AI for financial surveillance

Summary: 

AI’s capabilities include analyzing complex financial data, tax filings, and offshore reporting, enabling the IRS to determine that 75% of taxpayers who engage in digital asset exchanges are not compliant with federal tax laws.

Client:

The Internal Revenue Service (IRS) is the federal agency in the United States tasked with collecting taxes and enforcing tax laws. The IRS conducts audits on taxpayers either randomly or after identifying discrepancies in their tax returns.

Problem Statement:

The IRS is enhancing its compliance enforcement and tax evasion detection efforts by leveraging AI programs and features.

Between 2002 and 2019, the number of partnerships with over $100 million in assets and 100 or more partners surged by nearly 600%. Despite this increase, the audit rate for such partnerships dropped to less than 0.5%.

To address this, the IRS is using AI to expedite and assist with redundant processes, as well as to audit parties that are too complex or large for the agency’s current capabilities.

The integration of AI technologies will enable the IRS to allocate manpower more efficiently and thoroughly investigate complicated and nuanced cases that were previously beyond their capacity. This initiative will primarily focus on high-income earners, large partnerships, and large corporations.

Investigating partnerships is in line with the IRS’s broader efforts to scrutinize wealthier taxpayers in 2024. Additionally, AI enables the IRS to examine harder-to-evaluate assets such as foreign bank accounts and cryptocurrencies.

Results:

• Hundreds of US taxpayers were identified for not filing an FBAR (Report of Foreign Bank and Financial Accounts) despite having aggregated account balances exceeding $1 million.
• 75% of taxpayers who engage in cryptocurrency and NFT transactions were found to be non-compliant with federal tax laws, which require the disclosure of these assets on their tax returns.
• Tax schemes involving fraudulent labor “brokerage” were uncovered, where contractors made payments to fictitious “subcontractors” who then refunded the money to the contractor’s corporation.
• 42% of taxpayer interactions were resolved without the need for assistance from a live customer service representative.
• Increased efficiency and reduced report processing time.

AI Solution Overview:

To enhance compliance, the IRS utilizes AI to develop risk assessment models that identify taxpayers more likely to be non-compliant.

Automation processes, which require basic knowledge of IRS and accounting protocols, vary in complexity and often require coordination between multiple external systems. Robotic Process Automation (RPA) and increased use of optical/intelligent character recognition aim to reduce the IRS’s reliance on paper forms and minimize the need for human processing and data entry into agency systems. 

AI technology detects behavior patterns aimed at evading tax reporting and facilitates investigations into specific groups of US taxpayers. By comparing information provided to the IRS with tax filings from associated taxpayers, AI helps detect discrepancies and potential non-compliance with federal tax laws. The Risk-Based Collection Model analyzes tax data patterns to detect fraud, resulting in the recovery of $375 million in Fiscal Year (FY) 2023 alone.

References:

1. IRS to use AI to crack down on millionaires and large business partnerships that owe back taxes. https://fedscoop.com/irs-to-use-ai-to-crack-down-on-millionaires-and-large-business-partnerships-that-owe-back-taxes/
2. The I.R.S. is using AI to Crack Down on Tax Evasion. https://blogs.luc.edu/compliance/?p=5592
3. From Chatbots to Audits: How the IRS Will Use AI This Tax Season. https://www.kiplinger.com/taxes/chatbots-to-audits-how-irs-will-use-ai
4. IRS to use AI to crack down on ultra-rich taxpayers and partnerships. https://www.washingtonpost.com/business/2023/09/08/irs-ai-tax-evasion/
5. How Does the IRS Use AI to Identify Tax Cheats? https://www.jdsupra.com/legalnews/how-does-the-irs-use-ai-to-identify-tax-6526291/
6. How AI and automation are helping America’s Internal Revenue Service better serve we the people. https://www.ibm.com/blog/irs-ai-automation/
7. AI and Automation in Tax. https://www.businessofgovernment.org/blog/ai-and-automation-tax
8. Chairman Jordan and Rep. Hageman Open Inquiry into IRS’s Use of AI to Surveil Americans’ Financial Information. https://judiciary.house.gov/media/press-releases/chairman-jordan-and-rep-hageman-open-inquiry-irss-use-ai-surveil-americans#:~:text=%22In%20September%202023%2C%20the%20Internal,and%20improve%20case%20selection%20tools.
9. Tax Administration. https://www.gao.gov/tax-administration#:~:text=Between%202002%20and%202019%2C%20the,don’t%20find%20any%20problems

Industry: Public Services

Vendor: IBM

Client: IRS

Publication Date: 2023