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Artificial intelligence advocates say the technology can help the Internal Revenue Service find and collect from tax cheats. But those wary of AI say that will happen only if the agency has enough well-trained personnel to ensure the system is used responsibly.
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You’re not worried about a tax audit.
You were careful when you filed your return. You made sure your deduction and credit claims were legitimate, and you have the documentation to support them. You also tried best to avoid waving audit red flags.
So, you’re safe from the Internal Revenue Service’s future prying eyes, right?
Maybe. Maybe not.
Whether an IRS examiner comes asking questions could depend on artificial intelligence, or AI as we familiarly call this increasing presence in our lives.
AI helping IRS find audit targets: AI also is going to be a bigger part of the IRS’ digital operations.
Uncle Sam’s tax collector is testing a Palantir tool to detect “highest-value” audit and investigation targets from a maze of legacy systems, according to a recent WIRED magazine report.
Yes, that Palantir.
The technology company founded, among others, by Peter Thiel, who bankrolled the start of now Vice President JD Vance’s political career. The company also has come under scrutiny and criticism for helping Uncle Sam spy on not just suspected foreign threats, but also potentially all of us who are in U.S. government databases.
Last year, the IRS paid Palantir $1.8 million last year to improve a custom tool designed to help the tax agency identify the “highest-value” cases for audits, collection of unpaid taxes, and potential criminal investigations, according to documents WIRED obtained via a public record request.
Palantir designed a custom tool, dubbed the Selection and Analytic Platform or SNAP, to help the IRS streamline how it identifies potential fraud cases.
SNAP was created to address what, according to the WIRED story, the IRS described as a “fragmented landscape” of “more than 100 business systems and 700 methods” built over the course of “decades” to select cases in which people may have incorrectly reported their taxes or owe the IRS money.
The IRS said that such a scattered approach “can lead to a number of undesirable outcomes including but not limited to duplication of effort and cost, poor understanding of gaps in the coverage, and suboptimal case selection.”
The English to tax-speak translation: Too many tax cheats were slipping under the IRS’ audit radar.
Bulked-up DIF: The WIRED story notes that it is not clear exactly how SNAP might fit into existing IRS technology systems. For now, writes WIRED reporter Caroline Haskins, the software is only being used as part of a pilot program.
But to some, it looks like SNAP could be DIF on steroids.
DIF, the acronym for Discriminant Information/Inventory Function, is (was?) the IRS’ long-standing computer-scoring audit filter. DIF evaluates tax returns based on IRS formulas created from years of agency data collection.
Basically, DIF looks at deductions, credits and exemptions and sets norms for taxpayers in each of the income brackets. When taxpayer claims are noticeably larger, DIF notes that and alerts IRS examiners as the first step in a potential audit.
But, as the IRS has acknowledged, its ability to catch tax evaders has not been stellar. The agency’s overall individual audit rates are extremely low, with the latest IRS Data Book showing around 0.3 percent of total individual returns were audited for tax year 2019, the most recent year outside the statute of limitations period.
However, the audit odds do increase for taxpayers who make more money. IRS Data Book 2019 figures also reveal that the chance of an audit went to 1.6 percent for filers who reported income between $1 million and $5 million; 3.1 percent for filers with earnings between $5 million and $10 million; and about 11 percent for filers who reported $10 million or more in income.
AI audits and you (and me!): The literal bottom-line question for all taxpayers is, of course, are we all going to become audit targets when AI plays a larger role in determining IRS examinations?
The answer is the same as the basic one for all tax questions. It depends.
“Advancing a strong compliance agenda while improving collections beyond historical norms,” said IRS CEO Frank Bisignano in written testimony before the Senate Finance Committee earlier this month. And ideally, AI could help the IRS better target filers whose returns indicate they’ve tried to put one (or more) past the agency.
But there are a lot of buts to ensure that happens.
One biggie, notes CNN senior business writer Jeanne Sahadi in a recent story on IRS AI usage and audit chances, is whether the tool will be used responsibly and strategically.
Ideally, AI’s capacity to more efficiently and effectively search and identify patterns in tax returns than current systems allow could help keep the IRS off the back of perfectly compliant tax filers.
But, as former IRS Commissioner Danny Werferl told Shahadi, responsibly means the IRS must balance “the use of AI with a human review – double checking and confirming AI is generating reliable output.”
And that could pose a problem if the IRS continues to lose human staff and their expertise due to Congressional budget cuts and continued so-called efficiency efforts like those instigated by the Department of Government Efficiency (DOGE).
So, will AI mean more of us will be audited? I refer back to my answer at the top of this post.
Maybe. Maybe not.
It all depends on the state of the IRS and possible future personnel changes, as well as the rapid development of AI and its embrace by the private and public sectors. Those unknowns make AI’s potential effect on taxes, just like its impact on the other parts of our lives, hard to determine.
You also might find these items of interest:
- GOP bill supports AI use in IRS enforcement efforts
- IRS watchdog says AI could make for more productive tax audits
- AI will be part of expansive IRS crackdown on wealthy, corporate tax evaders
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