IRS Takes on Fraud with AI as Criminals Adapt to New Technology

In an era where technology evolves rapidly, the Internal Revenue Service (IRS) faces a growing challenge: sophisticated fraud schemes powered by artificial intelligence (AI). Criminals are employing these advanced tools to commit a staggering amount of fraud, with online payment fraud alone surpassing $360 billion annually. In response, the IRS is mobilizing its own resources, including investigators trained in high-tech crime-fighting techniques, to stay ahead of these growing threats.

The Rise of AI in Fraud

Criminals are increasingly leveraging AI to streamline their operations. Jarod Koopman, the executive director of cyber and forensics for IRS Criminal Investigations (IRS-CI), recently highlighted that what once required extensive human effort can now be executed efficiently by AI. “They can now do this with AI that’s much more efficient, much more effective, and certainly much more volume at high speed,” Koopman stated.

The IRS is aware that this technological arms race is serious. Traditional forms of check fraud are also on the rise. As AI continues to change the landscape of criminal activity, the IRS is preparing to fight back.

IRS’s Commitment to Recovery and Enforcement

Under the Inflation Reduction Act, the IRS has made strides in tax recovery, bringing in over $1.3 billion from about 1,600 millionaires who had outstanding tax obligations. While the IRS-CI is not currently employing AI tools for tax recovery, it is actively investigating how to use AI to enhance these processes. “They want to make sure what they’re doing is implemented in a way that is very unbiased,” Koopman explained. This careful approach aims to protect taxpayer privacy as well as the integrity of tax laws.

Through its enforcement operations, the IRS is committed to adapting to the technological landscape that enhances criminal strategies. The agency has noted a pronounced rise in complex fraud schemes that utilize AI, including the development of deepfake technology and misinformation campaigns.

Broadening the Scope of Investigation

Fraud is not the only focus for IRS-CI. Approximately 50% to 60% of its casework relates to taxes; however, the agency also investigates a wide array of financial crimes, including public corruption, funding terrorism, organized crime, drug trafficking, and money laundering. A recent high-profile investigation led to the arrest of 300 individuals worldwide involved in child exploitation, funded through cryptocurrency transactions.

As the sixth-largest law enforcement agency in the federal government, the IRS-CI faces unique challenges compared to larger agencies such as the FBI, which has 30,000 to 40,000 employees. In contrast, the IRS-CI operates with about 3,500 staff members, limiting their capacity. Despite this, Koopman emphasized the agency’s adaptability: “We’re also a very small portion of the IRS as a whole… And that’s really helped us, I think, in the long term.”

Investing in Expertise

In an effort to enhance its capabilities, IRS-CI is hiring personnel with specialized skills in areas like international banking, anti-money laundering, and cybercrime, with about 2,500 of its current staff comprising frontline special agents. In recent years, the agency has successfully increased its workforce, a recovery to levels not seen since the late 1990s and early 2000s.

“Over the last couple of years, we’ve actually been able to increase our employees on roles a bit to help continue to meet the demands,” Koopman stated, indicating a commitment to staying updated in the field of financial crime.

Using AI for Enhanced Data Analysis

Currently, the IRS is leveraging AI to improve its efficiency in analyzing vast amounts of data. This includes operational data from past cases and intelligence from various financial institutions. AI empowers IRS investigators to identify patterns of fraud, emerging threats, and other red flags that might go unnoticed otherwise.

Koopman described this process: “AI has certainly made us much more effective and efficient in sifting through that to find patterns.” Importantly, AI is used to flag data trends; it does not make decisions independently. This approach allows IRS employees to delve deeper into leads and make informed decisions based on comprehensive analysis.

Ensuring Data Security

Another piece of the IRS’s strategy relies on new privacy-enhancing technologies. These innovations permit the agency to share sensitive information securely with law enforcement partners and financial institutions through encrypted channels. This system enables partners to run analyses without accessing sensitive source data, thereby maintaining overall data integrity.

“It’s really a game changer… it just further enhances the security of the data that the government has and that all of these other partners have,” Koopman said, underscoring the importance of data protection in modern law enforcement.

Key Takeaways and Future Implications

As criminals increasingly adopt sophisticated AI tools for fraudulent activities, the IRS is stepping up its game. Through strategic hiring, innovative use of technology, and adaptability in its operations, the IRS aims to not only keep pace with fraudsters but also enhance the agency’s ability to enforce tax laws effectively.

Looking ahead, the IRS-CI’s ability to harness AI and improve data security will be critical in maintaining public trust and accountability. As fraud schemes continue to evolve, the IRS is committed to defending against these threats while ensuring privacy and integrity in its enforcement process.