How AI is Helping Modernize the IRS
After years of slow audits, taxpayer frustration, and seemingly endless mounds of paperwork, the IRS is now turning to artificial intelligence (AI) to overhaul its technology infrastructure, strengthen compliance, and improve taxpayer services. With funding from the Inflation Reduction Act (IRA), these modernization efforts represent a fundamental change in how the agency operates. Here’s how AI is helping modernize the IRS.
Audit Selection and Fraud Detection
The first area in which the IRS is leveraging AI to help improve its operations is audit selection and fraud detection. Specifically, AI is aiding the IRS in optimizing its audit and compliance functions. For individual tax returns, AI models select a representative sample of returns to audit and identify returns likely to contain errors and taxpayers who may owe additional taxes. For partnerships, the agency uses two AI models to help prioritize partnership returns for audit. The significant increase in the number of large partnerships since 2002 has made it more difficult for the agency to identify taxable income and potential tax evaders. Because large partnership tax returns are complex, the IRS conducts very few of these audits; however, AI can select the highest-risk large partnership returns for audits.1
Taxpayer Service
AI is also helping to provide better taxpayer service. Since 2022, the agency has deployed AI-powered chatbots and voicebots to provide self-service assistance for payment collection questions, such as payment options and notices. These tools can help reduce call wait times and free up IRS agents to focus on more complex issues requiring human intervention.2 The IRS plans to expand its use of a commercial AI agent to help with tasks such as case summarization and searches that could increase efficiency amid an IRS workforce reduction.3 To assist in processing the millions of paper tax returns received annually, the IRS is piloting AI-powered tools to implement advanced automated scanning and AI-assisted data extraction to help reduce manual data entry and minimize data errors.
AI is Helping Modernize the IRS Technology
In 2024, the U.S. Department of the Treasury reported that AI helped prevent and recover more than $4 billion in fraudulent or improper payments.4 While this shows some progress has been made with AI initiatives, the modernization effort, which includes AI government oversight bodies, such as the Government Accountability Office (GAO), have warned about the need for transparency, safe data, and ongoing monitoring to ensure fairness in audit selection.5 Despite these concerns, AI modernization efforts will continue to move forward, and the IRS has stated that it has made considerable progress on its long-term IT modernization plan to better serve taxpayers.6
