The IRS Is Utilizing Algorithms to Select Audit Targets. Small Companies Have to Put together
As adoption of new tech tools increases, tax experts explain what entrepreneurs and small-business owners need to know.
The days of the quintessential taxman, like the meticulous, trench-coat-wearing auditor Will Ferrell played in Stranger Than Fiction, may be gone. Now, the agent scouring your returns for tax mistakes may be AI.
“[The IRS] is using AI to identify targets for who’s going to be audited,” Rob Kovacev, a tax lawyer at Miller & Chevalier, told Inc. “They’re doing that at all levels, for everything—from small businesses and individuals across the board.”
The IRS hasn’t explicitly outlined every way
The IRS hasn’t explicitly outlined every way it uses AI. Historically, the agency has kept its audit-selection formula close to the vest. However, public records still offer a partial picture. According to a March 2026 report from the Government Accountability Office (GAO), the agency’s AI inventory grew from just 10 use cases in 2022 to 126 by mid-2025, including 65 classified as too sensitive for public disclosure.
That same report flags another issue. After a wave staff reductions in 2025, the IRS may not have the personnel to responsibly manage the AI tools it’s already using or the ones it plans to add. “The recent staff reductions, the intent to pursue additional AI initiatives, and the absence of a plan to address AI skills gaps increase the risk that IRS AI efforts will not succeed,” the report said.
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Kovacev raised a related concern: Without enough people minding the machine, bias can slip through unnoticed. “You need a human IRS employee who reviews whatever the algorithm says and signs off on it,” he said. “If you don’t have that, you’re at the mercy of a black box algorithm that no one understands.”
Kovacev referenced a 2023 Stanford study that found
Kovacev referenced a 2023 Stanford study that found that Black taxpayers are three to five times more likely to be audited.
According to Kovacev, the IRS uses algorithms to flag statistical anomalies in tax returns. For example, this may occur when a business claims a much larger credit or deduction than in past years.
Source: www.inc.com
