The Internal Revenue Service has begun using artificial intelligence to investigate tax evasion in multibillion-dollar partnerships as it looks for ways to best police hedge funds, private equity groups, real estate investors and big law firms.
Friday’s announcement demonstrated how an over-muscled IRS is using some of the $80 billion earmarked by last year’s inflation-reduction law to deal with cases that have become more complicated and complicated by targeting wealthier Americans.
The agency’s new funding is intended to help the IRS raise more federal revenue by cracking down on tax evaders and others who use sophisticated accounting tricks to avoid paying what they owe. But the provision remains politically contentious, with Republicans saying the IRS would use the funds to harass small businesses and middle-class taxpayers. Earlier this year, Republicans won a $20 billion withdrawal as part of a deal to raise the nation’s debt.
That political fight has put the onus on Democrats and the Biden administration to show that funding primarily helps the IRS target the wealthy.
“These are complex cases for IRS teams to open,” Daniel Werfel, the IRS commissioner, said in a conference call with reporters. “The IRS doesn’t have enough resources or staff to address partnerships; in a real sense, we’ve been overwhelmed in this area for years.
Mr. Werfel explained that artificial intelligence is helping the IRS identify patterns and trends, giving the agency more confidence that large partnerships can find where to protect income. This leads to larger audits that the IRS has not previously dealt with.
The company said it will open the selection of 75 of the country’s largest partnerships identified with the help of artificial intelligence by the end of this month. The partnerships all have more than $10 billion in assets and will receive audit notices in the coming weeks.
More audits are likely to come. In October, the IRS will send 500 notices, called compliance alerts, to other large partnerships that the agency has found to have discrepancies on its balance sheets. These partnerships also face audits if they cannot explain differences in balances from the end of one year to the beginning of the next.
The focus on partnerships is part of a broader push by the IRS to focus on wealthier taxpayers in 2024. The IRS is devoting dozens of revenue officers to pursuing 1,600 millionaires who owe at least $250,000 in unpaid taxes, Mr. Werfel said.
In the coming year, the IRS said it plans to increase its scrutiny of digital assets as a vehicle for tax evasion and investigate how high-income taxpayers use foreign bank accounts to avoid disclosing their financial information.
So far, the IRS has been tight-lipped about using artificial intelligence to prevent tax evasion. Mr. Werfel suggested the technology would be used to identify “compliance threats” that are hard to detect and that would help the agency reduce unnecessary audits.
As part of its recruitment strategy, the IRS is looking to hire data scientists to develop new in-house artificial intelligence tools. The agency is collaborating with outside experts and contractors on this project, Mr. Werfel said.
Last month, the IRS said it had increased its full-time employees to nearly 90,000, a number not seen in more than a decade.
Even as the IRS increased its resources, Mr. Werfel warned of threats to the company’s budget, such as a $20 billion clawback.
Mr. Werfel warned that additional cuts to its annual budgets would divert money to improving the agency so it can do basic work, and that ultimately taxpayers would bear the brunt of such poor practices.
“If you fund our base budget, it will help us keep the lights on and modernize — and it’s my great responsibility to tell Congress and the American people that modernizing the IRS is good for everyone,” he said. .
