IRS Harnesses AI: What Are Your Audit Chances Now?

Recent data from the IRS indicates that audit rates remain low but are subject to change due to evolving practices and the integration of technology. In the 2021 tax year, only 0.3% of filers faced audits. Traditionally, even select groups of taxpayers have seen audit rates below 10%, and often below 1%. This trend may shift in the coming years as the IRS adapts its enforcement strategies, especially through the use of artificial intelligence (AI).

IRS Audit Chances: A Look Ahead

The IRS has undergone significant staffing changes, particularly with the loss of experienced employees in enforcement roles. A report by the Treasury Inspector General for Tax Administration indicated that over 25% of tax examiners and revenue agents left their positions recently. This reduction in personnel poses challenges for the agency in maintaining effective audits.

Impact of Technology on Audit Rates

Amid these staffing changes, the IRS is modernizing its systems and increasing the use of AI. IRS CEO Frank Bisignano emphasized this shift, stating that AI will enhance the agency’s accuracy in identifying non-compliance and fraud. Part of the agency’s objective is to improve collections and strengthen compliance.

• Current Audit Rates: Less than 1% for most filers.
• Staff Changes: Over 25% of tax examiners and revenue agents have left.
• AI Integration: Aims to analyze returns more efficiently.

AI is expected to assist in pinpointing returns that deviate from expected patterns. According to former IRS commissioner Danny Werfel, using AI is akin to having “night-vision goggles” to identify instances of tax evasion and underreporting. However, it is crucial that AI outcomes be verified by human experts to ensure reliability.

Concerns About Audit Procedures

The rise in AI-driven audits may lead to an increase in “correspondence audits,” where filers receive letters requesting further payment or indicating withheld refunds. While this method is less resource-intensive than field audits, it necessitates adequate support for filers who may have questions or disputes regarding their assessments.

Despite the excitement surrounding AI’s capabilities, the IRS is also facing challenges ahead. The incorporation of advanced technology must be met with sufficient staffing to manage the complexities of audits effectively. Johnson, a former chief data officer at the IRS, noted that AI cannot replace the need for experienced personnel who can interact with taxpayers and scrutinize financial records.

Looking to the Future

As audit practices evolve, the unpredictability of AI technology presents both opportunities and challenges. Currently, the IRS has up to three years to audit a tax return, or longer in cases of suspected fraud. The landscape of audits may look quite different in the coming years due to advancements in AI.

In conclusion, as the IRS navigates staffing shortages and embraces AI, filers might see changes in their audit probabilities. The effectiveness and implementation of these technologies will determine how the agency adapts its compliance efforts in an ever-evolving tax environment.