State tax authorities are intensifying their efforts to scrutinize high-income individuals, even as the IRS focuses on the affluent. According to tax experts, New York’s tax department saw a significant surge in audits targeting wealthy taxpayers in 2022. Despite facing budget constraints leading to a reduction in auditors, the department managed to escalate audit activities through the application of Artificial Intelligence (AI).
In 2022, New York witnessed a staggering 56% increase in audits compared to the previous year, reaching a total of 771,000 audits. Simultaneously, the number of auditors in the state decreased by 5% to under 200 due to budget limitations. This paradoxical situation underscores the adoption of AI as a pivotal tool in identifying audit candidates efficiently.
The implementation of AI-generated letters has emerged as a strategic approach adopted by the New York tax department. These letters primarily target affluent remote workers or individuals undergoing changes in tax residency. While the exact motive behind this AI utilization remains ambiguous, it is perceived as a pragmatic response to staff shortages and budget constraints.
Mark Klein, a prominent figure at Hodgson Russ LLP, highlighted the sophistication of AI technology employed by tax authorities. The focus lies on discerning optimal audit subjects, particularly those affluent individuals relocating from high-tax states to jurisdictions offering favorable tax environments, such as Florida or Texas. The rationale behind this strategic focus is evident: pursuing revenue sources among high-income individuals rather than those with lower earnings.
New York City’s status as the global hub of millionaires and billionaires underscores the significance of robust tax enforcement measures. With 340,000 millionaires, 724 centi-millionaires, and 58 billionaires calling it home, the city presents a lucrative tax base. Leveraging AI alongside traditional audit methods enables tax departments to conduct comprehensive assessments, including scrutiny of cellphone records to ascertain taxpayers’ primary locations and corresponding tax obligations.
Klein emphasized New York’s assertive stance in tax enforcement, particularly regarding individuals attempting to claim residency changes while maintaining significant ties to high-tax jurisdictions. The discrepancy between claimed relocation and actual lifestyle patterns often becomes a focal point in audits. Instances like Shakira’s tax dispute, where individuals claim residency in low-tax jurisdictions despite substantial presence elsewhere, exemplify the complexities inherent in tax compliance among high-profile personalities.
The convergence of AI and human auditing expertise heralds a new era in tax enforcement, characterized by enhanced efficiency and precision. Despite facing resource constraints, tax authorities are leveraging technological advancements to maintain robust oversight over high-income taxpayers. As tax departments across the US embrace AI-driven methodologies, the landscape of tax enforcement continues to evolve, emphasizing the imperative of compliance among affluent individuals.
In conclusion, the integration of AI into tax enforcement practices represents a paradigm shift in targeting high-income taxpayers. By harnessing the analytical capabilities of AI, state tax authorities can optimize audit selection processes and mitigate resource constraints. As tax compliance remains paramount in sustaining public finances, the role of AI in enhancing tax enforcement efficacy cannot be overstated.
