The IRS’ New Use of AI

The Internal Revenue Service (IRS) is turning to artificial intelligence (AI) to help select tax returns for audits, aiming to narrow the tax gap. A recent Government Accountability Office (GAO) report emphasizes the need for consistent and transparent use of this technology. The IRS is piloting AI models to improve the efficiency and selection of audit cases for its National Research Program (NRP). However, the agency has not fully documented key components and technical specifications of these models, which the GAO recommends addressing to ensure clear communication and assessment.

The IRS recently announced plans to increase audits of large corporations, partnerships, and wealthy individuals using funding from the Inflation Reduction Act. However, the GAO points out that the IRS's strategic operating plan is not clearly linked to tax gap data and does not address sole proprietor noncompliance, a significant area of tax noncompliance. The GAO recommends that the IRS link its compliance strategies with NRP data to effectively allocate enforcement resources.

This comes on the heels of Republicans pushing to roll back the IRS budget increases to the tune of nearly $20 million dollars with a focus on decreasing audit funding. Regardless of budget changes, AI is permeating every aspect of tax compliance and firm managers need to be aware of how technology changes will be impacting the tax landscaping over the next year.

Tax practice owners and managers should leverage AI tools to streamline their operations and improve the accuracy of returns being filed. Suggestions for practice owners and managers to review as part of their tech stack include:

1. Automated bookkeeping: AI-powered bookkeeping software like Botkeeper or Xero can automate data entry, categorization, and reconciliation, saving time and reducing errors.
2. Tax preparation: AI-driven tax preparation software such as TaxAct or TurboTax can guide users through the tax filing process, ensuring accuracy and compliance. Stanford Tax is also rolling out new AI features in the coming months that promises to deliver on improving accuracy of return preparation.
3. Document management: AI-based document management systems like Docubot or Leverton can extract relevant data from tax documents, reducing manual data entry and improving organization.
4. Chatbots: AI-powered chatbots can handle routine client inquiries, allowing staff to focus on more complex tasks and providing 24/7 customer support.
5. Predictive analytics: AI-driven predictive analytics tools can help identify potential areas of noncompliance, assess risk, and optimize resource allocation for tax practices. Tools like LiveFlow can help with re-built dashboards to assess compliance risks.

By adopting AI technologies, tax practice owners and managers can enhance efficiency, reduce errors, and improve client service. However, ensuring that these tools are implemented consistently, transparently, and with proper documentation is essential. As the IRS continues

integrating AI into its compliance efforts, tax professionals must stay informed about the latest developments and adapt their practices accordingly.