The advent of AI and machine-learning tools is poised to revolutionize the way that tax authorities conduct audits and identify potential areas of noncompliance. In fact, the $80 billion IRS budget includes the objective to deliver cutting-edge technology, data, and analytics. Unfortunately, multinational enterprises (MNEs) that are not prepared for this future reality risk getting caught off guard and facing significant penalties for noncompliance.
As a tax expert with over 20 years of experience, I know that tax audits can be extremely time-consuming and frustrating, dragging on for years (Medtronic and Softmoc are companies that come to mind when thinking about stressful, lengthy audits). Imagine the enhanced reach of a tax authority that can use AI to analyze large amounts of data from historical tax filings, identify patterns, and flag potential issues or inconsistencies. AI can help identify potential issues and patterns that suggest transfer pricing manipulation. The increased likelihood of audits, and larger assessments of taxes, penalties, and interest is unfortunately, an inevitability. Furthermore, as tax authorities become more sophisticated in their use of AI, using sources like social media or other public information, they may be able to identify tax risks that were previously unknown or hidden. It’s now a question of timing.
Since deploying new technology can be a slow and bureaucratic process, especially for government agencies, it is possible that the IRS would spend several years vetting and testing new technology before unleashing it on a wide scale. This delay could be good news for agile and proactive MNEs as it presents a window to take certain steps to mitigate potential tax risk.
For example, MNEs could invest in technology and data analytics of their own. By using AI and machine– learning tools to perform a preliminary analysis of their own tax data, MNEs can stay ahead of the curve and address any issues before they are flagged by tax authorities. MNEs can also manage and mitigate risk by conducting internal audits and reviewing their transfer pricing arrangements regularly, keeping in mind that audit-ready documentation will give them an edge in response to tax audits or investigations.
Today, MNEs should focus on improving their tax compliance processes, deploying technology to streamline and reduce the risk of errors or oversights. In fact, AI-enhanced technology should be leveraged to create more strategic tax professionals armed with better data analysis and intelligence. If MNEs are to avoid the significant penalties and reputational damage that can result from noncompliance with tax laws, awareness and preparation will be key.
