IRS plan to use AI may affect wealthy taxpayers. Here's how

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After criticisms of low audit rates among the wealthy, the IRS on Friday renewed plans to focus on higher-end enforcement, including expanded use of AI to examine large partnerships, such as hedge funds, real estate investors, law firms and more. The IRS announced on Friday that it would focus on higher-end enforcement. This includes expanded use of AI for large partnerships such as hedge fund, real estate investors and law firms. The algorithm constantly interrogates the data with AI. “

Once fully implemented, the newly enhanced technology is more likely to catch previously missed higher-end tax issues, he said.

They can expect increased scrutiny from the IRS over the next few years.

Robert Kovacev

Tax controversy partner at Miller & Chevalier

“They can expect increased scrutiny from the IRS over the next few years,” said Kovacev. He said that the change will not be immediate but in three to five year’s time, there will be an increase in audits for large partnerships, businesses, and high-net worth families.

‘More important than ever’ to keep tax records

Even if you’re not subject to increased IRS scrutiny, Kovacev said it’s “more important than ever” to stay organized with tax records, including receipts to support positions from past tax returns.

“Any taxpayer should be keeping their tax returns for at least seven years,” he said, noting that it can be difficult to “reinvent the wheel” for an audit when you haven’t kept a paper trail.

Typically, there’s a three-year statute of limitations for an IRS audit, with extensions in some cases, but there’s no time limit when the agency pursues fraud or nonfilers.

There’s IRS pressure to ‘show results’

While the technology may aid compliance efforts, the plan also presents risks for the agency, according to Mark Everson, a former IRS commissioner and current vice chairman at Alliantgroup.

“There’s obviously pressure on the administration to show results,” especially with the 2024 presidential election approaching amid continued scrutiny of the IRS funding.

“They’re going to press for getting those points on the board,” Everson said. But they also can’t afford to make a mistake.

Despite increased funding, the agency still faces a staffing challenge, which is crucial to compliance. He said that the higher-end would fight back if it felt like things were being done incorrectly.