The IRS is inking contracts for artificial intelligence and machine learning technology as it plans to use more AI and fewer human auditors in pursuit of unpaid tax dollars.
In an interview with Money, former IRS Commissioner Danny Werfel explains that the IRS has begun to "deploy and scale AI for the purposes of tax enforcement," evidenced by a recent 64-page report from the Government Accountability Office (GAO).
The agency could, admittedly, use some help.
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The IRS has lost nearly a third of its audit staff in the Trump administration's quest to trim government spending. Werfel says IRS tax enforcement-related revenue collection was down roughly 5% last fiscal year (mostly under President Donald Trump), in contrast with year-over-year increases of up to 15% under Biden, who increased IRS resources with the Inflation Reduction Act of 2022.
In public statements, IRS officials have signaled that AI-assisted tax audits are coming. IRS CEO Frank Bisignano wrote in April testimony that the IRS is "undertaking efforts to improve [tax] collections in a manner that employs data, analytics and improved technology to focus compliance efforts where they matter most." Before that, the IRS updated its policy on AI governance, which now states that "high-impact" applications of AI must be tracked, including "AI that informs or influences whether a taxpayer will be subject to audit, or what aspects of a return will be subject to audit."
The agency's recent moves raise the question: With less manpower, will the IRS instead rely on tools like ChatGPT and Claude to identify tax evaders?
Not exactly, says Werfel, who serves as an advisor to Prime Meridian, an AI tax prep service.
"Imagine an IRS employee sitting down to play chess against a potential tax evader, and now suddenly you have IBM Watson on your side telling you exactly how to play the chess game. That's what AI does," says Werfel, who led the IRS from 2023 to 2025. "It provides the IRS personnel with a much more sophisticated way of seeing the evasion in ways they couldn't see it before."
The IRS did not respond to Money's request for comment about its use of AI in tax audits. Records show the agency is spending tens of millions per year on AI, but how much of that is related to tax compliance? And, perhaps more importantly for consumers, how many IRS audit decisions are actually AI-influenced?
How the IRS is using AI for tax audits
With new "data and analytic strategies," the IRS will be able to identify tax evasion that it wouldn’t have detected just a few years ago, according to Bisignano.
Although the IRS first explored AI technology in 2008, it has significantly increased its applications in recent years, initiating two-thirds of its 126 use cases between June 2022 and June 2025, according to the GAO report. About a third of those use cases were listed as operational when the report was published in March.
An AI use case is defined as "the application of an AI technique to meet a particular business need," according to the report.
What is the IRS using all this AI for? The largest bucket of applications, 59, relate to operational efficiency. The second-biggest category was tax compliance and fraud detection, with 18 of 43 use cases functional as of last June.
In the GAO report, a graphic shows how AI-assisted audit decisions actually work. It shows returns being fed through an AI tool trained on historical audit data that assesses which ones may be fraudulent or noncompliant by providing a "risk score" for each return. A human review is the final step of the process before audit decisions are made.
It amounts to "a very powerful engine that can see across many tax filers at the same time, detect patterns or trends that typically were not previously detected, zeroing in in a very forensic way and a very effective way," Werfel says.
For everyday taxpayers, audits aren't reason to panic. The IRS audits well under 1% of tax returns, and those audits are generally opened for a reason (even if no issues are ultimately found). Random audits can occur, but if your return is accurate and you've kept records, you shouldn't have much to worry about.
Dawn Delia, a federal tax attorney based in San Diego, predicts IRS audit numbers will likely rise as the agency deploys AI. But so far, she says she has "not seen an uptick in any type of different audit activity than the norm."
Despite reports about AI, the top audit triggers are still the same: high incomes, complex tax returns, aggressive tax credits, unusual charitable donation deductions, high business deductions or high mortgage interest deductions, Delia says.
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Which AI technologies is the IRS using?
As of 2024, the IRS was spending tens of millions per year on AI — a number that could grow as White House officials "continue to cite AI technologies as tools that can help increase efficiency and better serve taxpayers," according to the GAO report.
While 65 of the IRS's AI use cases "were either too sensitive for public reporting or were research and development efforts exempt from public reporting," according to the GAO report, some of the public database entries mention notable AI technologies, including Microsoft, Palantir and IBM tools, among others.
A full picture of the IRS's spending is not available, and much of the reporting comes from public records requests for specific contracts. For example, according to a February Tax Notes report, the IRS paid $1.8 million to Palantir for a case selection contract testing three AI models. A document obtained by the outlet states the IRS has been using more than 100 business systems and 700 methods to "identify the highest value exam, collection and investigation cases."
However, it's unclear whether the IRS is moving forward with this Palantir partnership.
Critics of the IRS's introduction of AI in audits worry about unintended bias in audit selection as well as data privacy. House Democrats have questioned whether the IRS has enough staff to deploy AI responsibly while also raising concerns that Trump's budget cuts have led to fewer audits.
Audits are one way the severely underfunded IRS can claw back money, but the rate of audits has slipped. According to the Taxpayer Advocate Service, the IRS opened 205,000 audits in fiscal year 2025, down from 335,000 audits in 2024. For comparison, the agency was auditing over 1 million returns a year as recently as 2017.
Werfel says there is a public perception due to IRS staffing reductions that the agency now has "less highway patrolmen monitoring for speed… giving out speeding tickets and setting speeding traps," potentially emboldening tax cheats.
But he adds that nobody should underestimate the potential for the IRS to come after taxpayers with AI — now or later.
"The way in which AI is evolving and becoming more and more sophisticated, I think it's very reasonable to expect that these tools will be extremely powerful in the near term, in both identifying and rooting out noncompliance in our tax system," Werfel says.
