In its annual update to the IRA Strategic Operating Plan, the tax agency said it is reliant on IRA funds for digitization and other technological innovations after the appropriations process for fiscal years 2023 and 2024 zeroed out its money for modernization. When those IRA funds are exhausted by fiscal 2026, the IRS said automated taxpayer solutions will be cut back and cyber and cloud work will be incomplete, increasing the risk of cyberattacks and system failures.

“The IRS will continue focusing on making improvements and efficient use of funding,” IRS Commissioner Danny Werfel said in a press release. “We highlight accomplishments rather than taking a victory lap because more work remains. But to stress the importance of continuing this momentum, the IRS will continue working to make a difference for the nation’s taxpayers. At the same time, it’s critical that the IRS has stable, secure funding to allow technology modernization and taxpayer service improvements to continue into the future.”

The accomplishments referenced by Werfel run the gamut of digital projects. Over the past year, the IRS said it used IRA funding to expand online services — pointing specifically to improvements with the Where’s My Refund? tool — resulting in fewer phone calls, paper processes and other burdensome tasks for agency workers. Additionally, the IRS continues to tout its Direct File pilot: More than 140,000 returns this tax season were filed electronically through the agency’s program, though its future remains up in the air.

The agency also leaned into artificial intelligence, pairing the technology with advanced analytics to identify “complex partnerships for audits.” The result of that collaboration between data scientists and tax enforcement officials was 60 audits launched on corporations with average assets exceeding $24 billion, in addition to 76 examinations of “the largest partnerships in the U.S. that represent a cross section of industries including hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms, and other industries.”

Ahead of the anticipated funding shortfall two years from now, the agency said it aims to “accelerate” several digitization efforts in fiscal 2025. Those efforts include an expansion of online services and the modernization of foundational agency technology and “aged programming from the point of intake of tax returns and information systems.” Data security will be prioritized in these efforts, the agency noted.

The IRS will also lean into digitization by making as many as 150 non-tax forms available in digital mobile-friendly formats — on top of the 20 it provided in fiscal 2024 — while enabling “scanning at the point of entry virtually” for every paper-filed tax and information return.  

Still, the IRS said that absent “sustained funding,” the agency will fall short of meeting the modernization goals laid out in its report — especially once IRA appropriations run dry and “if inadequate levels of discretionary funding once again result in underinvestment and service gaps.”

“Without help from Congress, taxpayers will have a difficult time finding someone at the IRS to talk to for help in FY 26,” a supplement document to the plan stated. “The consequences will be a return to the low levels of service, technology that does not fully reflect the digital world we live in, and a return to low audit rates that allow some taxpayers to avoid paying what they owe.”

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Speaking Wednesday at the Scoop News Group-produced UiPath On Tour: Public Sector event in Washington, D.C., IRS Commissioner Danny Werfel said the agency is using Inflation Reduction Act funds to continue to modernize systems through AI utilization. While taxpayers can interact with the IRS through paper, at in-person centers and over the phone, Werfel said that employing AI capabilities will allow taxpayers to not have to wait or be put on hold, instead logging on and interacting with those technologies to find the answer to a frequently asked question or challenge. 

Werfel said AI can also assist the agency with automated efficiency to reduce mistakes and strengthen the tax system’s integrity, allowing investigators “to go where scrutiny is needed most.” The technology, according to Werfel, can be used to select the corporations and wealthy individuals most in need of auditing, and leave those who are “playing by the rules” alone.

“We’re gonna need an AI-powered solution to help taxpayers get the answers they need,” Werfel said. “Those solutions have to be developed, increasingly. … We have a strong baseline and momentum in using [IRA] funds, of starting to build AI, build chatbots and other solutions to go after these basic questions, but we’re really just getting started.” 

These tools could also help those who face complicated challenges when it comes to filing, including taxpayers living in vulnerable communities, according to the commissioner. Werfel noted that these populations are more susceptible to fraud schemes and often do not have access to services that investigate suspicious or malicious acts.

“Maybe over time we can increasingly find AI solutions to address” more complicated problems, Werfel said. “But in the meantime, we will continue to have human interaction and expert account managers to help.”

Earlier this year, Werfel testified in front of the House Ways and Means Committee and acknowledged that the IRS is using AI to help identify corporations and individuals with a “higher risk for tax noncompliance.”

During the same hearing, Werfel said that from 2010 to 2022, Congress clawed back the IRS’s budget by 25%, a fact he mentioned again at Wednesday’s event. 

The agency’s use of technology was “stagnant” over that time period, he added, despite the tax system reportedly growing in number of filings and overall complexity over the course of 12 years. 

The IRS reported more than 98 million e-filed returns in 2010, accounting for nearly 70% of total filings. In 2022, the agency reported over 152 million e-filing returns received, almost 92% of the total filings.

During the ACT-IAC/DCI CX Summit in Arlington, Va., last year, Werfel said the IRS was making progress in the push for digitization and needed to address “some real mission critical-risks” with IRA funding. This included improvements to static IRS web tools and hiring staff so that taxpayers had a better chance of getting through to the IRS via phone calls. Werfel said Wednesday that call wait times were down to an average of three minutes this tax season, and the agency saw “the most traffic to IRS.gov we’ve ever had.”

The IRS is also working toward the creation of a prototype validation server, specifically at the Statistics of Income division, Office of Science and Technology Policy Deputy Chief Technology Officer Deirdre Mulligan said during the IAPP Global Privacy Summit earlier this month in Washington, D.C. 

“The [SOI] at the IRS is creating multiple synthetic datasets and administrative tax data and building a prototype validation server using differential, formal privacy methodologies that empowers researchers to indirectly conduct statistical analyses on that confidential data,” Mulligan said. 

The federal government, she added, wants to “make sure that even researchers are protecting that data.”

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The Government Accountability Office said pricing estimates for Direct File — the electronic filing program made available this tax season for payers in 12 states — didn’t include start-up costs, including for the technology underpinning the system.

“A review by the Treasury Inspector General for Tax Administration found that IRS had no documentation to support the underlying data, analysis, or assumptions used for Direct File cost estimates. We found this as well. A best practice for economic analysis is a transparent methodology, including analytical choices and assumptions,” the GAO wrote, adding that start-up tech costs for “a novel system” of this kind “could be substantial.”

The tax agency, which received tens of billions of dollars from the Inflation Reduction Act to improve the taxpayer experience, budgeted $114 million for Direct File for fiscal 2024. Those funds, which came from appropriations accounts, included $50 million for business systems modernization, $38 million for taxpayer services and $26 million for operations support.

While acknowledging “several uncertainties in the estimates” for the Direct File pilot, the IRS projected an annual price tag to run the program of between $64 million and $249 million, with approximately $21 million in tax preparation cost savings for filers.

The GAO said that a May 2023 report from the IRS to Congress “did not fully align with best practices for cost estimation.” The agency now risks missing several “time-sensitive opportunities” for estimates connected to Direct File, including in cost categories such as customer service, the integration of state returns, supporting additional tax situations and extra labor.

Estimates for technology costs appear to be an especially unwieldy target. In its report to Congress, the IRS said that Direct File would require “frequent updates” given changes to tax law. The underlying technology may also need updating based on customer feedback, the report noted.

In a letter to the GAO’s director of tax policy and administration, IRS Commissioner Danny Werfel said the agency’s cost estimate shortcomings were due in part to “the lack of a baseline or comparable data available.” Information collected during the pilot, Werfel added, “will allow us to develop an accurate baseline for this novel government service.”

Werfel left the door open in his letter for Direct File to be a one-and-done program. Agency officials told the GAO in February that senior IRS leaders “had not decided on the future of the pilot beyond the 2024 tax filing season,” pointing to mitigating factors such as a “lengthy” hiring process to properly staff the program, especially if “new capabilities are to be added.”

Assuming the IRS does move forward with Direct File for the 2024 tax year, the GAO offered three recommendations to the commissioner regarding how the agency can ensure best practices on cost estimates, proper documentation on the program’s benefits and the leveraging of data to inform future decisions about the system. 

“Without collecting the information needed during the 2024 pilot to inform a comprehensive assessment of the costs associated with Direct File and its benefits, IRS risks making longer-term decisions without full information,” the GAO wrote. “Taken together, these steps should help support data-driven evaluation by IRS leadership and members of Congress.” 

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Previous projections for how IRA funding would impact the IRS’s revenue only took into account revenues that were directly connected to increased enforcement staffing. The new analysis added modernization investments — as well as information reporting for digital assets, enhanced services to boost voluntary compliance, advances in analytics to improve productivity and other activities — to the equation.

With the “diversified revenue strategies” assessed in the analysis, Treasury projects the IRS to take in $851 billion from fiscal year 2024 to fiscal year 2034. Accounting for IT modernization, the report noted, reveals “a wide array of potential revenue benefits.” 

“Expanded data intake capacity and productivity will help increase compliance; improved audit selection and collection planning can increase the productivity of enforcement activities,” the report stated. “IT investments can also increase the productivity of auditors by providing them with better access to data during the audit process and allow for quicker and more efficient communication between auditors and taxpayers. 

“IT and customer experience investments can also facilitate voluntary compliance by making it easier for taxpayers to communicate with us, enabling taxpayers to complete more tasks online, reducing the demand for direct contact with customer service representatives and allowing us to process returns more quickly and efficiently,” it said.

The analysis noted specifically how investments in IT infrastructure will better position the IRS to handle IT-related outages. During the 2018 tax season, for example, a massive outage took the system offline for 11 hours, leading to processing delays for millions of returns. 

The Treasury highlighted California’s Enterprise Data to Revenue initiative as a case study in how the IRS’s modernization funding infusion could play out. The Golden State saw an approximate 1% increase in collections during the initial phase of its project, which a senior state official attributed mostly to “technical and process improvements that allowed for increased taxpayer self-service.”

If the 1% efficiency increase held for the IRS, the agency would be looking at an extra $43 billion annually, the report said.

While the potential is there for a significant revenue boon for the IRS, the analysis notes that the agency must be prepared for the downside to “the integration of technology in administration.”

“While it significantly enhances government capability to reduce tax evasion through enriched data access, it concurrently presents sophisticated taxpayers, particularly those with high incomes, with novel opportunities to evade taxes,” the report said. “Therefore, as we modernize our IT infrastructure, we must also devise strategies to close these new loopholes, ensuring that the digital transformation leads to a more equitable tax system.”

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The agency will now have one deputy commissioner instead of two, and four chiefs, who will be charged with managing taxpayer service, tax compliance, information technology and operations. Rajiv Uppal is set to join the agency next year as its chief information officer and will oversee the IRS IT unit, which is currently helmed by Kaschit Pandya.

“Our work in the technology arena is critical to our current work on everything from filing season to our phone lines and our online tools,” IRS Commissioner Danny Werfel said in a statement. “And we must continue to make foundational improvements in this area to ensure the success of our transformation work and bringing new tools to help taxpayers. 

“Creating this position will be critical to making sure information technology works closely with our business units and our transformation teams to create successes for taxpayers and the tax system, now and in the future,” he said.

Doug O’Donnell, who currently serves as the IRS’s deputy commissioner for services and enforcement, will transition to the new overarching deputy commissioner role for the agency. He served as acting commissioner from November 2022 through March 2023 and has been with the agency for more than 37 years.

In addition to Uppal, the three other chief roles will be filled by Ken Corbin (taxpayer service), Heather Maloy (taxpayer compliance) and Melanie Krause (chief operating officer).

“This new governance model better supports the agency’s mission as well as giving heightened importance to these four key areas of taxpayer service, tax compliance, IT and operations,” Werfel said. “These are critical areas we need to focus on, and this structure will reflect those priorities.”

In comments last week at the ACT-IAC/DCI CX Summit in Arlington, Va., Werfel said the agency is making progress on its digitization push, a move largely made possible by IRA funds that will “benefit taxpayers of the nation, not do something that anyone should be concerned about.”

The IRS’s move toward a paperless future includes a pilot program next year that will allow eligible taxpayers in 13 states to file their returns using a free online system. The agency is also currently seeking information to scale up its robotic processing automation program.

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In an attempt to stop large foreign-owned corporations from improperly engaging in transfer pricing — wherein those companies report losses and low margins to avoid accurate reporting of U.S. profits — compliance alerts are being sent to roughly 150 subsidiaries of firms that fit that bill, reiterating their American tax obligations and urging self-correction. 

The IRS is also expanding its Large Business & International Division’s Large Corporate Compliance, a move that leverages data analytics to pinpoint which large corporate taxpayers merit an audit. The program, which will boast an expanded accounting staff by early next year, will perform an additional 60 audits of the biggest corporate taxpayers, as identified by artificial intelligence and subject matter experts.

The IRS said it has already seen major wins thanks to its IRA-funded programs targeting tax-avoiding individuals. The agency noted in a release that enforcement efforts on high-income, high-wealth people who have not filed taxes or failed to pay tax debt has resulted in collections of more than $122 million in over 100 cases. Roughly 1,600 new taxpayers that fall into that category are being contacted by the agency. 

The tax agency announced last month that it would use artificial intelligence and other technology to crack down on millionaires and organizations who have avoided paying their taxes. 

Among the individuals caught by the agency were a person ordered to pay more than $15 million after falsifying millions in expenses to build a 51,000-square-foot mansion and another person who was sentenced to 54 months in federal prison after fraudulently securing $5 million in COVID-19 relief loans for fake businesses and using those funds to buy multiple sports cars.  

From a customer experience standpoint, the agency said it’s focused on improving interactions between taxpayers and IRS staff, whether it’s online or in-person. The agency is now operating 50 Taxpayer Assistance Centers across the country, including eight that have opened since the one-year anniversary of the IRA.

And on the modernization front, the IRS said it has made “significant progress” on digitization efforts, particularly in scanning and e-filing paper returns. The agency so far this year has scanned more than 1 million tax forms. 

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As part of the “limited-scope pilot,” taxpayers in Arizona, California, Massachusetts and New York will be presented with the option to electronically file their federal returns in 2024 directly with the agency at no cost. 

Additionally, taxpayers in nine states with no income tax — Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming — may also be eligible to take part in the program.

IRS Commissioner Danny Werfel said in a statement that the agency will work closely with officials in the four participating states, whose revenue departments signed separate Memorandums of Understanding with the IRS last month. Information-gathering from the pilot will inform the “future direction” of Direct File, Werfel added.   

While all states were invited to join the pilot, “not all states were in a position” to do so in 2024, the agency noted. Taxpayers with “relatively simple returns” in the 13 states will be eligible to participate. Those who receive the Earned Income Tax Credit and the Child Tax Credit can also partake in the Direct File pilot. 

The IRS was tasked with studying the feasibility of a free, direct filing tax program as part of the agency’s nearly $80 billion funding infusion via the Inflation Reduction Act. The Direct File pilot program comes after the IRS delivered a report to Congress in May that detailed costs, benefits and operational challenges, all of which will be evaluated in the pilot program.

“We have more work in front of us on this project,” Werfel said. “The Direct File pilot is undergoing continuous testing with taxpayers to identify and resolve issues to ensure it’s user-friendly and easy to understand. We continue to finalize the pilot details and anticipate more changes before we launch for the 2024 tax season.” 

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The new effort will focus on 1,600 taxpayers who have incomes above $1 million that have more than $250,000 in tax debt and large, complex business partnerships that have more than $10 billion in assets that owe the government large sums. It will not affect those earning less than $400,000 a year, the agency announced.

“This new compliance push makes good on the promise of the Inflation Reduction Act to ensure the IRS holds our wealthiest filers accountable to pay the full amount of what they owe,” said IRS Commissioner Danny Werfel. “Anchored by a deep respect for taxpayer rights, the IRS is deploying new resources towards cutting-edge technology to improve our visibility on where the wealthy shield their income and focus staff attention on the areas of greatest abuse.” 

Werfel said the IRS will apply cutting-edge machine learning technology to increase IRS compliance efforts on “those posing the greatest risk to our nation’s tax system, whether it’s the wealthy looking to dodge paying their fair share or promoters aggressively peddling abusive schemes.”

Previous efforts to scrutinize millionaires who owe back taxes have allowed the IRS to collect $38 million from more than 175 high-income earners. The agency said it will build upon such efforts using new AI technology to go after those 1,600 wealthy individuals who owe hundreds of millions of dollars in taxes.

By the end of the month, the IRS will also open investigations of 75 of the largest business partnerships in the U.S. that have avoided paying taxes, including hedge funds, real estate investment partnerships, publicly traded partnerships, large law firms and other industries. On average, these partnerships each have more than $10 billion in assets.

The IRS last month also announced a new digitization program that would help enable agency data scientists to reduce tax evasion by wealthy individuals and large corporations.

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According to the agency, the effort will eliminate up to 200 million pieces of paper annually, cut processing times in half, and expedite refunds by several weeks.

The digitization initiative is being financed through an $80 billion infusion of cash for the IRS over 10 years under the Inflation Reduction Act (IRA) which President Joe Biden passed into law last August.

“Thanks to the IRA, we are in the process of transforming the IRS into a digital-first agency,” Treasury Secretary Janet Yellen said during a visit to an IRS paper processing facility in McLean, Virginia with IRS Commissioner Daniel Werfel on Wednesday.

“By the next filing season,” she said, “taxpayers will be able to digitally submit all correspondence, non-tax forms, and notice responses to the IRS,” Yellen added.

The IRS also said in its announcement of the digitization program, that it would help enable agency data scientists to implement “advanced analytics and pattern recognition methods to pursue cases that can help address the tax, including wealthy individuals and large corporations using complex structures to evade taxes they owe.”

Using IRA resources, taxpayers are now able to respond to more notices online, and the IRS says it has made significant progress adopting new technology that automates the scanning of millions of paper returns. 

In the coming two years, taxpayers will be able to digitally submit all correspondence, non-tax forms, and responses to notices which will allow more than 94% of individual taxpayers to no longer ever need to send mail to the IRS, according to the agency. 

It added that taxpayers who still want to submit physical paper returns and correspondence will be able to do so.

Taxpayers use non-tax forms to request or submit information on a range of topics, including identity theft and proof that they are eligible for key credits and deductions to help low-income households. 

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The nonprofit is assisting the agency with the report along with Loyola Law School Associate Professor of Law Ariel Jurow-Kleiman, according to a New America spokesperson.

IRS’s e-file feasibility study was mandated by the Inflation Reduction Act (IRA), which stipulated that the agency engage independent third parties to study new options for a free, online direct tax-filing system.

The legislation directs IRS in the study to examine factors including cost and organizational design, as well as the agency’s capacity to operate such a system.

The IRA legislation also provided $80 billion in fresh funding for the agency, of which $4.8 billion was allocated for the modernization of business systems and cybersecurity monitoring.

In its 2023 report to Congress, the Office of the Taxpayer Advocate, which represents the interests of the U.S. taxpayer, said the agency should develop tools to allow citizens to use e-filing tools for more complex tax returns.

According to the report, which was published last month, current e-filing tools made available to taxpayers by software companies in partnership with the IRS do not allow citizens to attach documents.

Other common errors with existing e-filing technology include an inability to process returns when taxpayers override certain entries.

New America spokesperson Tara Moulson said: “To assist the IRS with this work and assessment, the agency selected New America, a strictly non-partisan, non-profit think tank dedicated to public problem solving with expertise in technological change, the tax code, and the taxpayer experience of everyday Americans.”

IRS expects to deliver the report to Congress in May.

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