As the IRS embraces AI, the question on many taxpayers' minds is: "What are my chances of being audited?" The answer, it seems, is a complex and evolving one.
The Audit Landscape
The raw numbers paint a reassuring picture: less than 1% of filers have faced audits in recent years. However, certain groups, based on income or tax breaks, have seen higher rates, though still below 10%. This landscape is about to change dramatically.
IRS in Transition
The IRS has undergone significant upheaval. A large number of experienced employees, including tax examiners and revenue agents, have left the agency. Simultaneously, funding for enforcement has been reduced, despite promises under the Inflation Reduction Act. Yet, the IRS is modernizing, turning to AI for enforcement.
AI's Role
AI is being deployed to identify non-compliance and fraud more accurately. It can search for patterns and anomalies in tax returns, potentially improving the IRS's efficiency in detecting underreporting and violations. Former IRS Commissioner Danny Werfel emphasizes the need for responsible use, suggesting AI could lead to more contacts with taxpayers who have unpaid balances.
Correspondence Audits
AI may increase the rate of correspondence audits, the most common type. These audits involve the IRS sending a letter to a filer regarding potential issues with their return. The filer must then respond or challenge the assessment. With more correspondence audits, the IRS will need to ensure it has the staff to handle inquiries.
Expertise Gap
The loss of experienced staff could impact the IRS's ability to conduct audits, especially complex ones. AI may not replace the expertise needed to review books and records and determine the accuracy of tax returns.
AI's Potential
AI's rapid development means its capabilities are constantly evolving. Former Commissioner Werfel warns that decisions about enforcement should consider not just the IRS's current capacity but also its future capabilities, given the potential paradigm shift AI represents.
Timeframe for Audits
It's important to note that the IRS has up to three years from the filing date to audit a return, and even longer if fraud is suspected.
Conclusion
The introduction of AI to IRS enforcement is a double-edged sword. While it has the potential to improve efficiency and accuracy, it also raises questions about responsible use and the need for human expertise. As AI continues to evolve, so too will the IRS's approach to audits, leaving taxpayers with an uncertain future regarding their chances of being audited.
