The IRS Will Use AI to Collect Unpaid Taxes. Here's How

Artificial intelligence (AI) is a popular topic for tech companies these days, but the use of the technology has lots of potential far beyond fancy chatbots. The IRS thinks it can implement AI to help sift through tax returns and find people who are trying to avoid paying taxes.

Tax cheats cost the IRS an estimated $1 trillion annually, and the agency is eager to collect the money that it's owed. A recent infusion of nearly $80 billion into the IRS over the next 10 years, thanks to the Inflation Reduction Act, gives the IRS new resources to find discrepancies in tax filings.

Here's how the IRS will scrutinize tax returns using AI, who it's targeting, and some tips for avoiding an IRS audit.

How the IRS is using AI to look at tax filings

The good news is that most taxpayers won't fall under the additional scrutiny of artificial intelligence. That doesn't mean you shouldn't file your tax returns correctly, of course, but most people shouldn't worry about the potential for an audit based on the new AI implementation.

The audits won't increase for people making less than $400,000, and the IRS says it will focus on very high earners -- people with incomes above $1 million -- who also have more than $250,000 in recognized tax debt. The IRS says 1,600 taxpayers in this category owe hundreds of millions of dollars in taxes.

The agency is also focusing its attention on partnerships (including hedge funds, real estate investors, and law firms) and large corporations. By using AI, the IRS says it will be able to use machine learning to more closely examine specific areas of tax filings from both groups that have traditionally received limited scrutiny.

The IRS is just getting the AI system up and running and expects to increase the use of this technology in the coming years as it tries to ramp up its efforts to collect taxes from wealthy individuals and corporations.

It's also worth mentioning that the IRS said there are three "priority areas" that it's focusing on in 2024:

• Reporting of digital assets, like cryptocurrencies
• People with a foreign financial account but who have failed to file a Foreign Bank and Financial Accounts (FBAR) form
• Labor brokers who may be making fraudulent payments to shell companies

So, for example, if you're not a high earner but you do own digital assets, you may find that there's additional reporting or more questions involving your cryptocurrency investments, even if your returns are not being checked by AI.

How to avoid a tax audit

If you're worried about the potential of being audited by the IRS, the best way to avoid having it happen is to honestly report all of your income and not claim deductions that you're not entitled to take.

If you're still nervous about audits, two good ways to help avoid them are to hire a tax professional or use tax preparation software. Both can help you ensure you report all of your income and get the correct deductions.

I once paid way too much money to hire a company to prepare my taxes, which was bad enough, but I also accidentally scheduled the appointment with the tax preparer on Feb. 14. Worst Valentine's Day date ever. So, if you hire a tax expert, maybe plan ahead better than I did.

Tax prep software often has audit checks that it can run to give you even more peace of mind that you've done your taxes correctly, and some even offer additional audit support. The additional service, which you pay extra for, will defend you against the IRS or your state if you're audited.

And if your taxes are pretty straightforward -- you're not self-employed, and you take the standard deductions on your tax returns -- you may benefit from using free tax prep software.

No matter which avenue you choose, the most important thing to do to avoid an audit is to be truthful about the information you put on your returns -- whether AI will take a look at it or not.