IRS Using AI To Close Tax Gap

A report released last Wednesday by the Government Accountability Office found that 85% of the taxes owed at the national level were filed voluntarily during the 2014 – 2016 fiscal tax years. The other 15% make up what’s more commonly known as the “Tax Gap”.

Much of that gap is made up of self-employed individuals who under-report their income. A newly launched AI System is helping the Service choose audit targets to close the gap. Some of the tools at their disposal include…

Form 1099 – K

This is where an entity’s credit card processing is reported to the Federal Government. If this form shows that you processed $1M in credit card sales and you only reported $800K in sales that year, then an audit will probably ensue.

Basic Modeling Techniques

Please understand that the IRS has income and expense figures on every possible type of American company going back a long time. If you’re in a particular industry where your Cost Of Goods Sold must be at least 50% in order to stay afloat and you report 20% less in sales to try to avoid paying tax, the modeling system will red-flag the return and you may end up in an audit.

Lifestyle

The IRS understands that it takes a certain amount of income every year to maintain a specific lifestyle. If you live in a particular house, have a couple of Cadillacs, a couple of kids in a Montessori school, and a spouse who doesn’t work, then you’ll need “X” in annual income to pay your bills. If you only report lets say “X – Y” then you may get a knock on the door.

These are the most common ways that the Service has chosen its audit targets in the past. This new AI System is just doing most of the leg work.

This means that the IRS Agents who make the final selections on who gets audited have a lot more cases from which to choose. The auditors walking into an audit will have an even better idea where to look.

This also means that the accuracy of your accounting is more important than ever. Please get your work into us today.

Let me leave you with this.

The Republican-led House Appropriations Financial Services and General Government Subcommittee approved a budget for the IRS in Fiscal 2025 of $10.1B. That’s $2.2B less than the IRS will receive this year. It’s also $2.2B less than the White House had requested.

It should be understood that this is only a recommendation. Lots of horse-trading and arm-twisting is going to happen before the final budget is put up for a vote in either the House or the Senate.

Please realize that this is a seminal year for tax law, given the fact that most of the 2017 Tax Cuts and Jobs Act is due to expire. Without this law being renewed, we’d go back to the pre TCJA system which would substantially increase income taxes on Entrepreneurs.

The Subcommittee just fired the first shot across the bow by trying to drastically cut the IRS Budget. I wonder what the other side will do in response?

The next six months should be interesting.

We’re all going to get through this. Let’s get through it together.

Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,

Sincerely yours,

Chris Amundson

President

Accounting Solutions Ltd.

773-267-7500

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