IRS Leverages AI to Combat Tax Evasion in Enhanced Large Partnership Compliance Program

by | Dec 2, 2023

The IRS is implementing a new initiative to combat tax evasion. By expanding its Large Partnership Compliance program and integrating Artificial Intelligence, the IRS aims to crack down on non-compliance and uncover complex tax avoidance schemes in major partnerships in the United States. This move is part of the agency’s plan to enhance tax enforcement and protect the integrity of the tax system.

Expanding the LPC Program:
Originally designed to examine complex partnership returns, the LPC program will now include hedge funds, real estate partnerships, publicly traded partnerships, and large law firms. These partnerships, each with an average of over $10 billion in assets, will undergo thorough examinations to ensure compliance with partnership tax, general income tax, accounting, and international tax laws.

Targeting High-Risk Partnerships:
To identify partnerships for examination, the IRS has collaborated with experts in data science and tax enforcement. Using a comprehensive approach, the agency can identify high-risk issues and focus on partnerships most likely to engage in non-compliant practices. This focused strategy has the potential to uncover significant tax cheating and compliance risks.

Focusing on Pass-Through Entities:
Pass-through entities, such as partnerships and S-corporations, are a primary concern in the expanded program. These entities, which are not subject to corporate income tax, have their income taxed at the individual or corporate owners’ income tax rates. By devoting resources to large or complex pass-through entities, the IRS aims to intensify compliance efforts, particularly among high-income taxpayers.

Utilizing AI and Advanced Technology:
The integration of AI and improved technology into the LPC program equips the IRS with powerful tools to detect tax evasion and identify compliance risks. Through machine learning algorithms, the agency can uncover sophisticated tax avoidance schemes, enhancing its case selection process and overall enforcement capabilities.

Encouraging Compliance:
Partnerships selected for examination should expect a thorough review of their tax practices as the LPC program expands. The use of AI and advanced technology streamlines the examination process, enabling the IRS to identify potential compliance risks more efficiently. This approach strengthens the agency’s ability to detect non-compliant practices and encourages partnerships to take proactive measures to ensure accurate and compliant tax filings.

Options for Non-Compliant Taxpayers:
Taxpayers who find themselves non-compliant should know that they have options to resolve their tax situations, even if the IRS has not yet contacted them. Seeking guidance from a specialized tax advisor is highly recommended to understand the best compliance options and ensure adherence to tax regulations.

The IRS’s expansion of the Large Partnership Compliance Program, coupled with the integration of AI technology, represents a significant milestone in tax enforcement. By leveraging machine learning algorithms and collaborating with experts, the agency aims to enhance its examination focus, identify compliance risks, and eliminate tax cheating in large partnerships across various industries. As the IRS intensifies its compliance efforts, partnerships are advised to consult specialized tax advisors to ensure ongoing compliance with tax regulations and contribute to a fair and transparent tax system.