In the past, we have peeled back the layers of M&A strategy and the truth about Delaware incorporations, moving past the default setting to bespoke strategy. Now, as the IRS harnesses the power of artificial intelligence for auditing, the conversation shifts from reactive defense to proactive governance.

From data privacy to “hallucinated” legal precedents, the challenges posed by artificial intelligence are reshaping professional landscapes.

The IRS just rolled out new AI tools to flag underreported income, using sophisticated algorithms to spot complex financial patterns previously under the radar. Will your small business sink or swim when the very same AI tools used for enforcement are also raising complex questions in courtrooms nationwide? Read on to find out:

• How the IRS is leveraging AI and data analytics for audit selection
• What the ethical obligations of attorneys and businesses include
• Why the compliance best practices for IRS audits mirror the ethical best practices for using AI

The New Reality of Tax Compliance 

The internal Revenue Service is no longer relying on simple, random audits. They have entered the age of the “algorithmic auditor,” leveraging powerful AI and machine learning to sift through billions of tax returns and financial data points.

These systems are designed to effectively identify anomalies and patterns that human auditors could easily miss. This new standard demands a higher degree of data integrity, transparency, proactive risk management, and adherence to all other regulatory requirements. The IRS’s new AI-powered algorithm will indicate a failure to meet these obligations instantly.

What is the IRS’s AI Auditor Looking For?

Beyond simple mathematical error verifications, the IRS’s machine learning models are deployed to pinpoint high-risk financial activities that previously went undetected. This involves systematically matching internal tax filings with vast quantities of external information, including W-2s, 1099s, real estate databases, and data from digital asset platforms. Through advanced pattern recognition, the AI helps flag inconsistencies within complex financial ecosystems, such as tiered partnerships, that often signal a potential for non-compliance or undisclosed wealth.

These systems target discrepancies that suggest potential non-compliance, including:

• Income Discrepancies:

Inconsistencies between filed returns and third-party reports (Forms 1099, W-2).

• Undisclosed Asset Sales:

Unreported gains or incorrect basis reporting on real estate or other asset transfers.

• Industry Outliers:

Business expenses significantly outside established industry benchmarks.

• Hidden Accounts/Entities:

Unreported financial accounts, side businesses, or undisclosed interests in partnerships/pass-through entities.

• Digital Asset Transactions: 

Unreported or mischaracterized sales of cryptocurrency and other digital assets.

This process is entirely systematic and data-driven. If a business’s records lack integrity or transparency, the AI may flag the return for an audit, even in cases of honest error or good-faith efforts. Proactive governance and clean data are your only defense.

Your Proactive Defense in the Age of the Algorithm

The convergence of artificial intelligence in regulatory enforcement and legal practice means that traditional, reactive compliance strategies are no longer sufficient. The margin for error is shrinking. The sheer speed and data-matching capabilities of the IRS’s AI tools demand a higher level of precision and proactive governance from every small business and firm.

This new landscape presents a choice: operate with a “wait and see” approach, risking an AI-triggered audit and the subsequent legal entanglements, or adopt a forward-thinking strategy that ensures you are audit-ready and legally sound from the start.

At Mavacy, we specialize in providing the strategic counsel necessary to navigate these complex frontiers. We help firms stay compliant before the algorithmic auditor finds them by offering services that include:

• Proactive Compliance and Risk Management: We assist in designing and implementing robust governance frameworks that anticipate AI-driven scrutiny, turning a potential liability into a strategic advantage. 

• Meticulous Documentation and Audit Readiness: We help you achieve a higher standard of data integrity. Mavacy ensures your financial records are transparent and verifiable, meticulously prepared to support all income and deductions for auditing. 

• Expert Tax Representation and Dispute Resolution: Should an anomaly be flagged, our team provides strategic case handling, direct IRS communication, and strong advocacy to resolve complex tax disputes effectively.

• Outside General Counsel Services: We provide access to high-level legal expertise without the overhead of a full-time in-house lawyer, offering tailored support for your specific needs, including regulatory compliance and data integrity issues.

Don’t let the new wave of AI enforcement catch your business unprepared. Partner with Mavacy to build an audit-ready, legally sound, and strategically compliant operation. Visit our services page to learn more and schedule a consultation today.