South Carolina to Deploy AI for Tax Audit Selection Beginning in 2026

COLUMBIA, S.C. — The South Carolina Department of Revenue will begin using artificial intelligence in 2026 to help select which state tax returns to audit, a move that aligns the state with the IRS and other tax authorities increasingly relying on algorithms to enforce tax law. The plan, confirmed by a report from The Post and Courier, marks a significant technological shift for the state agency. Historically, the SCDOR has selected returns for audit by analyzing information from past filings and cross-referencing data from the IRS and other government sources to identify discrepancies. The introduction of AI is intended to enhance and accelerate this process, allowing the department to analyze millions of returns simultaneously for subtle patterns and anomalies that might indicate non-compliance. In our experience, the shift to AI-driven audits means that tax agencies are no longer just looking for simple math errors. These systems build complex profiles of what a business's financials should look like based on its industry, location, and size, and any significant deviation can trigger a flag. For small and mid-sized businesses, this raises the stakes on meticulous record-keeping for everything from business travel expenses to claiming tax credits. The AI is designed to cross-reference data from multiple sources, making it harder for inconsistencies to go unnoticed. Proving the legitimacy of every deduction and credit is paramount. This is precisely the environment where professional guidance becomes critical. Our firm's tax preparation and compliance services are designed to ensure our clients' filings are accurate, well-documented, and prepared to withstand this new level of automated scrutiny. Business owners concerned about their compliance can contact C&S Finance Group LLC at csfinancegroup.com to develop a proactive strategy. This initiative in South Carolina reflects a broader trend in tax administration. The Internal Revenue Service has already begun using AI more extensively to tackle the national “tax gap”—the difference between taxes owed and taxes paid. The IRS estimated this gap to be approximately $496 billion annually for the 2014-2016 period. By deploying machine learning models, tax agencies aim to improve efficiency and more effectively identify returns with a high potential for error or fraud, especially as they face staffing constraints. These AI systems function by building a financial profile of what a typical taxpayer or business in a specific situation should look like. According to tax law experts, when a filed return deviates significantly from that algorithmically generated expectation, it is flagged for review. The technology can analyze relationships between related business entities, compare reported income against lifestyle indicators gathered from other data sources, and scrutinize specific high-risk areas. For instance, the IRS is using AI to match flight records and passenger manifests against claimed business aviation expenses to verify their legitimacy. However, the growing reliance on AI in tax enforcement is not without controversy. A significant concern is the potential for algorithmic bias. Independent studies of IRS practices have shown that Black taxpayers are audited at rates three to five times higher than other groups. The U.S. Government Accountability Office has identified unintentional algorithmic bias as a potential cause for this disparity. When an AI model is trained on historical audit data that contains existing human biases, it can learn and perpetuate that discrimination in its automated selections. For South Carolina businesses and individual taxpayers, the implementation of this new system underscores the importance of diligent record-keeping. Under state law, taxpayers are required to provide proof of their income, expenses, and the cost of assets if they are audited. In an AI-driven environment, having organized, contemporaneous documentation is the primary defense against a flagged return. The audit process itself will not change dramatically; taxpayers selected for an audit will still receive an official notice from the SCDOR, which may be for a “desk audit” conducted through mail. If a taxpayer discovers an error on a previously filed return, South Carolina law allows them to file an amended return using a new SC1040 form and an accompanying Schedule AMD. Tax professionals often advise that proactively correcting errors can lead to better outcomes than waiting for an audit notice from the state or the IRS. As the 2026 implementation date approaches, South Carolina businesses and residents should monitor for further guidance from the Department of Revenue on the new audit selection process. The program's rollout will likely be watched closely by tax professionals and civil rights advocates to assess both its effectiveness in promoting tax compliance and its fairness in application.