Chatbots, Tax Evasion, and Big Data — How AI is Transforming the IRS

In September, the IRS sparked debate when it announced that it would be using funding from the Inflation Reduction Act to integrate Artificial Intelligence (AI) into its operations. While the move promises to enhance efficiency, streamline processes, and offer more accurate data handling, the move has been met with a mix of support and skepticism from lawmakers.

Background

For over a decade, the IRS has faced ongoing budgetary constraints, having lost 20% (adjusted for inflation) of its funding and 38% of its staff since 2010. Challenges peaked in 2020 when pandemic-related lockdowns strained resources, and additional tasks, such stimulus check distribution, were added to the Agency’s list of responsibilities. Recognizing the need for improved tax compliance and modernized taxpayer services, lawmakers allocated $80 billion to the IRS through the Inflation Reduction Act of 2022, an amount that was later reduced to $60 billion.

On Sept. 8, 2023, the IRS announced that it would be using some of it new funding to incorporate AI as part of a “sweeping, historic effort to restore fairness in tax compliance by shifting more attention onto high-income earners, partnerships, large corporations and promoters abusing the nation’s tax laws.”

Potential Benefits of AI in the IRS

The IRS is betting that AI will help solve at least some of its problems. Here is a glimpse into some of the potential advantages:

• Immediate Assistance with AI Chatbots: After years of criticism for slow or nonexistent customer service, the IRS has put AI to work in the form of expanded chatbots. These chatbots are designed to answer questions from taxpayers who got notices they could be under-reporting. Since January 2022, chatbots have helped resolve issues in both English and Spanish for 13 million taxpayers and created $151 million in payment agreements.

• Predictive Modeling and Tax Evasion: Lack of funding has resulted in a disproportionately low number of audits on wealthy tax payers, but that may not be the case much longer. The IRS plans to use AI’s ability to analyze vast datasets to identify patterns and anomalies, enabling the Agency to spot potential tax evasion strategies that might have previously gone unnoticed and has announced a renewed focus on large partnerships, including real estate investors, hedge funds, law firms and others.

• Tackling Staff Shortages: Still short-staffed and expecting another 5,000 employees to retire over the next 5 years, the IRS hopes that AI can bridge the gap by helping manage complex taxpayer issues and ensuring continuity in service.

• Transparency and Fairness: As AI systems become more integral to IRS operations, these systems, combined with robust coding practices, may increase transparency in decision-making processes. This could ensure fairness and build greater trust with the public.

Concerns and Challenges

While the introduction of AI into the IRS holds undeniable promise, it also brings concerns and challenges, including:

• Bias: One of the primary concerns with AI implementation is been algorithmic bias. Earlier this year, research from Stanford University showed that Black taxpayers were 3 to 5 times more likely to be audited than non-Blacks due to algorithmic bias. There is concern that greater use of AI will result in more bias incidents if not carefully monitored.

• Potential Harassment and Needless Audits: With the IRS gaining more robust tools to scrutinize tax records, there is a fear that many taxpayers might be unnecessarily harassed or audited, especially if AI triggers false positives.

Calls for Oversight and Accountability

Many lawmakers argue that there needs to be heightened oversight, transparency, and accountability to ensure that AI doesn’t inadvertently penalize innocent taxpayers or favor specific groups. Senate Finance member James Lankford (R-Okla.), for example, introduced a bill calling for federal agencies to notify people when they are interacting with AI and other automated systems or subject and give them the opportunity to appeal decisions made by them. On a broader level, Senate Finance Committee Chair Ron Wyden (D-OR.), Senator Cory Booker (D-NJ), and Representative Yvette Clarke (D-NY) have introduced the Algorithmic Accountability Act to create new protections for people affected by AI systems in areas including housing, credit, and education.

Tonneson Can Help

While the IRS’s use of AI promises better, faster service, it also underscores the importance of thorough documentation and adherence to tax guidelines. Greater efficiency combined with renewed scrutiny on high-end taxpayers make it more important than ever to ensure your financial records are well-organized and accurate.

At Tonneson, we combine decades of experience with a forward-thinking approach to emerging technologies to keep our clients compliant while helping them optimize their financial strategies. Contact us today.