How AI could shrink America’s $1 trillion tax gap

The United States loses approximately $1 trillion annually in uncollected taxes, presenting a significant challenge that artificial intelligence and modernized systems could help address.

The scale of the problem: The U.S. tax gap, representing taxes owed but unpaid, amounts to nearly 20% of potential revenue, dwarfing the rates seen in other developed nations.

• The U.S. national debt has surpassed $36 trillion, exceeding the combined debt of over 170 other countries
• Denmark, by comparison, maintains a tax gap of less than 2% of revenue
• The annual tax gap alone could cover the entire interest payment on U.S. debt while potentially enabling tax reductions

Root causes of the crisis: The U.S. tax system’s complexity and outdated infrastructure create significant barriers to efficient tax collection and compliance.

• The tax code spans over 100,000 pages of complex regulations
• The IRS continues to rely on technology infrastructure dating back to the 1960s
• In contrast to countries like Sweden, where tax filing takes minutes, U.S. taxpayers often spend months on the process

Current approach limitations: The IRS’s traditional enforcement strategies have proven inefficient and costly.

• Recent $60 billion funding from the Inflation Reduction Act has primarily funded personnel rather than technology
• More than half of wealthy taxpayer audits result in no changes
• Each audit costs approximately $100,000 to conduct

AI-powered solutions: Modern technology offers several promising approaches to reduce the tax gap.

• AI-powered call centers could provide pre-filing assistance and reduce errors
• Automated systems could perform real-time error detection and prevention
• Smart filling systems could flag inconsistencies and detect underreporting during the filing process
• Up to 30% of audits could be automated according to McKinsey research

International precedent: Several developed nations have successfully implemented AI strategies in their tax systems.

• Countries like Spain and France have demonstrated the effectiveness of AI in tax administration
• These implementations provide proven models for U.S. modernization efforts
• Success stories show the potential for significant revenue recovery through technological innovation

Looking ahead – transformation possibilities: The combination of public support and technological capability creates a unique opportunity for meaningful reform.

• With 93% of Americans viewing tax payment as a civic duty, there is broad support for improving the system
• The potential to recover a significant portion of the $1 trillion annual tax gap presents a compelling case for modernization
• Success would require shifting from a personnel-heavy approach to a technology-first strategy with targeted human intervention for complex cases

Critical considerations: While AI and modernization present promising solutions, implementation must be carefully managed to ensure fairness, accessibility, and effectiveness while maintaining taxpayer privacy and security.