The amalgamation of large partnerships, large corporations, and other high-income earners has overwhelmed the understaffed and underfunded Internal Revenue Service for years, but the agency is turning to a force multiplier, AI, to even the playing field and turn up the heat on the wealthy who do not pay their fair share in taxes.
“If you have AI, and data analytics, you have an algorithm that can sift through huge mountains of data in milliseconds, whereas it would take 100 revenue agents 100 days to do the same work,” said Mr. Robert Kovacev, a partner at the Washington, D.C. law firm Miller & Chevalier. His practice focuses on federal tax controversy and tax litigation.
“Before, the taxpayer could rely on the audit lottery, hoping they wouldn’t get picked, that their number simply wouldn’t come up, and there was a high likelihood of that happening, because the audit rate was so dismal. But now, with AI, that will be a lot harder to rely on.”
Thanks to an infusion of funds from last year’s Inflation Reduction Act, the IRS is hiring hundreds of revenue agents with technological expertise, and has added AI to its toolbox in an effort to reverse the agency’s slumping audit rate on the rich. According to the Government Accounting Office, for those making $5 million or more, the tax rate fell from 16 percent in 2010 to just over 2 percent in 2019.
As the income level rises, so does the complexity of the return, and maneuvers by the wealthy to tuck income away from detection. More complex returns take more hours to evaluate. Prior to the hiring campaign, staffing at the IRS had remained stagnant for decades, stretching thin the ability of the agency to uncover tax cheats. But that all changes with AI.
IRS Commissioner Danny Werfel said the new compliance push follows through on the promise of the Inflation Reduction Act to hold wealthy filers accountable to pay what they owe. “The years of underfunding that predated the Inflation Reduction Act led to the lowest audit rate of wealthy filers in our history,” he said. “I am committed to reversing this trend, making sure that new funding will mean more effective compliance efforts on the wealthy, while middle- and low-income filers will continue to see no change in historically low pre-IRA audit rates for years to come.
According to a statement by the IRS, “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.”
“Prior to the Inflation Reduction Act, more than a decade of budget cuts prevented IRS from keeping pace with the increasingly complicated set of tools that the wealthiest taxpayers use to hide their income and evade paying their share. The IRS is now taking swift and aggressive action to close this gap.”
The initiative builds on the agency’s Large Partnership Compliance (LPC), launched in 2021, and will focus primarily on taxpayers with an annual income of over $1 million and more than $250,000 in tax debt, according to the IRS. The agency will also soon start examining hundreds of the largest partnerships in the U.S., each having assets of more than $10 billion. That includes hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms and other industries.
Commissioner Werfel added, “Anchored by a deep respect for taxpayer’s rights, the IRS is deploying new resources towards cutting-edge technology to improve our visibility on where the wealthy shield their income and focus staff attention on the areas of greatest abuse.”
