The Safe Adoption of AI in Tax Administration: Forging a Path Forward
Tax authorities across the globe are increasingly exploring the use of artificial intelligence (AI) to modernize enforcement, enhance compliance, and improve taxpayer services. This growing interest is evident in initiatives by state governments and tax agencies investing in AI-powered tools. For example, Law360 reports that Michigan Governor Gretchen Whitmer has proposed $1.3 million in funding for AI-driven data analytics and fraud prevention within the state’s Department of Treasury. Similarly, tax leaders in New York, New Jersey, and Louisiana are investigating AI-powered chatbots to improve taxpayer engagement and streamline service delivery.
The growing adoption of AI in tax administration is not without challenges. While AI offers significant potential, tax authorities must balance innovation with accuracy, privacy, and governance to ensure effective implementation.
The Benefits and Risks of AI in Tax Administration
AI has the potential to transform tax administration in several ways. Some of the most notable opportunities fall in the areas of fraud detection, risk assessment, taxpayer services, and decision making:
- Enhanced Fraud Detection: AI-driven analytics can uncover hidden tax fraud patterns, identifying discrepancies between reported and actual income.
- More Accurate Risk Assessments: AI models can prioritize high-risk audits, ensuring resources are allocated efficiently.
- Improved Taxpayer Services: AI-powered chatbots and automation can enhance customer interactions, reducing response times for taxpayer inquiries.
- Faster Decision Making: AI accelerates tax audits and compliance checks, improving enforcement efficiency.
AI also presents risks that tax authorities must address in order to leverage the advantages it brings. There's already been much discussion around generative AI hallucinations and the like, and these concerns can pose great risk when it comes to administering tax compliance in an accurate, fair and unbiased way that respects taxpayers' privacy.
- Accuracy & Reliability: AI must produce precise results to avoid misidentifying taxpayers or generating incorrect audit targets.
- Data Privacy & Security: Given the sensitive nature of taxpayer information, strict safeguards are required to protect data from breaches or misuse.
- Legal & Governance Challenges: Governments must determine how existing tax laws apply to AI-generated decisions and ensure compliance with regulations.
- Public Trust & Transparency: AI adoption in tax adminstrations must be fair, unbiased, and explainable to maintain taxpayer confidence.
To address these concerns, Law360 recently reported that the Federation of Tax Administrators (FTA) is developing a white paper to guide tax agencies in AI adoption. According to the article, the FTA white paper will cover governance policies, legal frameworks, pilot evaluations, and future AI applications—ensuring a responsible and effective approach.
To harness AI’s power while safeguarding against risks, tax agencies should consider the following best practices:
· Prioritize Transparency & Explainability –AI-driven decisions should be clear, traceable, and backed by understandable methodologies to ensure taxpayer trust.
· Invest in Accuracy & Model Refinement – Before deployment, AI models should be thoroughly tested to minimize errors and bias.
· Adopt Strict Data Privacy Protections – AI tools should comply with national and international data security regulations to protect taxpayer information.
· Use AI as an Assistant, not a Replacement – AI should enhance human-led investigations, not entirely replace tax professionals.
· Continuously Monitor & Improve AI Models – AI tools should be regularly evaluated and updated to align with evolving tax laws and economic conditions.
By implementing these safeguards, tax authorities can ensure that AI solutions enhance compliance efforts without compromising integrity or fairness.
“Identifying noncompliance is the holy grail of AI for tax administrators.”
How IVIX is Uniquely Positioned to Help Tax Authorities
At IVIX, we understand the challenges tax authorities face in adopting AI while ensuring accuracy, compliance, and transparency. Our AI-driven platform is purpose-built for tax enforcement, helping agencies identify tax noncompliance with unprecedented accuracy.
· Open-Source Intelligence (OSINT) – As explained in our recent blog, IVIX draws from publicly available data across the web, which delivers more accurate and complete assessment of hidden business activity than proprietary datasets can. And because OSINT uses only legally accessible data, it is a non-intrusive, ethical, and respects data privacy laws.
· Advanced Data Analytics – IVIX’ AI models, which were purpose-built for tax, process the vast datasets we collect, uncovering patterns of underreported income, fraud, and evasion. IVIX does this at speed and scale, for many thousands of subjects within a fraction of the time it can be done manually.
· Automated Noncompliance Detection – IVIX gives tax authorities highly accurate, pre-vetted leads, ranked by impact, thereby streamlining case selection and audit prioritization, so tax agencies can focus resources on the highest-risk cases.
· Privacy & Compliance at the Core – IVIX is designed with strict data protection measures to ensure compliance with legal and ethical standards.
The California Department of Tax and Fee Administration’s Director Nicolas Maduros, who was recently named the new secretary of California’s Government Operations Agency (GovOps), told Law360, “Identifying noncompliance is the holy grail of AI for tax administrators.” IVIX is uniquely positioned to deliver on this promise, helping tax agencies achieve smarter, more effective tax enforcement.
The Future of AI in Tax Administration
As AI technology evolves, tax agencies must remain adaptable, leveraging innovation to stay ahead of emerging compliance challenges. The FTA’s ongoing AI research and white paper development reflect the growing role of AI in tax enforcement.
To ensure AI’s responsible adoption, tax agencies must collaborate, share best practices, and continuously refine their AI-driven compliance strategies. With AI solutions like IVIX that are purpose built for tax compliance, tax authorities can enhance enforcement, optimize operations, and build a fairer tax system for the digital age.
Conclusion
AI is poised to transform tax administration, offering tax agencies the ability to detect fraud, streamline enforcement, and improve taxpayer services.However, successful AI adoption requires careful governance, accuracy, an da strong commitment to data privacy.
IVIX provides the AI-powered solutions tax authorities need to navigate this shift—helping them unlock the full potential of AI while ensuring fairness, transparency, and compliance. As tax authorities continue exploring AI, those who embrace these tools responsibly will lead the future of data-driven tax enforcement.
Learn more about AI-driven tax compliance at IVIX.ai
