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IRS Using AI to Enforce Tax Compliance for the Wealthy

Dec 13, 2023 | Investing, Personal Finance, Tax

The Inflation Reduction Act funding passed by Congress in August of 2022 granted additional funding to the IRS. The Service has announced it will apply a portion of those funds to restore fairness in tax compliance, and it plans to do so by using advances in artificial intelligence (AI) to increase the ability to crack down on high-income earners, partnerships, corporations and promoters who are abusing the nation’s tax laws.

What effect has the Inflation Reduction Act had?

The Inflation Reduction Act appropriated $79.6 billion to the IRS through 2031, specifically to be used to bolster taxpayer services and increase enforcement.

This increase in funding has provided the IRS with the ability to drastically improve performance levels. For instance, in less than a year of when the Act was passed, “the IRS cut phone wait times to three minutes from 28 minutes, served 140,000 more taxpayers in person, and digitized almost 225 times more returns.”

With this funding, the IRS is now able to develop AI advancement and improved technology to identify sophisticated schemes that the wealthy, including large partnerships, are using to avoid taxes. Before the implementation of the Inflation Reduction Act, the IRS did not have the funding or the staff to adequately pursue violations of tax laws.

The IRS is focusing on large partnerships because they consist of more complex structures and tax issues. To understand these complex large partnerships, the IRS launched the Large Partnership Compliance (LPC) program in 2021. The LPC program focuses on the largest and most complex partnerships, and the IRS will use this program along with AI to determine if any of these partnerships are violating tax law. The IRS is planning to examine the 75 largest partnerships in the U.S. which, on average, have more than $10 billion in assets.

What does this mean for us ordinary taxpayers?

The IRS has stated that they will ensure that audit rates will not increase for those who earn less than $400,000 annually. IRS Commissioner, Danny Werfel, has also committed to making sure “middle- and low-income tax filers will continue to see no change in low pre-IRA rates for years to come.”

So where else is the IRS focusing on now:

  • Taxpayers with total positive income above $1 million that have more than $250,000 in recognized tax debt
  • Partnerships with over $10 million in assets that have discrepancies between end of year balance sheet balances compared to beginning balances the following year [*1]
  • Digital assets
  • FBAR compliance [*2]
  • Construction contractors using “shell” companies as subcontractors.

Until the new funding provided by the IRA, the IRS was woefully unequipped to police tax compliance and concentrated its efforts on the lowest hanging fruit. This new funding will allow the use of A1 and other resources to identify areas with the potential for meaningful tax recoveries.

Article contributed by Steve Benson

[1] Compliance letters have already started being issued.

[2] Report of Foreign Bank and Financial Accounts

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