IRS’s Use of AI Shows How New Funding Can Catch Old Tax Evaders

Funding from the Inflation Reduction Act is allowing the IRS to make a significant investment in its technological and human resources—an opportunity that’s been largely absent for more than a decade. The latest initiative builds on years of efforts to improve tax administration benefiting every American.

The IRS is now focusing on getting “high-income earners, partnerships, large corporations and promoters abusing the nation’s tax laws” to comply with the law using improved technology and artificial intelligence to detect tax evasion, identify emerging compliance threats, and improve case selection tools.

Advanced data and analytic strategies have enhanced capabilities to identify areas of noncompliance in ways that weren’t remotely possible just a few years ago. The IRS has access to decades of important data that, coupled with improved funding and emerging technologies, should allow it to more efficiently and effectively build audit workplans as well as identify noncompliant taxpayers and anomalies in filed returns.

Enhanced AI will be effective in helping to determine returns that should be examined as well as returns that shouldn’t be subjected to examination, lessening the burden on compliant taxpayers.

Historic Initiatives

A compliance focus on wealthy taxpayers isn’t new. In the late 1990s, the IRS focused heavily on wealthy individual and corporate taxpayers engaged in various “listed transactions” designed to artificially reduce certain tax responsibilities. At the same time, the agency pursued one of the largest criminal tax investigations in history, solely focused on whether certain tax professional enablers assisted various wealthy taxpayers in evading their tax responsibilities.

The IRS’s enforcement radar has long focused on: potentially abusive transactions, including offshore noncompliance, high-wealth and high-income non-filers, cryptocurrency transactions, certain tax shelters such as syndicated conservation easements and micro-captive insurance shelters, certain monetized installment agreements, certain Maltese individual retirement arrangements, and certain split-dollar loan arrangements, as well as certain grantor retained annuity trusts.

For most of a decade, the IRS’s global high wealth program has focused on wealthy, potentially noncompliant taxpayers, often using personnel from other parts of the agency to assist on a complex examination. The Office of Fraud Enforcement, Office of Promoter Investigations, Whistleblower Office, the Joint Strategic Emerging Issues Team, and the Advanced Collaboration Data Center pursue noncompliant high-wealth and high-income taxpayers and corporations.

For the past few years, a special compliance initiative, Revenue Officer Compliance Sweep, has also focused on wealthy non-filers and others. These efforts target activities that are more likely to be engaged in by wealthy taxpayers.

In 2020, the IRS created the enterprise digitalization office to improve business processes and modernizing systems. The staff of “Team Digi” are customer-centered thinkers who focus on desired outcomes instead of prescriptive approaches, and quickly identify combinations of business process and technology that will best improve IRS operations. Team Digi, composed of some of the most creative people in government, has operated similarly to a highly motivated private sector tech company, improving both internal and external operations.

While facing long-term, consequential resource challenges, the agency routinely was tasked with new, significant responsibilities. Resource constraints often prevented investments in new technologies, leaving the agency to maintain current systems or to build them internally. Without significant, annual investments in technology, the cost to just maintain existing systems could soon exceed several billion dollars a year.

New Resources

Investing in new technologies using the new funding from Congress will radically improve every facet of operations—internal, external, both service and compliance efforts—allowing the IRS to become a “best in class” agency.

Private sector technology is also more available to the IRS. The private sector has relentlessly pursued new technologies to streamline and accelerate important processes, increase efficiency, leverage important human resources, reduce errors, and improve data quality. To move forward quickly, private sector firms are acquiring technology from others rather than relying on homegrown technology and in-house teams.

The IRS has also used Inflation Reduction Act funding to expand efforts to recruit and retain experienced, sophisticated, and specialized, technical personnel who can conduct meaningful examinations of complex returns, including those from multinationals and multi-tiered partnerships.

But the number of recent accounting graduates has been steadily declining, and many other tax practitioners are deciding to leave the profession. It won’t be easy for the IRS to recruit and onboard new staff, although this is a great opportunity for mid-career financial people to gain invaluable professional experience and to serve our country.

Congress should require whatever oversight it desires for IRS operations but should respect the critical need for funding to rebuild the agency and avoid opportunities to reduce existing funding. The IRS interacts with more Americans than any other public or private institution and reports annual gross revenue of approximately 95% of the country’s entire gross revenue. Congress should help in earning trust and respect for the IRS, rather than targeting it for political gain.

Most recent IRS commissioners have pushed Congress to provide “timely, consistent, flexible, multi-year funding” that would enable the IRS to enhance taxpayer services, compliance, and modernization efforts. The IRS must be able to provide meaningful services of a type and quality every American deserves. Timely, meaningful guidance should be readily available in whatever form (and language) the taxpayer desires.

For many years, important IRS operational decisions have too often been resource driven, but no more. The IRS is best suited to provide the services Americans deserve and equitably enforce the tax laws to support compliant taxpayers when it receives the resources it needs to do so.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Charles Rettig served as IRS commissioner from 2018 to 2022. He serves on the board of directors at K1x, a digital K-1 packet production platform, and previously was a tax lawyer based in Los Angeles.

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