Think dealing in cryptocurrency or on the dark web will help you hide from the IRS? Assume the IRS is still relying on its old manual processes to flag returns? Think again. The IRS is getting technically savvier while, at the same time, increasing its already high conviction rate for those found guilty of tax crimes.
You may have heard that the IRS is so understaffed that the chances of being audited have diminished. It’s reported that the IRS now has fewer auditors than at any point since World War II and that U.S. taxpayers are half as likely to get audited as they were a decade ago.
That may be true, but there’s an important distinction that’s left out of those statistics. Thanks to technology, the IRS has become more efficient at identifying who exactly should be audited. Therefore, while fewer audits may be happening, the accuracy of those audits has increased tremendously. The result? The IRS is winning more cases and doing more with less.
Consider the following areas in which emerging tech is giving the IRS an upper hand:
- The IRS Criminal Investigation Division achieved a conviction rate of 91.2% in fiscal year 2019, which is among the highest of all federal law enforcement agencies. The group credits data analytics for improving its ability to trace virtual currency in financial investigations and to boost results for traditional tax investigations, international tax enforcement, employment tax, refund fraud, and tax-related identity theft.
- The IRS uses software called an Automated Underreporting (AUR) program to match information returns against taxpayer returns to catch underreporting of income. This program flags returns for review, but these reviews aren’t necessarily considered official examinations. That’s a critical point because recent court cases show an AUR review, and a separate human review can be ordered for the same year without triggering the IRS “duplicate review” restriction.
- The IRS’s Large Business and International Division (LB&I) is now using data analytics to determine which large and complex corporate taxpayers to audit. This Large Corporate Compliance (LCC) program uses sophisticated AI technology to efficiently evaluate large taxpayers’ gross assets, gross receipts, operating entities, multiple industry status, total foreign assets, total related transactions, and foreign tax. It’s similar to a process the agency already had in place, but that process was performed manually.
- The Wall Street Journal recently dove into how the IRS is forging new paths with AI technology. For one, the AI is “studying notes that agency employees take when fielding questions from taxpayers and testing which combinations of formal notices and contacts are most likely to get a taxpayer who owes money to send a check.” According to IRS Commissioner Charles Rettig, the AI also uncovers what Rettig calls a “heat map” that can identify high-income non-filers (individuals who have historically flown under the IRS radar), sometimes with just a name and a cellphone number as a starting point.
These developments can be great news for legitimate taxpayers because they can result in fewer time-consuming faulty audits. But at what point are machines better than humans altogether when it comes to identifying underpayments and fraud? When will this type of data mining cross the line and become overly invasive? We’ll keep an eye on the latest news. In the meantime, feel free to contact us with questions.