IRS Expands AI-Powered Tax Enforcement in 2025, Increasing Audit Risks for Taxpayers

The Internal Revenue Service plans to increase its efforts to collect unpaid taxes in 2025, utilizing artificial intelligence and additional funding to enhance enforcement capabilities. Individuals with outstanding tax debts, unfiled returns, or incomplete understanding of new reporting requirements could face heightened risk of audits, wage garnishments, and tax liens. With the IRS prioritizing collections on high-penalty debts, taxpayers must take proactive measures to protect their financial security.

Using Inflation Reduction Act funding, the IRS has already made strides in enforcement, recovering $520 million from high-income individuals and partnerships who failed to file or pay recognized tax debts. Additionally, the IRS has opened audits of 76 of the largest partnerships in the U.S., including hedge funds, real estate investment partnerships, publicly traded partnerships, and large law firms. These audits showcase the agency's use of AI and advanced analytics to select complex cases for examination.

While current IRS collection efforts are primarily focused on high-income individuals and complex partnerships, its AI-driven oversight is expanding. One of the IRS's Tax Exempt & Government Entities priorities for FY 2025 is to continue working with RAAS to develop and implement an Artificial Intelligence capability to assist with review and prioritization of referrals received on Exempt Organizations. This initiative underscores the IRS's broader commitment to using AI to enhance oversight of tax-exempt organizations, ensuring that nonprofits and similar entities comply with tax laws and are not being used for fraudulent activities.

The collaboration with the Research, Applied Analytics & Statistics division will enable AI to screen and prioritize referrals more effectively, increasing efficiency in investigations and compliance efforts. With increased funding and advancements in AI-driven tax enforcement, the IRS may develop more efficient methods to identify and pursue unpaid taxes across all income levels. As of February 2, 2024, the Treasury Inspector General for Tax Administration reported 68 AI-related projects aimed at modernizing its operations, demonstrating the agency's significant commitment to integrating AI across its operations to bolster compliance and service.

Despite significant progress, the IRS has faced challenges in accurately tracking and managing its AI projects. Evolving definitions of AI and inconsistent reporting have contributed to these difficulties. To address this, the IRS has established a dedicated governance structure under its Chief Data and Analytics Officer to oversee AI initiatives and ensure alignment with agency goals. Although the IRS has yet to confirm whether AI-driven enforcement will target everyday taxpayers, it is clear that artificial intelligence is playing an increasingly significant role in tax compliance efforts.