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The IRS’s IRA Funding Plan Misses Key Technologies in Becoming a “Digital-First Organization”

The IRS’s IRA Funding Plan Misses Key Technologies in Becoming a “Digital-First Organization”

April 27, 2023

Last year’s Inflation Reduction Act (IRA)—a law that aims to curb inflation by reducing the federal deficit, including by lowering health care costs, promoting clean energy, and increasing tax revenue—provided the IRS with $80 billion over ten years. Earlier this month, the IRS shared its 150-page strategic operating plan for this money. The plan includes several commendable, if not past due, initiatives, including accelerating the replacement of seriously old legacy systems, introducing a “Business Online Account” for taxpayers, and initiatives to shift enforcement toward high-income earners and corporations rather than middle-income taxpayers. However, if one of the plan’s central aims is to “transition [the IRS] to being a modern, digitally capable, customer-centric agency” through “cutting-edge technology” over the next decade, it should include technologies such as artificial intelligence (AI) and commit to building a free, electronic filing system.

The IRA gave the IRS budget authority over $80 billion for specific activities: $45.6 billion for tax enforcement activities, $25.3 billion for operations support, $3.2 billion for taxpayer services, and $4.8 billion for its ongoing Business Systems Modernization project. In the law’s language, technology investments play a role in each of these activities.

The “Internal Revenue Service Inflation Reduction Act Strategic Operating Plan” shares how the IRS intends to use the funds across these activities and services to advance five objectives: improving taxpayer services, resolving taxpayer issues, expanding enforcement activities, delivering cutting-edge technology, and expanding the workforce.

The plan seems particularly focused on that last objective, with the IRS planning to add 30,000 new employees by the end of 2024. The IRS has certainly struggled with budget cuts and low staffing levels over the past several years, so some workforce expansion is expected. And apparently, the agency has been able to answer between 80 and 90 percent of phone calls during the latest filing season—a huge improvement from 13 percent in 2022—in part because the IRS recently hired 5,000 customer service representatives.

However, an agency looking to evolve into a digital-first organization shouldn’t revert to old methods to solve problems. Improved customer service doesn’t require the IRS to return to its 2010 staffing levels. If one of the plan’s initiatives is to “pursue leading-edge tools and techniques,” then the IRS should explore technology like AI that both improves efficiency and customer experience. Indeed, one reason why the IRS likely requires so many customer service reps is because its website is not user-friendly, with information that’s either too confusing or difficult to access.

Unfortunately, the plan makes no mention of artificial intelligence at all besides describing a run-of-the-mill, FAQ-style chatbot. OpenAI’s AI chatbot, ChatGPT, certainly isn’t perfect, but it demonstrates what AI will be capable of in the very near future, and it’s odd that the IRS’s plan doesn’t reserve space for technology that can greatly improve customers’ digital experience while also reducing phone calls.

AI is also highly useful in modern data management, which the IRS identified as an important priority in the plan. AI solutions can more quickly explore, organize, and evaluate data, supporting faster processing times for tax filings and helping IRS staff to make better decisions regarding more complex tax filings and enforcement.

Investing in AI and ML technologies is also important from a long-term budget sustainability point of view. The plan claims that the IRA’s $80 billion will increase revenue by $180 billion over the next ten years. If that’s true, technologies that allow the IRS to hire fewer people, increase efficiency, identify fraud, and improve tax collection processes would produce an even higher return on investment.

Another core issue with the plan is that it doesn’t explicitly confirm that the IRS will develop its own electronic filing system. While a single online account that allows taxpayers to receive e-notices, ask questions, and track filing and refund status is a good concept, it won’t be particularly useful if it can’t support the one thing taxpayers have to do: file taxes.

The IRA required the IRS to explore “increased options for filing electronically,” but this plan doesn’t fully commit to developing such a system. If the IRS is to offer a truly robust, end-to-end digital experience for its taxpayers then it needs its own free electronic filing system that’s integrated with the taxpayer’s online account, as well as an application programming interface (API) to allow tax filers to use third-party tax preparation software with their accounts.

For the IRS to become “a world-class customer service operation where taxpayers can engage with the IRS in a fully digital manner if they choose,” it should commit to using modern technologies, like AI, and developing core digital services, like an electronic filing system, that can actually deliver on that promise. Otherwise, the IRA’s $80 billion won’t produce the kind of transformation that Congress expects.

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