The IRS is expanding its use of artificial intelligence (AI) and data analytics across enforcement and taxpayer service, while also rolling out new tools designed to resolve disputes and provide penalty relief more efficiently.

Reuters reports that during a recent PwC webcast, tax specialists said the IRS is increasingly using machine learning to identify higher-risk returns for examination and applying AI in areas such as taxpayer service and rulemaking. At the same time, practitioners remain responsible for the work produced with these tools. Mireille Khoury, a managing director at PwC, noted that guidance under Circular 230 makes clear that AI is “not a substitute for human judgment.”

That expectation is particularly relevant in areas receiving increased enforcement attention, including transfer pricing, intercompany financing, economic substance and certain tax credits. PwC specialists said examiners are placing greater emphasis on business purpose and contemporaneous documentation, making it important for taxpayers to establish the rationale behind transactions before an audit begins.

The IRS is also expanding options for resolving issues earlier. Fast Track Settlement, for example, has resulted in agreements in roughly 80% of cases within about 100 days, according to PwC.

Penalty administration is changing as well. Beginning with the 2025 tax year, a new Automatic Exemption from Penalty program will replace First Time Abate for many common return types. Eligible taxpayers with a clean three-year compliance history will receive relief automatically. As PwC managing director Deb Palacheck explained, “No taxpayer action is required.”