Tax specialists from PricewaterhouseCoopers (PwC) detailed the IRS’ growing reliance on data analytics and artificial intelligence for enforcement, a renewed focus on compliance hot topics, and the expansion of early dispute resolution programs and automated penalty relief during a July 30 webcast.
IRS embraces data, AI in enforcement shift
The IRS is advancing its modernization goals by leaning into data analytics and AI, said Mireille Khoury, a managing director with PwC. In February, the agency released an AI governance policy emphasizing public trust and the privacy constraints of IRC § 6103. Khoury said the technology is already being deployed for case selection, using machine learning to score returns for risk, and for taxpayer service and synthesizing public comments during rulemaking.
The push extends to a “zero paper effort” aimed at reducing reliance on correspondence. “The IRS spends $600 million a year processing the 90 million pieces of mail that it gets each year,” Khoury said.
The agency has also set guardrails for practitioners. Khoury noted that the Office of Professional Responsibility issued guidelines under Circular 230 reminding tax professionals that AI is “not a substitute for human judgment.”
Kristina Novak, a principal in PwC’s Transfer Pricing Services, said the IRS still expects to see the underlying work even when AI is used. Whether a taxpayer relies on AI prompts for benchmarking or other analysis, the formulas and methodology “still needs human judgment, human sort of overview, oversight,” she said. The modernization effort also includes expanded e-filing for forms previously accepted only on paper, such as those for insurance companies, regulated investment companies, and real estate investment trusts.
Economic substance, transfer pricing lead compliance ‘hot topics’
Alexis MacIvor, a principal with PwC, said the codified economic substance doctrine has drawn renewed attention since a 2022 directive removed the requirement for executive-level approval to assert it, and after the IRS secured its first courtroom win under the doctrine last year.
Novak described the doctrine’s application to transfer pricing as a “huge sea change.” Rather than simply determining an arm’s length price, she said, the IRS can invoke judicial doctrines to disallow a transaction’s tax benefit entirely — a “really harsh” result that can shift years of income back to the United States as if a transfer of intellectual property never occurred.
Examiners are now asking about intent and business purpose in transfer pricing audits, Novak said, making it important for taxpayers to document “the business purpose and how the transaction is changing their economic position.” Contemporaneous records, she added, are “incredibly effective” if an issue surfaces later in an audit.
Novak flagged intercompany financing as another focus area, pointing to recent guidance on implicit support and the IRS’ revived use of the commensurate-with-income standard under IRC § 482 to make retrospective adjustments on transferred intellectual property. Other areas under scrutiny include energy credits enacted under the Inflation Reduction Act, P.L. 117-169, and the research credit.
Early resolution tools, new penalty relief offer taxpayers options
Even as examinations increase, the IRS is promoting tools for early dispute resolution. Khoury said the agency is more willing to use programs like Fast Track Settlement to resolve issues sooner, with about 80% of those cases settled by agreement in roughly 100 days. She urged taxpayers who had a poor experience years ago to reconsider. “Today is quite different,” she said.
The shift has coincided with the elimination of the acknowledgement of facts information document request, which taxpayers found added time but not value.
On penalties, Deb Palacheck, a managing director with PwC, said the IRS is launching a new Automatic Exemption from Penalty program to replace First Time Abate beginning in summer 2026. The relief covers failure-to-file, failure-to-pay, and failure-to-deposit penalties for most common return types, including the 1040, 1065, and 1120 series, and applies to taxpayers with a clean three-year compliance history.
Palacheck called the change “a good news item” that saves time for both taxpayers and the resource-constrained agency. Beginning with the 2025 tax year, relief will be applied without a request. “No taxpayer action is required,” she said. Eligible taxpayers will receive a letter confirming that the exemption has been applied.
Practitioners advise proactive audit readiness
PwC specialists urged a proactive approach built on robust, contemporaneous documentation that supports key positions before an audit begins. That stance extends to the exam itself, particularly in newer areas like energy credits, where practitioners can help educate agents.
“Sometimes it’s way more efficient for the taxpayer to share some of that,” said Nikole Flax, a principal with PwC, rather than “having the agents trying to learn it behind the scenes.”
Taxpayers should not hesitate to engage with exam teams, Flax added. “I wouldn’t be hesitant to be proactive with your exam team, make suggestions of things that you think might work better,” she said. “The way that they’re utilizing some of the procedural tools is much more creative … than there has been in the past.”
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