The Australian Taxation Office (ATO) has significantly enhanced its ability to detect tax compliance issues by expanding the use of artificial intelligence (AI) alongside its established data-matching systems. This development aims to improve taxpayer compliance and reduce the incidence of incorrect or fraudulent tax returns.

The ATO employs AI technology to analyze extensive datasets, identify patterns, and assess risks related to unusual claims, under-reporting, and potential tax fraud. According to Geraldine Magarey, group executive of policy and international at Chartered Accountants ANZ, the era of “creative” tax returns is largely over. She noted that while some incorrect claims still occur, the likelihood of them going undetected has diminished substantially due to advanced technological measures.

Assistant Commissioner Anita Challen clarified that much of the public perception surrounding AI in the tax system mainly pertains to the ATO’s long-standing data-matching practices. These systems securely gather information from a variety of third-party sources, including banks, registries, cryptocurrency platforms, and other government agencies, to pre-fill relevant details in tax returns.

Challen explained that the specific use of AI and machine learning focuses on recognizing unusual patterns compared to peer taxpayers. For instance, if a deduction claim appears atypical, the ATO may prompt the taxpayer to review the item before lodging their return. Despite the automation, human oversight remains integral to the process to ensure accuracy and fairness.

The ATO already collects and pre-fills more than 100 million pieces of information annually, yet errors in tax returns persist. Challen highlighted common mistakes, such as failing to declare all income sources, including earnings from full-time or casual jobs, self-employment, cash work, government payments, online ventures, the sharing economy, crowdfunding, foreign income, interest, rental properties, partnerships, trusts, and dividends.

Additionally, incorrect claims for work-related expenses and reliance on inaccurate tax advice from friends, social media, or unverified AI sources have contributed to ongoing compliance challenges. The ATO continues to emphasize the importance of accurate reporting and the growing role of technology in supporting taxpayer compliance while identifying discrepancies.