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AI-Powered Fraud Detection Algorithms: IRS and HMRC To Hit Crypto Users With Penalties for Unpaid Taxes

Last Updated April 27, 2024 11:12 AM
Giuseppe Ciccomascolo
Last Updated April 27, 2024 11:12 AM

Key Takeaways

  • The US Internal Revenue Service is using artificial intelligence (AI) to crack down on tax evasion.
  • The UK’s tax authority, HMRC, will impose strict deadlines and hefty fines on those who fail to pay their crypto taxes.
  • AI can be a powerful tool for identifying tax evasion by analyzing vast amounts of data.
  • However, fiscal authorities still have more to do to fight tax losses.

In a two-pronged attack on tax evasion, authorities on both sides of the Atlantic are wielding new weapons. The US Internal Revenue Service (IRS) is deploying artificial intelligence (AI) to target complex financial maneuvers by wealthy Americans. At the same time, the UK’s HM Revenue & Customs (HMRC) cracks down on cryptocurrency tax delinquents with hefty fines and strict deadlines.

These measures highlight the growing focus on combating tax avoidance and ensuring fair contributions from all corners of the financial system. However, fiscal authorities can do much more to fight illicit tax reporting.

US’s IRS Uses AI To Tackle Tax Evasion

The Internal Revenue Service (IRS)  has embarked on a new approach to combat tax evasion among multibillion-dollar partnerships. It is leveraging artificial intelligence to scrutinize entities such as hedge funds, private equity groups, real estate investors, and large law firms.

This initiative showcases the IRS’s proactive stance in harnessing some of the $80 billion allocated through last year’s Inflation Reduction Act. The aim is to target the wealthiest Americans and address intricate cases that had previously overwhelmed the agency.

The infusion of new funding is geared towards enhancing the IRS’s capacity to recover federal revenue by cracking down on tax evasion and sophisticated accounting practices. However, the allocation has sparked political contention. Republicans voiced concerns about potential overreach, leading to a $20 billion reduction earlier this year.

Grover Norquist, founder and president of Americans for Tax Reform, expressed  skepticism, suggesting that the IRS tends to blame its enforcement challenges on algorithms. He argued that AI adoption could serve as a shield against accusations of bias or uneven enforcement practices.

While specifics about the IRS’s AI strategy remain scarce, the technology is expected to assist in identifying elusive compliance threats and streamlining audit processes, according to former IRS acting Commissioner Danny Werfel.

HMRC Introduces Penalties

HM Revenue & Customs (HMRC) of the UK has instituted  a strict 30-day window for users who have previously disclosed their crypto taxes to settle all outstanding payments. Failure to meet this deadline may result in penalties and fines, signaling a robust crackdown on cryptocurrency tax evasion.

As part of HMRC’s intensified efforts to enforce tax compliance, hefty penalties await those who fail to adhere to their obligations. Non-compliance can incur fines of up to £10,000 or 20% of the taxable income, whichever is greater.

While the 30-day payment window allows users to rectify their tax situation, extensions are not granted beyond the stipulated deadline. Therefore, it is imperative for individuals who have disclosed their crypto taxes to track payment deadlines diligently to avoid facing punitive measures.

This policy adjustment underscores the escalating significance of crypto tax compliance. Not only in the UK but also on a global scale. With governments and regulatory bodies ramping up efforts to combat cryptocurrency tax evasion, staying abreast of the latest developments in crypto-financial policies and regulations is essential for both individuals and businesses alike.

UK Has A Problem With Evasion

The United Kingdom stands at the forefront of global finance, yet grapples with the persistent challenge of tax evasion. The estimated tax gap for the fiscal year 2021 to 2022 amounts to a staggering £35.8 billion ($45.2 billion), comprising 4.8% of total theoretical tax liabilities, according  to the latest report from the UK tax authority.

Tax evasion depletes government resources and erodes public trust in the tax framework. Exploiting gaps within the system, both individuals and corporations can maneuver to minimize their tax obligations. While not all tax avoidance strategies are illegal, the proliferation of aggressive tactics that skirt the edges of legality is cause for alarm.

Majid Aminzare, from the University of Bradford School of Management, advocated  embracing artificial intelligence as a potent tool in combating tax evasion. Despite AI’s transformative potential, its integration into the UK’s taxation system has been sluggish, representing a missed opportunity. AI’s advantages in tax enforcement are manifold. They promise not only heightened efficiency. But also a level playing field for law-abiding taxpayers.

Moreover, AI can facilitate taxpayer compliance by furnishing real-time guidance and advice, mitigating inadvertent noncompliance. Embracing AI in taxation reflects a commitment to fairness, transparency, and the fortification of the tax framework.

However, the journey towards AI-driven tax enforcement presents challenges. Privacy, data security, and the imperative for robust oversight mechanisms demand meticulous attention. Additionally, the UK government must invest in training tax professionals, equipping them with the requisite skills to navigate and interpret insights derived from AI technologies.

How AI Can Detect Unpaid Taxes

Through sophisticated data analysis and pattern recognition, AI sifts through vast volumes of financial and transactional data. It identifies irregularities such as sudden spikes in reported expenses, signaling potential evasion scenarios that might otherwise evade human detection. Moreover, AI facilitates cross-verification of Real-Time Information (RTI) data from the payroll system with other financial records. This ensures consistency, uncovering any disparities indicative of fraudulent activities that demand further scrutiny.

AI fosters collaboration between tax authorities and financial institutions by identifying accounts or transactions warranting further investigation. It aids in uncovering offshore accounts and evasion mechanisms, enhancing the efficacy of enforcement efforts.

It delves into ledger analysis for cryptocurrencies and blockchain transactions to trace flows and detect potential evasion or money laundering activities. In fraud detection, AI-powered algorithms analyze payment transactions, invoices, and receipts to identify evasion schemes.

Artificial intelligence’s anomaly detection capabilities flag unusual transactions or discrepancies between reported income and financial activities. By pinpointing cases where reported expenses deviate from industry averages, AI aids in detecting potential evasion scenarios.

Natural Language Processing (NLP)  algorithms further augment evasion detection by analyzing textual data, such as emails and contracts, for incriminating information related to evasion schemes or hidden assets.

Moreover, AI extends its reach to social media monitoring, identifying lifestyle inconsistencies that might raise suspicions of tax evasion. For instance, individuals flaunting lavish lifestyles despite reporting minimal income can trigger investigations.

While AI offers significant potential, its implementation should complement traditional methods, adhere to privacy regulations, and ensure robust data infrastructure and cybersecurity measures. Effective interpretation of AI-generated insights necessitates expertise in tax evasion detection, ensuring the integrity and efficacy of enforcement efforts.

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