5 Ways IRS Modernization Efforts Are Reshaping Lending Risk (And What Lenders Need to Know) Published November 13, 2025
Amid funding cuts and staffing turmoil, the IRS is undergoing its most significant transformation in decades with a strategic embrace of technology.
Developments in recent years show the agency deploying new tools not just for audit selection, but across fraud detection, taxpayer services, and enforcement operations, funded by programs like the Inflation Reduction Act.
AI is infiltrating every corner of the financial sector, and the IRS’s modernization efforts are creating new dynamics across tax enforcement, fraud detection, and taxpayer services. As the agency continues to face funding clawbacks, the environment is increasingly complex. If you’re a commercial lender navigating tax-related risks, gaining an understanding of these shifts will help you protect your portfolio and make smarter lending decisions in a constantly changing landscape.
1. Criminal Investigation Battles Tech-Enabled Fraud
The IRS Criminal Investigation division is deploying advanced AI tools to combat technology-enabled fraud schemes. As fraudsters increasingly use deepfakes, synthetic identities, and AI-powered bots to target financial institutions, the agency is scaling its investigative capabilities to match.
Fraud targeting small business lending programs has surged, with some reports showing increases of more than 70% since the pandemic. Another study found that a quarter of American small businesses have been targeted by generative AI scams in the past year. As a direct result, the IRS is using AI to combat both AI-powered fraud and traditional fraud schemes.
Key Takeaway: The IRS is leveraging AI to counter advanced fraud schemes targeting financial institutions and small businesses.
2. AI-Powered Audit Selection Targets High-Risk Borrowers
Gone are the days of random audit selection. The IRS now uses sophisticated AI algorithms combined with subject matter expert review to target high-risk taxpayers with laser precision.
Last year, the agency completed audits of 76 large corporations and partnerships, leveraging technology focused on complex structures that traditional methods might miss. This initiative is increasing the crackdown on collections that were started under the previous administration.
For commercial lenders, this creates both opportunities and risks. Borrowers in high-scrutiny segments may face more frequent audits affecting their financial stability. However, increased enforcement catches non-compliant taxpayers and encourages voluntary compliance among all others, improving overall tax compliance rates.
Still, the Treasury Inspector General warns that the IRS needs to better leverage examination results to improve these AI models. The technology isn’t foolproof, and while AI helps to make enforcement more targeted, it doesn’t eliminate the need for thorough due diligence.
Key Takeaway: AI-driven audit selection can improve enforcement precisions but may introduce new risks and considerations.
3. Transparency Gaps Create Compliance Uncertainty
Despite technological advances; significant transparency issues remain. The Electronic Tax Administration Advisory Committee has raised concerns about the agency’s lack of public disclosure regarding AI use, governance, and data-sharing practices.
Advisory leaders want clearer public disclosure on AI applications, including a republished AI use case inventory and plain-English explanations of how these systems work. This lack of transparency creates challenges for lenders trying to understand audit risk factors and compliance requirements.
The agency has established interim AI governance policies, including appointing a Responsible AI Official. However, the absence of detailed performance metrics makes it difficult for lenders to fully assess how AI might impact their borrowers’ tax situations.
Key Takeaway: Limited public transparency around IRS AI use may create uncertainty for lenders seeking to assess audit risk and comply with evolving governance standards. Lenders should also encourage policy advocates and membership groups to advocate for greater transparency on their behalf, helping to establish clearer regulatory expectations and risk assessment frameworks.
4. Tech Acceleration Currently on Pause
As funding cuts at the agency move forward, modernization efforts will slow. Earlier this year, the IRS paused certain modernization investments in 2025 to re-evaluate priorities in light of AI technology developments. This reset resulted in a new framework focusing on nine key initiatives, including unified APIs, paper reduction, and improved digital services.
While the Government Accountability Office reports that this pause didn’t disrupt the 2025 filing season, it signals a more measured approach to technology implementation and that legacy systems aren’t going away just yet.
Key Takeaway: For lenders, some promised digital improvements may take longer to materialize—and in an ideal scenario, will be more robust when deployed.
5. Human Oversight Remains Critical
Perhaps the most important lesson from IRS modernization is that technology alone isn’t sufficient to manage IRS operations. The Treasury Inspector General for Tax Administration’s (TIGTA) recommendations emphasize the need for stronger feedback loops, performance evaluation, and human oversight in AI-assisted processes.
AI can help reduce fraud on an individual and institutional scale. But we need to accommodate its limitations as much as we embrace its utility.
For lenders, this means AI tools should enhance—not replace—traditional verification methods and human expertise. The most effective approach combines AI-powered screening with human review and trusted data sources to create comprehensive risk assessment frameworks. Organizations should also start establishing AI governance protocols, from bias monitoring to transparency requirements and model validation to ensure responsible use and to maintain regular compliance as AI oversight evolves.
Key Takeaway: Despite AI advancements, human oversight remains essential for effective fraud prevention, responsible use, and maintaining compliance integrity.
Preparing for the New Reality
The IRS’s modernization efforts represent a fundamental shift in tax enforcement and taxpayer services. For lenders, successfully navigating the evolving tax landscape requires understanding these changes and adapting accordingly.
Amidst all the changes this year, it’s clear that the state of modernization at the IRS will continue to shift, and AI may play a larger role in IRS operations. Thriving in a rapidly changing landscape requires quick adaptation—lenders who prioritize understanding modernization efforts and roadmaps will have significant competitive advantages.
