Money Management

The IRS is getting in on the AI tech trend to fight tax cheats. Read on to find out who the IRS is focusing on and how to avoid an audit. 

Artificial intelligence (AI) is a popular topic for tech companies these days, but the use of the technology has lots of potential far beyond fancy chatbots. The IRS thinks it can implement AI to help sift through tax returns and find people who are trying to avoid paying taxes.

Tax cheats cost the IRS an estimated $1 trillion annually, and the agency is eager to collect the money that it’s owed. A recent infusion of nearly $80 billion into the IRS over the next 10 years, thanks to the Inflation Reduction Act, gives the IRS new resources to find discrepancies in tax filings.

Here’s how the IRS will scrutinize tax returns using AI, who it’s targeting, and some tips for avoiding an IRS audit.

How the IRS is using AI to look at tax filings

The good news is that most taxpayers won’t fall under the additional scrutiny of artificial intelligence. That doesn’t mean you shouldn’t file your tax returns correctly, of course, but most people shouldn’t worry about the potential for an audit based on the new AI implementation.

The audits won’t increase for people making less than $400,000, and the IRS says it will focus on very high earners — people with incomes above $1 million — who also have more than $250,000 in recognized tax debt. The IRS says 1,600 taxpayers in this category owe hundreds of millions of dollars in taxes.

The agency is also focusing its attention on partnerships (including hedge funds, real estate investors, and law firms) and large corporations. By using AI, the IRS says it will be able to use machine learning to more closely examine specific areas of tax filings from both groups that have traditionally received limited scrutiny.

The IRS is just getting the AI system up and running and expects to increase the use of this technology in the coming years as it tries to ramp up its efforts to collect taxes from wealthy individuals and corporations.

It’s also worth mentioning that the IRS said there are three “priority areas” that it’s focusing on in 2024:

Reporting of digital assets, like cryptocurrenciesPeople with a foreign financial account but who have failed to file a Foreign Bank and Financial Accounts (FBAR) formLabor brokers who may be making fraudulent payments to shell companies

So, for example, if you’re not a high earner but you do own digital assets, you may find that there’s additional reporting or more questions involving your cryptocurrency investments, even if your returns are not being checked by AI.

How to avoid a tax audit

If you’re worried about the potential of being audited by the IRS, the best way to avoid having it happen is to honestly report all of your income and not claim deductions that you’re not entitled to take.

If you’re still nervous about audits, two good ways to help avoid them are to hire a tax professional or use tax preparation software. Both can help you ensure you report all of your income and get the correct deductions.

I once paid way too much money to hire a company to prepare my taxes, which was bad enough, but I also accidentally scheduled the appointment with the tax preparer on Feb. 14. Worst Valentine’s Day date ever. So, if you hire a tax expert, maybe plan ahead better than I did.

Tax prep software often has audit checks that it can run to give you even more peace of mind that you’ve done your taxes correctly, and some even offer additional audit support. The additional service, which you pay extra for, will defend you against the IRS or your state if you’re audited.

And if your taxes are pretty straightforward — you’re not self-employed, and you take the standard deductions on your tax returns — you may benefit from using free tax prep software.

No matter which avenue you choose, the most important thing to do to avoid an audit is to be truthful about the information you put on your returns — whether AI will take a look at it or not.

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Personal loans and credit cards are popular ways to borrow money. Here’s what to consider when choosing between them. 

If you need to borrow money to fund a purchase over time, credit cards or personal loans are usually the options you consider. Both can be used to buy almost anything you want, from holiday gifts to vacations.

But which one is right for you? To decide if you should use a credit card or a personal loan, here are a few key questions to ask yourself.

How much do I need to borrow?

The first thing to think about is the amount you need to borrow. With a credit card, you can only charge purchases up to your credit limit. If you have a card with a large credit limit, you may be able to borrow tens of thousands of dollars. But many cards come with lower limits, especially if you’re a new customer. You may be limited to charging a few hundred dollars, which might not be enough depending on your borrowing goals.

Personal loan lenders, on the other hand, usually allow you to borrow a lot more than you could charge on a credit card (although eligibility does vary depending on income, existing debt, and credit score). It’s not uncommon to find a personal loan lender offering loans of up to $100,000, so if you must borrow a large amount, a personal loan could be a better bet.

On the other hand, personal loan lenders also have minimum requirements. For example, you might need to borrow at least $1,000 or $5,000. If you need to finance something small, such as charging $50 worth of groceries until payday, a credit card could be a better bet.

How quickly can I pay off the loan?

The next big consideration is your repayment timeline. Personal loans come with fixed schedules for repayment and you’ll usually have a choice of loan terms, such as repaying your loan over two, five, or seven years. Since personal loans have predictable schedules that allow you to pay off your debt over a designated time, you’ll know upfront exactly when you’ll be debt-free and what total interest costs will be.

Credit cards are different. You usually have to make only a small minimum payment each month. This means you could pay less on your cards each month than your personal loan payment would be. The problem is, the card’s high rate and low minimum payment could mean you’ll be in debt for decades. If you want a definite payoff date, a personal loan could be best.

On the other hand, there are 0% APR credit cards that allow you to borrow without paying interest for a set period. If you’re confident you could repay your card’s full balance prior to the 0% rate expiring, this option could be more affordable than a personal loan.

How quickly do I need the money?

Finally, consider your timeline for when you need the funds. If you already have a credit card with available credit, you can start charging stuff right away so there will be no delay if you have a truly pressing expense. But you’ll have to apply if you want a personal loan.

Many personal loan lenders provide quick — sometimes almost instant — decisions on whether you can borrow. And some offer same day funding, but not all do. If you need money immediately, a card may be your best option. But if you can wait a day to get the funds in your checking account, a personal loan could be a potential solution too.

By asking yourself these questions, you can decide what the best borrowing option is. Once you’ve made your choice, get the funds you need by applying for a personal loan or using your card — then get serious about repaying what you’ve borrowed, so interest costs won’t jeopardize your financial goals.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Retiring with millions of dollars gives you more choices later in life. Read on to see how you can amass a $5 million nest egg. 

The average 60-something today has $112,500 in retirement savings, according to Northwestern Mutual. But what if you manage to wrap up your career with a far more robust IRA balance than that?

If you manage to end your career with $5 million in savings, you’ll no doubt be in the minority. But that might also give you plenty of options once your time in the workforce has come to a close.

A pretty sweet retirement

A $5 million nest egg won’t necessarily make it possible to travel 360 out of 365 days a year or live in a 5,000-square-foot mansion. But it could mean living very comfortably once you’re no longer working.

To see what a nest egg that large might mean for your retirement, let’s break down $5 million into annual income. Financial experts have long recommended using the 4% rule for retirement savings, which essentially means you’re taking out 4% of your balance every year. And it’s important to set a framework for tapping your nest egg so your money doesn’t run out.

But more recently, financial professionals have begun to make the argument that 4% is too aggressive a withdrawal rate given increasing life expectancies. So for the purpose of this discussion, we’ll assume you’re retiring with $5 million in your mid-60s and are sticking with a 3% annual withdrawal rate.

In that case, you’re looking at an annual income from your savings of $150,000. Seeing as how you’ll likely have some Social Security benefits on top of that, it’s clear that a $5 million nest egg could make for a nice lifestyle. If you no longer have a mortgage to deal with, on more than $150,000 annually, you could take a nice vacation every few months or a modest trip every month while still having money left over to do things like dine out and improve your home.

Of course, one thing you’ll need to account for is taxes. If you have a Roth IRA, withdrawals from your savings won’t be subject to taxes in retirement. But with a traditional IRA, the opposite will hold true, which means $150,000 in withdrawals is not $150,000 in spendable cash. Even so, though, you’ll likely end up with a nice sum to live on.

How to get to a $5 million nest egg

You might think that retiring with $5 million to your name is merely a pipe dream. But if you commit to saving and investing for retirement from a young age, you may be surprised at how much money you wind up with.

Let’s say you earn a $60,000 salary throughout your career and commit to saving 10% of it, or $6,000 annually, for retirement. Let’s also assume your IRA generates an average annual 10% return, since that’s consistent with the stock market’s average. If you start contributing to your savings at age 22 and continue doing so through age 69, you’ll end up with a nest egg worth around $5.2 million. Really.

You might assume that anyone retiring with $5 million is apt to have had a six-figure income or a lot of generational wealth passed down to them. But that’s not always the case. And as you can see, it’s more than possible to build a $5 million nest egg of your own through consistent saving and investing. So if you like the idea of a $5 million retirement, commit to it and make it happen. And then get ready to enjoy your senior years to the fullest.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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