IRS Harnesses AI to Crack Down on Tax Code Abuses
Washington, D.C. (September 15, 2023) - On September 8, 2023, the IRS announced a sweeping new effort to crack down on abuses of the tax code by focusing more attention on high-income earners, partnerships, large corporations and promoters. To that end, the IRS indicated it would utilize Artificial Intelligence (AI) to detect tax evasion, identify emerging compliance threats, and improve case selection tools to avoid unnecessary audits. The effort will be funded by the Inflation Reduction Act, which was passed by Congress last year and signed into law by President Biden on August 16, 2022.
Key elements of this new effort include:
• Using AI to expand its Large Partnership Compliance (LPC) program to identify potential compliance risk in the areas of partnership tax, general income tax and accounting, and international tax in a taxpayer segment that historically has been subject to limited examination coverage. The IRS indicated it will open examinations of 75 of the largest partnerships in the U.S. that represent a cross section of industries including hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms and other industries. On average, these partnerships each have more than $10 billion in assets.
• Prioritizing the review of high-income cases of taxpayers with total positive income above $1 million and more than $250,000 in recognized tax debt;
• Expanding work on digital assets, including cryptocurrencies, by using the John Doe summons effort and proposed regulations for broker reporting. The IRS noted its initial review showed the potential for a 75 percent non-compliance rate among taxpayers identified through records already produced from digital currency exchanges.
• Auditing taxpayers who have not filed FBARs (Reports of Foreign Bank and Financial Accounts);
• Conducting criminal investigations of labor brokers who are using shell companies to evade taxes. Specifically, the IRS indicated it is aware of instances where construction contractors are making Form 1099-MISC/1099-NEC payments to an apparent subcontractor, but the subcontractor is a “shell" company that has no legitimate business relationship with the contractor. Monies paid to shell companies are exchanged at Money Service Businesses or flowed through accounts in the name of the shell company and returned to the original contractor.
Overall, the use of AI will assist the IRS to improve its enforcement efforts. IRS Commissioner Danny Werfel said that the new compliance push is "a sea change" at the agency and that "deploying new resources towards cutting-edge technology to improve our visibility of where the wealthy shield their income and focus staff attention on the areas of greatest abuse" is "critical for the future of the nation's tax system."
Lewis Brisbois is actively monitoring this developing situation and advising clients on how to navigate the IRS compliance efforts that continue to emerge. Attorneys in our Government Investigations & White Collar Defense and Tax Practices are available to assist. For more information on these developments, contact the authors of this alert.
Sean P. Shecter, Partner & Chair of Supply Chain Due Diligence Practice
David Kern, Managing Partner - Akron, OH
Gregory P. Amend, Partner - Akron, OH
Manpreet (Monica) Uppal-Gupta, Attorney