The Internal Revenue Service (IRS) is implementing new plans to improve tax compliance and collect unpaid taxes from higher earners, partnerships, and large corporations. This initiative, which incorporates advanced technology and artificial intelligence (AI), has the potential to revolutionize tax enforcement. However, it may also pose challenges for the IRS, according to experts.

In response to past criticisms regarding low audit rates for wealthy individuals, the IRS has announced its intention to prioritize enforcement efforts on higher-income taxpayers. This includes an expanded use of AI to scrutinize large partnerships, such as hedge funds, real estate investors, and law firms.

The agency has also reiterated its commitment to not increase audits for Americans earning less than $400,000 per year. Additionally, safeguards will be put in place to protect low to moderate earners who claim the earned income tax credit, a group that has experienced elevated audit rates.

“Right now, you file a tax return and you play the audit lottery,” said Robert Kovacev, a tax controversy partner at the law firm Miller & Chevalier. “But with AI, the data is constantly being interrogated by the algorithm.”

Kovacev believes that once fully implemented, the enhanced technology will be more effective in identifying previously overlooked tax issues among higher-income individuals.

“They can expect increased scrutiny from the IRS over the next few years,” warned Kovacev. Although the changes won’t happen immediately, within three to five years, there will be a noticeable rise in audits of large partnerships, businesses, and high-net-worth families, he added.

Even if you are not subject to increased IRS scrutiny, Kovacev emphasized the importance of staying organized with your tax records. This includes keeping receipts to support positions from past tax returns.

“Any taxpayer should keep their tax returns for at least seven years,” Kovacev advised. He explained that not maintaining a paper trail can make it challenging to prepare for an audit.

While there is typically a three-year statute of limitations for an IRS audit, with possible extensions in some cases, there is no time limit when the agency pursues fraud or nonfilers.

While utilizing technology may enhance compliance efforts, it also presents potential risks for the IRS, according to Mark Everson, a former IRS commissioner and current vice chairman at Alliantgroup.

“There’s obviously pressure on the administration to show results,” especially with the 2024 presidential election approaching and ongoing scrutiny of IRS funding,” Everson noted.

Despite increased funding, the agency still faces challenges in terms of enforcement staffing, which is a crucial aspect of compliance. Everson cautioned that if high-income individuals feel that the IRS is operating improperly, they will fight back.