Tax system goes digital after IRS funding boost

The initial $80 billion funding boost for the IRS passed as part of the Inflation Reduction Act (IRA) in 2022 is putting more of the vast U.S. tax system online while digitizing more of the agency's internal operations.

The latest update on the IRS’s operating plan for the increased funding shows that while the tax system remains as complex as ever, all that complexity is increasingly moving toward digital formats.

The IRS announced Wednesday that a range of new tax forms are heading online, including employer returns as filed on business forms 941 through 943. Additional forms are being made available on smartphones, such as business identity theft and misconduct affidavits, spouse questionnaires, and sponsor agreements.

IRS employees can now access return information electronically while they’re on the phone with taxpayers helping to answer questions, the IRS said, similarly to many commercial tax preparation services.

The agency also now has a service that allows tax preparers to set up online payment plans on behalf of the delinquent clients through individual online accounts.

Business tax accounts are being consolidated so that taxpayers can check their outstanding tax balances, download documents and make payments on the same platform as opposed to through different portals.

IRS infrastructure is being updated to handle the increased digitization, with network bandwidth being doubled at some IRS offices in order to handle more online processing. Bandwidth expansion will be completed before the start of the next filing season, the IRS said.

Operationally, the IRS is updating its scanning equipment and human resources IT systems, which the agency said will help with its talent acquisition and workforce planning functions as the IRS hires tens of thousands of new auditors to boost enforcement.

The IRS expects to have hired 4,088 additional auditors through 2024, and 33,000 through fiscal year 2029. That puts auditor hiring to finish well below the 87,000 additional auditors in earlier personnel projections for the IRA funding boost.

In-person capabilities at the IRS are being expanded in addition to its electronic capacities. Increased staffing at pop-up taxpayer assistance centers, improved efficiency targets for call centers, and paper reduction goals are all on the agency’s to-do list. 

Community assistance visits for taxpayers who don’t live within a few hours’ drive of an IRS office will be available this summer across 10 different states along with Puerto Rico.

Republicans have objected to the IRS funding boost and have so far scaled the initial $80 billion expansion back to around $60 billion through clawbacks in regular appropriations. That money will be spent through 2032.

Most of that money is supposed to go to additional audits, specifically of high earners and corporations who account for sizable chunks of the taxes that are due to the government each year but not collected.

However, due to the challenge of hiring highly skilled auditors, only 3 percent has been spent of the IRA enforcement budget, which represented more than half of the initial $80 funding supplement. Last year, the IRS hired only 495 additional enforcement personnel.

$691 million in enforcement bucks have been spent, while $1.4 billion – or 43.2 percent of the taxpayer services budget – has been outlaid so far. 

While internally measured levels of service at the IRS have been improving, the agency still left 75 percent of the calls it received during the 2024 filing either unanswered or rerouted for an automated response, according to the National Taxpayer Advocate, an office within the IRS.

One of the most highly publicized elements of the additional IRS funding has been the Direct File pilot program, a publicly administered counterpart to many pieces of private tax preparation software, though one with more limited applicability to various tax situations.

That program has been met with ire from Republicans, who voted to rescind funding for it almost as soon as they retook the House in 2022.

Just this week, Ways and Means Committee member Rep. Adrian Smith (R-Neb.) along with Rep. Chuck Edwards (R-N.C.) introduced legislation to do away with Direct File and “prohibit the IRS from continuing or developing a successor to it.”

“This bill directs IRS to drop the program, which lacks both measurable success and statutory authority,” Smith said in a Tuesday statement.

With the recent Supreme Court ruling in Loper Bright Enterprises v. Raimondo that did away with a longstanding precedent for federal agencies to make their own interpretive judgments on legislation, the legal environment underpinning regulatory initiatives like those currently giving the IRS a makeover could be changing.

However, IRS Commissioner Danny Werfel, who has long stressed the need for greater resources at the IRS, didn’t sound phased by the ruling on a Wednesday call with reporters.

“There is a lot of momentum that we have that will not rely on … future steps on regulations, any regulatory challenges, and so I’m fairly optimistic that right now the only barrier we have to providing taxpayers better service is just funding,” he said. 

Werfel said Treasury’s Office of Tax Policy was assessing the effect of the Loper Bright ruling on agency operations.

“I know they and the rest of the government are looking at recent Supreme Court legislation and working to understand the impact and account for the impact,” Werfel added.