AI could transform IRS audits - what UHNW taxpayers should do now

As the IRS adopts AI, better records and support for complex tax positions may become more important. Are your records audit-ready?

In brief

• AI can connect data across records and systems. Missing or inconsistent documentation may draw greater scrutiny in audits.
• AI-powered audits reward preparation by UHNW taxpayers. Strong data, complete records and proactive reviews can help reduce risk before questions arise.

For years, many ultra-high-net-worth (UHNW) taxpayers operated in an environment where tax authorities faced practical limits on how deeply they could examine complex tax matters. Limited resources reduced the number of audits tax authorities could open. And manual processes, coupled with the sheer volume of information, often constrained the scope of an audit.

The environment may be changing

AI has the potential to help tax authorities analyze larger data sets and identify anomalies more quickly. It can also be utilized to review complex tax positions with greater efficiency and understanding. The IRS has announced that it will implement AI in new and increasing ways. While there is limited public information about how the IRS currently uses AI in examinations, the broader direction is clear: Tax administrations around the world are investing in data analytics and AI capabilities to improve their risk assessment and audit selection. The result could be audits that are more data driven, more targeted and in some cases more comprehensive.

But rather than trying to predict exactly how AI will shape audits, taxpayers may be better served by focusing on a simpler question: If a tax authority could review more data efficiently and evaluate complex tax positions more readily, would your records be ready?

How AI changes the equation

Historically, the scope of an audit was often shaped by time and resources. Reviewing years of records and tracing transactions across multiple and varying types of entities required significant manual effort. AI has the potential to significantly reduce these constraints.

And this trend is not limited to the United States. Tax authorities globally are exploring AI and advanced analytics to enhance compliance efforts. As these capabilities expand, taxpayers with cross-border structures or global business interests may face increased scrutiny from multiple jurisdictions.

Data quality moves to center stage

As audits become more data driven, the quality of the information supporting a tax position becomes increasingly important. Even a well-supported position can be difficult to defend if the underlying records are incomplete or inconsistent when questions arise.

AI can help auditors review and connect information across multiple sources more efficiently than before. The underlying workpapers, long a point of examination in an audit, now increase in their importance.

For UHNW taxpayers, these records often include more than traditional tax files. Calendars may help establish residency or travel patterns. Emails and correspondence may support the timing or purpose of a transaction. Bank records, brokerage statements, shipping records, delivery confirmations and other operational documents may help substantiate key facts.

The challenge is that many of these records are not retained indefinitely. Calendar histories may disappear. Third-party platforms may remove older records. Supporting documents that seem readily available today may be difficult to retrieve years later.

When documentation is missing, defending a position becomes more difficult regardless of the underlying facts. This is why preparation matters. Taxpayers should evaluate not only the strength of their positions, but also the quality of the supporting records. And taxpayers must then take steps to ensure the records are readily accessible for far longer than one might have traditionally believed necessary.

Simply put, a tax position is only as strong as the data behind it.

Four actions to take now

The rise of AI-enabled audits is not a reason for alarm. It is a reason to prepare. A few practical steps can help strengthen audit readiness.

The bottom line

AI has the potential to reshape how the IRS analyzes information, identifies risk and conducts audits. While the timing and scope of this transformation remain uncertain, the direction is not.

Tax authorities are gaining the ability to review more information and connect more data points with greater efficiency. They can then identify potential audit issues more effectively. As a result, UHNW taxpayers should assume that more information can be analyzed and scrutinized than ever before. The good news is that proper preparation can pay dividends, regardless of how the audit landscape evolves.

Strengthening data quality, improving record retention, validating critical information and leveraging technology are practical steps that can help reduce risk and improve confidence. The taxpayers best positioned for the future will not be those trying to predict exactly how AI will change audits. They will be the ones acting now to ensure that their records and supporting data are ready for whatever comes next.