IRS needs to plan better for modernization funding

The Internal Revenue Service hasn’t fully updated its plans to use the tens of billions of dollars in additional funds provided by the Inflation Reduction Act, according to a new report.

The report, released Tuesday by the Government Accountability Office, found the IRS intends to use some of the funds to replace legacy IT systems, give taxpayers more online tools and services, and protect taxpayer privacy and security. However, the agency hasn’t fully updated its plans to incorporate these additional funds, according to the report.

In part, that’s because the funds are constantly under threat of being rescinded by Congress. The Inflation Reduction Act of 2022 provided $80 billion in extra funding over 10 years to be used by the IRS to improve its aging technology, enhance customer service, and increase its enforcement efforts. However, over $21 billion in funding over a decade for tax enforcement was clawed back last year as part of the bipartisan deal to lift the debt limit and was distributed to other federal agencies. To avert the threat of a government shutdown in January, government leaders agreed to accelerate those cuts.

Nevertheless, the IRS has been rolling out technology improvements in line with the strategic operating plan it released last year. 

“With historic funding through the new law, we’re building an IRS where all taxpayers can meet all their responsibilities, including all interactions with the IRS — from questions to payments to resolutions — in a completely digital manner if they choose,” IRS Commissioner Danny Werfel said during a speech Monday at American University’s Kogod School of Business in Washington, D.C. “We’re catalyzing this transformation because a digital-first IRS is a generational imperative. It’s how most taxpayers want to interact with us in the 21st century.”

The IRS plan, among other things, according to the GAO report, involves retiring and replacing legacy systems and updating programming languages, giving taxpayers tools to access their data and use online services, and ensuring continued security and privacy of taxpayer data. However, plans showing changes to the scope of future work, milestones and efforts to retire legacy systems have not yet been updated. IRS officials told the GAO that updating these plans is contingent on completing a road map to implement the strategic plan. They added that the first version of the road map was completed last December. However, the road map didn’t include the technology objective. IRS officials told the GAO this objective would be included in version two of the roadmap, which they expect to be completed very soon. 

“Completing the roadmap and then updating ongoing IT modernization plans to reflect revisions driven by the strategic plan are essential to the transformation’s success,” said the GAO.

In response to the report, the IRS stressed the need for continued funding from congressional appropriators. 

“Of notable importance to the House and Senate Appropriations Committees, we also emphasize that although IRA funding has enabled the IRS to make progress, much work remains,” wrote Melanie Krause, acting deputy commissioners for operations support for the IRS, in response to the report. “In tandem with the critical multiyear funding from the IRA, the IRS needs its annual discretionary budget to include increases to maintain the maintain current levels of staffing, systems and service and to avoid our needing to cannibalize IRA funding just to keep the lights on, and we need Business Systems Modernization (BSM) appropriation restored because successfully executing the SOP depends on  both IRA funds and BSM funds. Without restored BSM annual funding, we will not be able to deliver the transformational modernization the IRA promised and taxpayers deserve.”

In his speech, Werfel discussed several ways the IRS has been making technology improvements. “We’ve already added more ways to interact digitally with the IRS,” he said. “For example, we made significant upgrades this year to the Where’s My Refund? tool. Also this filing season, we launched Direct File, a system where taxpayers in 12 pilot states can file their tax returns online, directly with the IRS, for free.”

The IRS is also planning to add a screen to taxpayers’ online accounts to help safeguard them from tax scammers and identity thieves. “Here’s an example of what’s coming in the near future — a clear way to communicate with the IRS and help protect taxpayers from scams and schemes,” he said. “We will have a screen on your online account, like this, letting you know if the IRS is trying to contact you. Why is this critical? Because we have too many bad actors calling and texting pretending to be the IRS and tricking too many Americans into pulling out their credit card and paying them a fake tax debt. In the future, if you get such a call or text, you will just need to go to your online account. If it shows a green banner like this, then the actual IRS is not trying to reach you. It’s not us. Hang up. Ignore the text. And if you are willing, report this to us — online — so we can investigate and attempt to hold the bad actor accountable.”

The IRS is also starting to leverage artificial intelligence to ferret out tax evasion by large partnerships. “Less resources dedicated to sorting paper returns means more resources to harness tools such as artificial intelligence to pierce through this complexity and find hidden income,” said Werfel. “In fact, we are already making use of AI to find those complex partnerships, some of the largest in the world, that are hiding income behind the complexity. That same AI will also help with our precision so that we do not need to contact the other partnerships that are doing the right thing. Using these new AI models we recently opened audits on 76 high-risk, complex partnerships including hedge funds and publicly traded partnerships.”

He noted that digital transformation enables the IRS to scrutinize more high risk, complex filers than it could previously. “Our digital transformation unlocks our ability to focus our enforcement efforts on some high-income groups that, for too long, have flown under the radar,” said Werfel. “With IRA funding, we have already served notices to 125,000 high-income taxpayers who failed to file federal income tax returns since 2017 — including 25,000 with incomes over $1 million. These nonfilers have more than $100 billion of financial activity. We will not allow those with higher incomes to fail to do their basic civic duty of filing a tax return. A more digital IRS unlocks our ability to audit the inappropriate write-offs for personal use of corporate assets, such as corporate jets. In my first year here, the IRS team has already collected nearly $500 million from millionaires and billionaires to ensure fairness in our tax system, and we are just getting started.”