Efficiency seems to be the buzzword in government these days, as many agencies are being asked to do more with less. The Treasury Inspector General for Tax Administration suggested in a report last month that the IRS should train artificial intelligence to flag noncompliant taxpayers using past audit results.
That sounds efficient enough, but we’ve seen how such a movie might end. In the Netherlands, it ended with mass apologies and a government collapse.
The Dutch childcare benefit scandal, known as the Kinderopvangtoeslagaffaire, saw early machine-learning models trained on skewed historical data flag tens of thousands of innocent families—overwhelmingly demographic minorities—as fraudsters. Human reviewers reportedly rubber-stamped algorithmic output as accurate with less than a full review, leaving households financially devastated.
The TIGTA report recommends that the IRS “leverage examination results” to improve models used for case selection. But historical IRS audits aren’t neutral.
A 2023 Stanford University-Treasury study showed Black taxpayers were, at that point, up to 4.7 times more likely to be audited than others—especially those claiming the earned income tax credit. This probably wasn’t the result of overt racism, but it likely stemmed from cost-driven audit selection algorithms.
Training AI on that data without careful curation could extend past bias into future enforcement—a potential disaster in the making.
AI can streamline IRS processes, but only when supported by at least three safeguards: data audits to scrub training data of inequities, transparent model outputs so policymakers and the public can see what is being flagged and why, and real human oversight empowered and instructed to overrule the machine when necessary.
—Andrew Leahey
Welcome to the Week in Insights for Bloomberg Tax’s latest analysis and news commentary. This week, experts analyzed Facebook’s loss in its transfer pricing dispute with the IRS, the potential impact of House Republicans’ tax package on service-based pass-through businesses, and more.
The Exchange—It’s where great ideas on tax and accounting intersect.
Insights
Arizona Is Modernizing Law with Alternative Business Structures
NewMarket Law founder Suzanne Porter says the legal community should embrace alternative business structures and view their growth as reregulation of the industry, not deregulation.
United Arab Emirates Sheds Light on VAT Rules for Virtual Assets
PwC’s Bastiaan Moossdorff explains how the United Arab Emirates has provided a useful framework for taxpayers on how they should manage their VAT position on virtual assets.
FOIA Failures at the IRS Are Leaving Taxpayers in the Dark
The National Taxpayers Union’s Pete Sepp says the IRS needs to fix its Freedom of Information Act process to help restore public trust.
New York Ruling on Out-of-State Online Retailers Misses the Mark
KPMG’s Russell Levitt and Aaron Balken say an appellate court should review a New York trial court’s decision to uphold additional income tax obligations on out-of-state online retailers.
Facebook’s Tax Loss Shows Need for Transfer Pricing Transparency
Dentons attorneys say Facebook’s recent US Tax Court defeat demonstrates why economic coherence and sound documentation are crucial when facing regulatory challenges in transfer pricing disputes.
College Endowment Tax Targets Have Chance to Gain Public Support
Baker Tilly’s Jessica Jeane and Dan Greenstein say the institutions affected by a proposed tax hike on university endowments have an opportunity to rebuild the public trust while addressing their precarious financial status.
Tax Bill SALT Treatment Punishes Mom-and-Pop Service Businesses
AICPA’s Melanie Lauridsen says the Republican tax package would harm service-based pass-through businesses by stripping them of the ability to deduct state and local taxes.
GOP Plan to Boost Estate Tax Exemption Offers Planning Certainty
BDO’s Abbie Everist says a proposal to increase exemptions for estate, gift, and generation-skipping transfer taxes creates an opportune time for tax advisers to ensure estate plans reflect the intent of their clients’ families.
Columnist Corner
Spain’s proposed 100% tax on non-EU homebuyers is a flawed attempt to address its housing crisis, because “the real issue isn’t who is buying homes—it’s how the homes are being used,” Andrew Leahey writes in his latest Technically Speaking column.
Taxing short-term flipping and vacant property would better target opportunistic buyers regardless of their nationality, Andrew argues, adding that the revenue from such taxes could directly support affordable housing construction. Read More
News Roundup
Yum! Brands Sues IRS Over $4 Billion Realignment Tax Bill
Restaurant giant
US OECD Funding on Chopping Block in Trump Rescissions Plan
The White House is calling for an end to US funding of the group negotiating the global tax deal as part of a $9.4 billion request to claw back funding from foreign aid and public media.
IRS Revises Safe Harbor for Corporate Book-Tax Calculation
The IRS said it would tweak a “safe harbor” formula that provides companies a simplified way to determine whether they are subject to the corporate minimum tax on book income.
Baker Tilly Looks to Build National Brand With Moss Adams Merger
Baker Tilly Advisory Group LP, now paired with competitor Moss Adams LLP, aims to build its brand into a “national powerhouse” for its middle market clients, leveraging a private equity investment to expand its services and upgrade its technology.
Tax Management Memorandum
How to Structure Tax-Free Rollovers in Add-On Acquisitions
Private equity sponsors should tailor add-on acquisitions to their particular portfolio companies, in order to achieve the most tax advantageous results—one size does not fit all, says Isaac Grossman of Morrison Cohen.
New CAMT Notice: Reasons Taxpayers Are Breathing a Sigh of Relief
The IRS’s CAMT Notice follows last year’s release of a complex set of proposed rules and provides much-welcome relief as taxpayers await final regulations, say KPMG practitioners.
Career Moves
Jill Lebowitz joined McCarter & English as a partner in its tax, employee benefits, trusts, estates, and private clients practice group in Newark, N.J.
Jon Gaston joined Foley & Lardner as a partner in its new Nashville office.
Rachel Harris joined Proskauer Rose as a partner in its private client services department in Los Angeles.
Daniel Simon joined Alvarez & Marsal Tax as managing director and leader of its US financial services tax practice.
If you’re changing jobs or being promoted, send your submission to TaxMoves@bloombergindustry.com for consideration.
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