS is targeting small and medium sized businesses (SMBs).

“The IRS will have to target small and medium businesses because they won’t fight back,” said Hinchman. “We’ve seen this play out before. . . . [T]he IRS says, ‘We’re going after the rich,’ but when you’re trying to raise that much money, the rich can only get you so far.”  

Hinchman explained that the IRS typically goes after SMBs also because they don’t have the financial bandwidth to challenge the agency in court.  

“The approach here is to double the IRS workforce, take the leash off, and see how much they can collect,” Hinchman added. “I think they’ll collect it but it will be quite painful.”