The IRS is moving full speed ahead with using IRS AI in its operations, changing the game. While you might have seen IRS AI used when you went to check your tax return status or track your refund, that’s just the beginning. The IRS is using AI to check returns for compliance, fraud, and more.
Using AI for Smarter Audits
Plenty of tax missteps, from typos to undeclared income, can trigger an IRS audit. IRS agents are trained to spot inconsistencies, but AI does it better and much faster. While the IRS uses “IRS AI” to determine flags for exams already, what IRS agents view as red flags are comparisons between a small selection of returns, but AI can quickly compare thousands of returns in the same industry or business sector. This isn’t anything new.
AI is particularly good at income matching (reviewing income data reported on a taxpayer’s filing and what a third-party reports). With increased reporting requirements, like 1099-K reporting, AI is getting even more income data for analysis. When income matching shows discrepancies, taxpayers receive CP-2000 notices.
IRS agents and AI work differently; what looks like a regular filing or harmless error not worth pursuing to an agent might be a glaring red flag for AI that has the benefit of comparing the filing to thousands or millions of others. IRS aims to improve compliance and narrow the tax gap with AI, which means many businesses and individuals will face IRS scrutiny.
Who is AI Targeting?
AI use at the IRS can potentially flag anyone or any business, whether they made an honest mistake or actual instances of fraud or tax evasion. Since the IRS began using AI, the biggest increase in audits has been to businesses. Particularly hard hit have been S Corps, C Corps, and partnerships.
While businesses seem to be in the spotlight, the IRS hopes that AI will encourage individuals and businesses to be as accurate as possible on their tax returns. There is no reason AI won’t be widely used in individual tax returns as well. No one enjoys a tax audit.
How the IRS Plans to Use AI Responsibly
The IRS knows that AI has flaws and biases. In September 2024, the IRS released the IRS Privacy Policy for Artificial Intelligence to demonstrate its commitment to transparency, fairness, and taxpayer privacy. The policy includes safeguards against biases, such as racial bias, and privacy standards to protect taxpayer data.
Ultimately, even with the best policies and intentions, it’s possible that the IRS’ AI use could result in you being flagged by the IRS. When there is an issue with your taxes, Highland Tax Group is here to help.