The Internal Revenue Service (IRS) is undergoing a transformation in its approach to identifying and targeting tax evaders by leveraging the power of artificial intelligence (AI). IRS Commissioner Danny Werfel recently outlined a vision where AI plays a pivotal role in detecting patterns of behavior indicative of tax evasion. This shift comes at a time when the IRS faces the longstanding challenges of being underfunded and understaffed, making AI a cost-efficient and effective tool to identify potential audit targets.
AI in Action: Uncovering Hidden Assets and Income
In a recent enforcement action, the US Department of Justice revealed a deferred prosecution agreement and a $122.9 million fine for Banque Pictet et Cie SA, a Swiss private bank. The bank admitted to conspiring with US taxpayers to hide over $5.6 billion in 1,637 secret bank accounts. This case underscores the IRS’s commitment to rooting out financial malfeasance, with AI being a crucial ally.
AI’s Role in Enhancing Enforcement
AI is now a game-changer for the IRS, especially with the implementation of the Foreign Account Tax Compliance Act (FATCA). This legislation compels foreign financial institutions (FFIs) to provide detailed information about the accounts and transactions of US taxpayers directly to the IRS. The IRS can now utilize state-of-the-art computer systems and AI to analyze electronic data received from FFIs worldwide, comparing it with the tax filings of associated US taxpayers. Any discrepancies trigger AI-driven red flags, initiating the audit process.
Cracking down on large partnerships
Commissioner Werfel highlighted the complexity of cases involving large partnerships, which, until now, posed challenges due to resource constraints. AI’s ability to swiftly analyze intricate financial data, offshore information, and tax filings allows the IRS to address tax evasion in a wide range of industries where partnerships have exploited loopholes.
Specific examples of AI’s impact
FBAR non-filers targeted
Through AI analysis, the IRS has identified “hundreds of US taxpayers” who failed to file a Report of Foreign Bank and Financial Accounts (FBAR) for accounts exceeding $1 million. AI ensures that the most egregious potential non-filer FBAR cases are promptly targeted for audit.
Unmasking cryptocurrency tax violations
An AI review of the IRS Virtual Currency Compliance Campaign revealed that up to 75% of US taxpayers identified through digital currency exchanges were not compliant with tax laws related to cryptocurrency and NFTs. AI facilitates the targeting and auditing of these individuals, streamlining enforcement efforts.
Exposing labor brokerage tax schemes
AI has played a crucial role in uncovering tax schemes involving fictitious labor brokerages. By analyzing patterns and data, the IRS can identify cases where labor contractors utilize shell corporations to funnel money back into their business, leading to substantial tax deductions. These cases are now under investigation for potential civil and criminal tax evasion.
Future implications: AI as the IRS game changer
Commissioner Werfel emphasized that AI allows the IRS to catch up from a decade of underinvestment, particularly in addressing tax evasion strategies employed by wealthy individuals, large partnerships, and corporations. The enhanced analytic capacity, supported by AI, enables the IRS to see through creative tax-advantaged structures and establish new expectations for compliance among wealthy filers.
As the IRS embraces the transformative power of AI, the agency is poised to significantly enhance its ability to detect and address tax evasion. The use of AI in scrutinizing vast datasets and identifying intricate patterns of non-compliance marks a new era in tax enforcement, enabling the IRS to fulfill its mandate effectively and adapt to the evolving landscape of financial transactions.
