Is Your Business Next? How the IRS’s AI Targets Partnership Discrepancies!

Earlier this month, the IRS announced that it will be utilizing some of its expanded funding from the Inflation Reduction Act to enhance tax compliance across key areas. Their intended focus at this time is business partnerships and high-income taxpayers. The agency has stated that it will use artificial intelligence (AI) and other technology to identify areas where compliance is low.

This audit focus will have a two-pronged initiative:

  • Expanding the Large Partnership Compliance Program through the use of AI
  • Increasing compliance letters for high-value business partnerships that have balance sheet discrepancies

At this time, the IRS is primarily putting its efforts into multi-million or billion-dollar business partnerships and high-income taxpayers, who may be at higher risk of low compliance and/or underreporting of their income.

Is Your Business Next? How the IRS's AI Targets Partnership Discrepancies!

How Will the IRS Utilize AI for Tax Compliance?

The Large Partnership Compliance program was launched by the IRS in 2021 with a focus on examining the most complex partnership tax returns of some of the nation’s largest business partnerships. The IRS now intends to use its funding to expand this program to other large partnerships and will use AI to select tax returns that may need additional examination or audits. The AI programs that will be used by the agency have been jointly developed by experts in data science and tax enforcement, and primarily use machine learning technology to identify potential areas of low compliance.

The agency announced its intention to begin examinations of 75 of the largest partnerships in the United States across multiple industries, including hedge funds, real estate investment, and law firms, by the end of September 2023.

IRS Targets Balance Sheet Discrepancies

The IRS has recently identified balance sheet discrepancies in partnerships that hold over $10 million in assets. Agents at the IRS continue to discover ongoing and additional discrepancies, many of which are valued at several million dollars or more, without any of the required discrepancy explanation documentation.

Before the Inflation Reduction Act, the IRS did not have the necessary resources to follow up with partnerships on these discrepancies. However, the IRS plans to approach the issues by sending out letters to approximately 500 large partnerships by early October 2023. Additional actions may be taken by IRS agents depending upon the responses that are received.

How Does this New Technology Affect Me as a Taxpayer?

Tax compliance has always been important, but is even more so now in the era of artificial intelligence. At this time, the IRS is primarily focusing on high-income taxpayers and businesses, but some of this attention will likely become focused on other taxpayers in the future.

Business owners and partnership members should be especially aware of tax compliance and may wish to emphasize consistent, accurate reporting within their business. Taxpayers should take steps to ensure compliance, conduct internal audits, become familiar with their operating agreements, maintain documentation, and consult with their Arizona tax attorney or tax professional for guidance on their taxes.

Upon receipt of a compliance letter, taxpayers who are seeking further guidance or representation can reach out to their Arizona tax lawyer for legal advice.

Received a Compliance Letter from the IRS and Wondering What Steps to Take Next?

Receiving communication from the IRS regarding your taxes or your business can be stressful, but the experienced Arizona tax lawyers at Silver Law, PLC are ready to help. As former IRS employees, our attorneys use their knowledge and expertise in the field of tax law to fight for your rights and help you obtain positive results. We have extensive experience negotiating with the IRS, providing representation in tax court, and guiding our clients through the IRS audit process. To learn more about how we can help and to obtain trusted legal advice personalized for your situation, contact us today!

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