HISTORIC FUNDING AND ENFORCEMENT EFFORTS: IRS ANNOUNCES USING IRA FUNDS FOR AI

Over the past decade, the Internal Revenue Service’s (“IRS”) budget has been cut, its workforce has been reduced, and audit rates for high-income taxpayers have nosedived. (Center on Budget and Policy Priorities). This has resulted in a large and consistently increasing tax gap (the difference between taxes paid and taxes owed). Id. After years of being underfunded, the IRS was allocated billions of dollars in federal funding via the Inflation Reduction Act of 2022 (“IRA”). (Alan Rappeport, The New York Times). This article reviews the impact of the IRA’s historic funding provided to the IRS, how the IRS is implementing the funding across its operations, and opposition that has arisen in response to the positive impact efforts, specifically surrounding the implementation of artificial intelligence (“AI”) as an enforcement mechanism.

The IRA created a funding stream for the IRS, meaning the funding is provided for directly in the IRA. (Chuck Marr & Samantha Jacoby, Center on Budget and Policy Priorities). This funding stream is different from, and in addition to, the discretionary annual appropriations that the IRS receives from the federal government. Id. The IRA funding effort seeks to protect taxpayers “by maintaining efforts to rebuild and modernize an IRS decimated by years of steep funding cuts.” Id. The IRS is deploying this funding in a variety of ways, including in efforts to upgrade taxpayer services and implement AI in tax enforcement efforts, such as audits. (Alan Rappeport, The New York Times).

A major initiative of the IRA centered on “making the tax code fairer” through implementing corporate tax reforms and increasing funding for the IRS. (The White House; Pub. L. 117-169, Aug. 16, 2022). By implementing a 15% corporate minimum tax on profits and a 1% excise tax on corporate stock buybacks, the IRA will result in an estimated $300B collected in taxes over a decade, increasing the tax revenue base and combatting the tax gap. (The White House). Perhaps most importantly, the IRA represents a “historic investment in modernizing the IRS.” Id. This investment is increasing funding for updating operations support, business system modernization, taxpayer services, and enforcement. (Brendan McDermott, Congressional Research Service).

Nearly $80B was allocated to the IRS and related agencies as a supplement to the agencies’ normal yearly appropriations. Id. Notably, this supplemental amount projects an increase in funding of 153% in business systems modernization and 69% in enforcement through fiscal year 2031. Id. $4.8B was allocated to help the IRS invest in upgrading taxpayer services administration systems and cybersecurity. Id. Over $25B was allocated to cover routine operations costs and the IRS Oversight Board, which was previously suspended due to a lack of quorum. Id. Another $3.2B was allocated to taxpayer services generally, ranging from filing and account services to processing tax returns. Id. A massive $45B was allocated to one of the IRS’ most important functions: tax enforcement. Id. This amount can be used to provide legal support, monitor and enforce taxes, and adopt “investigative technology.” Id.

On September 8, 2023, the IRS announced plans to capitalize on IRA funding to enforce tax compliance efforts. (Internal Revenue Service). To improve tax enforcement efforts for “high-income earners, partnerships, large corporations, and promoters abusing the nation’s tax laws,” the IRS made a novel move and announced the agency’s implementation of AI. Id. Through AI technology, the IRS believes that its agents will be able to better identify tax evasion and compliance threats. Id. This represents an expansion of a pilot program that was implemented in 2021 when the IRS launched a Large Partnership Compliance (“LPC”) program. Id. As part of the LPC program’s continued development, IRS Commissioner Danny Werfel has recently discussed how the IRS has harnessed AI to identify non-filers and look for trends of noncompliance in large partnerships that the agency did not previously have resources to support. (Martha Waggoner, Journal of Accountancy). Because the number of large partnerships has increased nearly 600% from 2002 to 2019, the use of AI will allow the IRS to be able to take a more “focused approach to best identify the highest risk issues and apply resources accordingly”. (US Government Accountability Office; Internal Revenue Service).

Whether these AI efforts will be fully implemented is not yet certain. The debt ceiling reached by the U.S. in June had a large impact on the $80B the IRA allocated to the IRS, cutting nearly $20B from the funding. (Martha Waggoner, Journal of Accountancy). Further, the IRS announcement to increase enforcement efforts through the use of AI has garnered strong opposition from legislators. Just two days after the IRS announcement, Congressman Clay Higgins (R-LA) announced plans to introduce legislation opposing the agency’s plans. (US Representative Clay Higgins, 3rd District of Louisiana). Congressman Higgins specifically opposes the use of AI by the federal government for the purposes of enforcing laws and regulations. Id. He views AI an “an Armageddon level threat” and “will not allow government controlled AI computer programs to crawl around in the private business of free Americans.” Id. While the debt ceiling and AI opposition will have a major effect on the IRS’ enforcement efforts, for now, the agency continues to develop these compliance efforts, albeit with a decreased budget.

The significant funding of the IRS, and the resulting development in tax enforcement efforts, will hopefully replenish our nation’s depleted tax revenue base that results from the tax gap. (Center on Budget and Policy Priorities). IRS Commissioner Werfel has described the agency’s recent use of AI in tax enforcement as “the start of sweeping, historic effort.” (Martha Waggoner, Journal of Accountancy). AI helps alleviate the overwhelming amount of tax returns the IRS sees each year and helps focus audit enforcement efforts on earners with large tax liabilities by identifying trends of potential noncompliance. These efforts further the Biden-Harris Administration’s goal of a fairer tax code by ensuring high earners are subject to tax enforcement efforts that will collect the taxes they owe. In sum, this historic funding provided to the IRS via the IRA helps develop enforcement initiatives that will result in a more efficient, more proactive IRS.