IRS Leverages AI to Counter Fraud Amidst Rising Tech-Driven Schemes

The Internal Revenue Service (IRS) is stepping up its game against increasingly sophisticated fraud schemes driven by emerging technologies. With criminals using artificial intelligence to create deepfakes, misinformation, and large-scale financial fraud, the IRS is turning to AI tools to detect patterns, flag risks, and stay ahead of evolving threats.

AI: A Double-Edged Sword in Financial Fraud

According to Jarod Koopman, executive director of cyber and forensics at IRS Criminal Investigations (IRS-CI), online payment fraud has now exceeded $360 billion annually, with check fraud also on the rise. The adoption of AI by fraudsters has made their schemes faster, more effective, and significantly larger in scale.

“What used to take a significant amount of effort, going into some type of a social media-type exploit or a hack, they can now do this with AI that’s much more efficient, much more effective, and certainly much more volume at high speed,” Koopman explained.

To combat these challenges, the IRS is leveraging AI to analyze vast amounts of data, identify fraud patterns, and flag emerging threats. AI also enables the agency to use operational data, third-party financial information, and open-source intelligence more effectively.

Expanding IRS-CI’s Capabilities

The IRS-CI, the sixth-largest federal law enforcement agency, investigates tax-related crimes (50%-60% of its casework), but also corruption, terrorism funding, organized crime, and money laundering. Despite its relatively small workforce of about 3,500 employees—2,500 of whom are special agents—the agency is embracing technology to maximize its impact.

• Recent Investigations: IRS-CI recently played a key role in a global crackdown on child exploitation material funded through cryptocurrency transactions, leading to 300 arrests worldwide.

• Staffing Improvements: Thanks to increased resources, IRS-CI has grown its workforce to levels last seen in the 1990s and early 2000s. The agency is hiring personnel skilled in international banking, anti-money laundering, cybercrime, and cryptocurrency investigations.

Balancing Innovation and Privacy

While the IRS is exploring AI for various use cases, Koopman emphasized the importance of unbiased implementation and maintaining privacy and data security. The agency is also employing privacy-enhancing technologies that allow encrypted data sharing with law enforcement partners and financial institutions. This enables those organizations to analyze the data or apply models without directly accessing the original source data.

“These technologies are a game changer,” Koopman said, explaining that they enable secure collaboration without exposing sensitive data. “It further enhances the security of the data the government has and that all of these partners have, without constantly shifting around information that’s pretty valuable to criminals and others.”

A Broader Fight Against Fraud

In addition to its use of AI, the IRS is tackling fraud across the trillion-dollar cryptocurrency market, which provides new avenues for criminals to conceal their activities. Koopman estimates that about 50-60% of IRS-CI’s cases are tax-related, with the rest spanning other financial crimes.

“From a general standpoint, we’ve seen not only fraud continue on the rise, but more sophisticated frauds in the way of AI, cyber components, in addition to traditional financial fraud,” Koopman noted.

Expanding AI Use Across IRS Operations

The IRS is exploring ways to expand its use of AI beyond fraud detection, including tax collection efforts. Under the Inflation Reduction Act, the agency has already recovered over $1.3 billion from approximately 1,600 millionaires who failed to pay overdue taxes or file returns in recent years.

Although AI isn’t currently used in these tax recovery cases, Jarod Koopman, executive director of cyber and forensics at IRS-CI, noted that the agency is actively reviewing AI as a potential tool for such scenarios.

“They want to make sure what they’re doing is implementing in a way that is very unbiased and done in a way that’s governed and utilized to ensure both the privacy, but also the integrity of the application of the tax law,” Koopman explained.

This cautious but forward-looking approach highlights the IRS’s commitment to integrating AI in a way that enhances efficiency while upholding fairness and data security.

What This Means

The IRS's integration of AI signals a transformative shift in how federal agencies combat fraud and enforce tax laws in an increasingly digital world. As fraudsters leverage AI to develop more sophisticated schemes, the IRS’s adoption of advanced technologies is essential to leveling the playing field.

However, the move toward AI-driven enforcement raises critical questions about privacy, ethics, and fairness. For instance:

• Privacy Protections: As the IRS implements privacy-enhancing technologies to securely collaborate with law enforcement and financial institutions, maintaining public trust will depend on transparent practices and robust safeguards.

• Balancing Act: While AI can flag potential fraud more efficiently, human oversight remains crucial to ensure fairness and prevent misuse. Koopman’s emphasis on unbiased implementation underscores the IRS’s awareness of these risks.

• Scaling Up: With a relatively small workforce compared to other federal law enforcement agencies, the IRS's success will hinge on how well it integrates AI into its operations without overwhelming its personnel or compromising data security.

Looking ahead, the IRS’s broader use of AI—whether in fraud detection or recovering unpaid taxes—sets a precedent for other government agencies grappling with the challenges and opportunities of emerging technologies. The agency’s ability to strike a balance between efficiency, ethical governance, and public accountability will ultimately shape its role in combating financial crime in the digital era.

Editor’s Note: This article was created by Alicia Shapiro, CMO of AiNews.com, with writing, image, and idea-generation support from ChatGPT, an AI assistant. However, the final perspective and editorial choices are solely Alicia Shapiro’s. Special thanks to ChatGPT for assistance with research and editorial support in crafting this article.