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 Barcode Automation for Revenue Collection to Organize Disbursement and Enhance (BARCODE) Efficiency Act, introduced Thursday by Sens. Tom Carper, D-Del., and Todd Young, R-Ind., would require paper returns that are prepared electronically to include a scannable 2D barcode that the tax agency could easily convert to digital form, simplifying the processing of returns.  

The bill calls for the use of allocated Inflation Reduction Act funding to implement the technology. The $80 billion infusion from the 2021 law has so far been used on everything from the IRS’s electronic Direct File pilot program to leveraging artificial intelligence to better identify tax avoiders. 

“The main thing here is that this legislation will help the IRS conserve their resources, minimize processing errors and reduce delays in refunds to taxpayers,” a spokesperson for Carper told FedScoop. “And that’s really the core of what Sen. Carper cares about.”

Leading up to the launch of the IRS’s free electronic filing pilot program, which is available this year to select taxpayers in 13 states, Carper urged the agency to make the process more equitable and accessible, including in letters that he and Sen. Elizabeth Warren, D-Mass., sent to Commissioner Danny Werfel.

“As government officials, we have a responsibility to be good stewards of taxpayer dollars. That includes ensuring that tax returns are processed accurately and in a timely manner,” Carper said in a statement. By implementing “commonsense technology” called for in the bill, the IRS will be more efficient and ultimately “make a big difference for millions of American taxpayers,” he added. 

The Government Accountability Office and the National Taxpayer Advocate have previously made calls to reduce paper returns and improve the processing of such returns. The 2D barcode method, which would eliminate the agency’s current manual transcription process, has been used by several state tax agencies, some for 20-plus years. 

While more than 4 in 5 tax returns are now filed electronically, those who still choose the paper route represent a substantial cost and efficiency problem for the agency. The IRS’s Taxpayer Advocate Service in 2022 estimated that 50%-60% of the individual income tax returns submitted on paper and processed in 2021 and 2022 were prepared with tax return software and would not have required manual transcription if the 2D barcodes had been included.

Young, who has previously prodded the IRS on privacy and transparency issues from his time on the Senate Finance and Banking Committee, said in a statement that the bill will go a long way toward reducing the time it takes for the tax agency to process individual returns.

“Millions of Americans are forced to wait months — and sometimes years — for the IRS to process their tax returns,” Young said. “Our bipartisan bill will better serve taxpayers by improving the processing of paper returns, reducing errors, and requiring the IRS to operate more efficiently.”

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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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