How the IRS Will Use AI This Tax Season

picture of the IRS building in Washington, DC

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As part of IRS efforts to increase tax enforcement for wealthy taxpayers, the agency is implementing the use of artificial intelligence (AI) to identify possible violations on high-income tax returns.

“We will start to see patterns and trends, and activity that we can link with tax evasion that we couldn’t previously,” IRS Commissioner Danny Werfel said of the agency’s AI use to crack down on so-called “wealthy tax cheats.” Werfel described artificial intelligence and the types of predictive modeling it provides as a “huge tool.”

The IRS will also deploy AI and similar automated technology to improve customer service for taxpayers. However, given a history of biased audit algorithms and other missteps at the agency involving taxpayer records and data, some may wonder whether the IRS’ use of AI will help or hurt.

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AI use for IRS audits

AI technology will help the agency sort through tax returns to identify tax evaders. People not paying the taxes they owe is a longstanding problem. The most recent numbers from the IRS reveal that the tax gap (the difference between taxes owed and taxes paid) jumped to $688 billion. The agency sees AI as a tool to help reduce that gap.

However, controversy and concern surround the IRS' use of AI in identifying returns for tax audits. This is largely because the algorithms underlying artificial intelligence, used to identify tax returns for audit, have sometimes produced biased results.

For example, Kiplinger previously reported on a study conducted with support from the U.S. Treasury Department and using IRS data. The findings showed Black taxpayers were selected for audits at significantly higher rates than other taxpayers. Some lawmakers, including Senate Finance Committee Chair Ron Wyden (D-Ore.), have stressed that the agency must do better.

“It’s really important to make sure that there’s better oversight and transparency and accountability,” Wyden told reporters.

Senate Finance Committee member James Lankford (R-Okla.) has also expressed concern about AI use in taxpayer targeting. Lankford introduced a bill that would require taxpayers to be given opportunities to appeal some determinations made by AI. Under the proposal, decisions made by AI wouldn’t be automatically reversed. Instead, human review would be required. So, Sen. Lankford says, the bill wouldn't be a “get out of jail free” card for wealthy tax evaders.

IRS audit red flags for wealthy filers

The IRS has looked at several factors during its efforts to increase tax enforcement for millionaires and large partnerships. AI can pick up on these patterns and trends when selecting returns for audits. So, wealthy taxpayers should be aware of the agency’s focus areas for enforcement to avoid audit triggers and red flags. Some circumstances that may put you on the IRS’ radar:

Claiming residence in Puerto Rico (without actually having real residency there)
Claiming exemptions based on treaty rules between the U.S. and Malta.
Failing to file tax returns but making luxury purchases
Illegally moving assets into offshore accounts
Contractors claiming to make Form 1099-MISC/1099-NEC payments to subcontractors that appear to be “shell” companies
FBAR violators (those who have foreign bank accounts but do not file a Report of Foreign Bank and Financial Accounts)
Being involved in significant cryptocurrency exchanges

Other circumstances may trigger an audit, including but not limited to, deducting large charitable contributions and failing to report all taxable income.

Chatbots for IRS customer service?

The IRS has already implemented chatbots to improve customer service, and the agency is expanding the technology to help more taxpayers. These chatbots can help taxpayers resolve certain issues, such as what to do if they’ve received an IRS notice and need more time to respond.

According to the IRS, chatbots have already handled more than 450,000 interactions. Of those interactions, the agency says 42% were resolved without a live customer service representative. That means taxpayers didn’t need to wait on hold. It also means agents, who would have otherwise been answering phone calls, were able to focus their time on other duties.

AI use at the IRS: Bottom line

It’s no secret that the IRS has turned its attention to high-earners, including large partnerships, since receiving billions in funding from the Inflation Reduction Act. So, wealthy taxpayers may have increased odds of facing an audit.

However, it’s too soon to say whether the IRS’ use of AI for identifying possible cases of tax evasion will target law-abiding wealthy filers. It's also too early to know if taxpayers will be helped by AI-driven chatbots.

But one thing is for sure: There’s never been a more important time for high earners to follow tax laws. Audit or not, if you’re complying with IRS rules and regulations, you can hopefully worry a little less about AI and the IRS' focus on high earners.

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Katelyn has more than 6 years of experience working in tax and finance. While she specialized in tax content while working at Kiplinger from 2023 to 2024, Katelyn has also written for digital publications on topics including insurance, retirement, and financial planning and had financial advice commissioned by national print publications. She believes knowledge is the key to success and enjoys providing content that educates and informs.