The Internal Revenue Service (IRS) has recently adopted advanced artificial intelligence (AI) technology to enhance its ability to identify tax underreporting and evasion, aiming to address the longstanding issue of the tax gap. While this move has the potential to significantly improve tax collection efficiency, it has also sparked a wave of concerns regarding transparency and privacy.
The AI Implementation
The IRS’s new AI system is designed to meticulously scan tax returns, identifying patterns and anomalies indicative of tax evasion. This technology surpasses traditional manual methods, offering a more precise and efficient approach to flagging noncompliance. According to a Government Accountability Office (GAO) report, the AI’s implementation has already increased the estimated tax gap in individual returns from $145 billion to $278 billion, illustrating its potential effectiveness.
Concerns Over Transparency
Despite its promising capabilities, the GAO has criticized the IRS for insufficient transparency about the AI system’s operations. The 62-page GAO report highlights that the IRS has not fully documented several critical elements and technical specifications of the AI. This lack of detailed information raises questions about accountability and oversight. The GAO has recommended six specific actions to enhance the system’s transparency and effectiveness.
IRS chief operating officer Melanie Krause acknowledged these concerns, stating that there is always room for improving existing technical documentation to make it more accessible. The IRS has agreed to take the GAO’s recommendations on board, aiming to increase the clarity and understanding of the AI system’s functioning.
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Privacy Issues
In addition to transparency issues, the AI system has sparked significant privacy concerns. House Republicans have voiced apprehensions about the potential for AI to be used to spy on Americans. Wyoming Representative Harriet Hageman, among others, has raised fears about the IRS possibly using AI technology to monitor taxpayers’ bank accounts and financial transactions.
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These concerns are rooted in the broader debate over the balance between effective tax enforcement and the protection of individual privacy rights. Critics argue that without proper safeguards, the AI system could lead to invasive scrutiny of taxpayers’ private financial data, infringing on their privacy.
The Tax Gap Challenge
The tax gap, the difference between the amount of taxes owed and the amount paid on time, has been a persistent challenge for the IRS. In the years examined by the GAO (2014-2016), taxpayers voluntarily paid about 85% of taxes owed, leaving a 15% gap—nearly $500 billion. This gap has grown in line with the overall economy, reaching an estimated $688 billion in 2021.
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Addressing this gap is crucial for the federal government’s revenue stream, funding essential public services and infrastructure. AI technology offers a promising solution to identify and reduce this gap more effectively than traditional methods.
Expert Opinions
Former IRS commissioner Eric Hylton supports the use of AI in tax collection, acknowledging its potential to improve efficiency and accuracy. Hylton, now a national director of compliance at the tax consulting firm Alliantgroup, recognizes the need for human oversight alongside AI systems. He notes that while AI can be extremely helpful, it is not a perfect system and will require ongoing technological improvements and human expertise to function optimally.
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Hylton’s balanced perspective emphasizes the importance of integrating AI with human knowledge and skills to achieve the best results in tax enforcement. He also acknowledges the inevitability of some errors or “hallucinations” within AI systems, emphasizing the need for continuous refinement and oversight.
Moving Forward
As the IRS moves forward with its AI implementation, it must address the transparency and privacy concerns raised by the GAO and lawmakers. Ensuring comprehensive documentation and clear communication about the AI system’s operations will be crucial to maintaining public trust and accountability.
Additionally, implementing robust privacy safeguards will be essential to protect taxpayers’ rights while leveraging AI technology to enhance tax compliance. Striking the right balance between effective enforcement and respect for individual privacy will be key to the successful integration of AI in tax collection.
In conclusion, while AI offers significant potential to improve tax collection and reduce the tax gap, addressing transparency and privacy concerns will be critical to its successful and ethical implementation. The IRS’s willingness to heed the GAO’s recommendations and the ongoing dialogue around these issues are positive steps toward achieving this balance.
