With the rapid increase of generative artificial intelligence (AI) in all aspects of our lives, there are also significant changes in the use of AI in federal government agencies including to establish overarching parameters to guide federal agencies in using AI ethically and responsibly. For example, in October 2023, Executive Order (EO) 14110, Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence required agencies to develop guidelines, standards, safeguards, and best practices for AI reliability, safety, and security, while promoting innovation and advancing equity. Federal agencies, such as the IRS, were exploring ways to use AI to improve efficiency and enhance capacity. Specifically, the IRS noted that it was striving “to harness the benefits of Al while mitigating its risks.” The IRS issued interim guidance effective May 20, 2024 to communicate AI governance and principles. More, recently the IRS issued a memorandum on Privacy Policy for AI, effective September 30, 2024, to outline privacy requirements and considerations for the IRS’s own use of AI that applies to IRS users, developers, and providers of AI. These IRS policies were intended to ensure the responsible use of AI at the IRS and “to create trust in the use of AI through responsible AI practices, and ensure compliance with federal mandates and legislation.” However, with the change in administrations, EO 14110 was rescinded on January 20, 2025. A recent Executive Order, Removing Barriers to American Leadership in Artificial Intelligence, issued on January 23, 2025, now requires the Assistant to the President for Science and Technology (APST) and others, to review all policies, directives, regulations, and orders, including those taken pursuant to EO 14110, and to propose new plans related to AI. Accordingly, it should be anticipated that in the near future, federal agency heads will take action to “suspend, revise or rescind such actions, or propose suspending, revising or rescinding such actions,” which may implicate the above IRS guidance.
How the IRS Harnesses the Benefits of AI For Enforcement
Even with these coming changes, it is important to take note that AI has been useful for the IRS’s enforcement work, including auditing, to reach its strategic priorities. Specifically, as part of its recent strategic operating plan, the IRS leaned into using technology “to be more nimble in the administration of complex tax laws,” and “to evolve along with taxpayer needs and expectations.” The IRS has been using a pilot program to leverage AI for auditing complex partnerships, and announced that they opened audits of 76 of the largest partnerships in the U.S. that represent a cross-section of industries.
In addition to audits, the IRS uses AI to combat tax fraud. At the same time, the government and tech experts have warned about the risks that AI poses in generating tax scams so the IRS is working to increase awareness of scams and identity theft, which may be exacerbated by the use of AI. For example, in February 2024, the U.S. Department of the Treasury announced that it recovered over $375 million as a result of implementing, at the beginning of Fiscal Year 2023, an enhanced fraud detection process that utilizes AI.
What Can Nonprofit Entities Expect Moving Forward with Respect to the IRS and AI
Although the new administrations plans are still under development, creating a bit of uncertainty, it is likely that the IRS will continue to expand its use of AI for auditing and review, and that the AI models can be expected to become more efficient and better at detection. Initially, the IRS prioritized high income cases and the largest and most complex partnerships for leveraging its AI enforcement. Moving forward, it will likely apply these AI tools to audit and review an increasing number of entities, including smaller entities such as nonprofits. Nonprofits should continue to ensure that they are complying with reporting and filing requirements to reduce the risk of an audit. As the technology and guidance around AI use continues to rapidly develop, it will be critical for entities to be aware of any changing expectations or requirements. We will continue to monitor these changes and any updated policies or guidance. If there are any specific questions about what this means or how to ensure compliance, please contact an attorney.