How The IRS' New Funding Boost Can Benefit from Technology

Sunday - October 1 2023, 23:47 UTC - 1 year ago

The Internal Revenue Service is getting a funding boost which will be used to step up enforcement and improve customer service for taxpayers. The agency aims to hire 20,000 people over the next two years, one-third of it in enforcement. In order to make enforcement more efficient, IRS Commissioner Daniel Werfel released a plan in early 2023 promising that 'technology and data advances will allow us to focus enforcement on taxpayers trying to avoid taxes, rather than taxpayers trying to pay what they owe.' The IRS is also relying on outdated technology which is hampering its effectiveness.

The Internal Revenue Service is getting a funding boost thanks to the Inflation Reduction Act, which President Joe Biden signed into law in 2022. That legislative package originally included about US$80 billion to expand the tax collection agency’s budget over the next 10 years. Congress and the White House have since agreed to pare this total by about $20 billion, but $60 billion is still a big chunk of change for an agency that until recently had about $14 billion in annual funding.

I’m a tax researcher who studies how the IRS uses technology and how taxpayers respond to the agency’s growing reliance on it. While the number of IRS enforcement personnel will surely grow as a result of additional funding, I think that the agency can get more mileage out of emphasizing technological improvements.

Making enforcement more efficient .

The IRS plans to use most of these new funds to step up enforcement and improve customer service for taxpayers. There’s been plenty of conjecture about what the added enforcement will look like and no shortage of fearmongering about the tens of thousands of new agents the IRS might hire. Often left out of this discussion is the fact that the agency’s staffing was cut by 22% between 2010 and 2021. Much of the agency’s hiring spree will replace these labor shortages rather than fill new posts. Further, the IRS expects over 50,000 of its employees to retire within five years.

The agency aims to hire 20,000 people over the next two years, of which one-third will work in enforcement. But IRS Commissioner Daniel Werfel has indicated that better enforcement won’t just rely on more tax agents and auditors. He released a plan in early 2023 promising that "technology and data advances will allow us to focus enforcement on taxpayers trying to avoid taxes, rather than taxpayers trying to pay what they owe." And U.S. Deputy Treasury Secretary Wally Adeyemo has said that "the IRS is going to hire more data scientists than they ever have for enforcement purposes," with the goal of using data analytics in audits.

At least initially, the agency was aiming to increase its spending on enforcement by 69%, from about $6.6 billion in 2022 to $11 billion in annual spending projected through 2031.

Technology, including the electronic filing of tax returns and a growing portfolio of online tools, transfers work from agents to computers. Online tools include the IRS’ digital scanning program, which expedites the processing of the roughly 1 in 5 federal tax returns that weren’t filed electronically in 2022. Werfel says the IRS workforce is becoming more efficient by ramping up its reliance on technology to provide services for taxpayers and spot tax cheats.

The IRS has tapped one form of data analytics or another to select people and companies to audit since the late 1960s. As early as 1986, it had researched ways to use artificial intelligence to improve how it selects its auditing targets. At the same time, outdated technology is hampering the Internal Revenue Service’s effectiveness. It relies on a 60-year-old computer system to maintain and process data. That undercuts its technological agility and cedes the digital advantage to taxpayers and other fraudsters.