The IRS has taken an unexpected strategic pause in its technology upgrade, eyeing the potential of AI to revolutionize tax administration.
Quick Takes
- The IRS halts modernization to integrate AI innovations.
- Outdated systems, like COBOL, hinder IRS operations.
- AI aims to reduce reliance on costly third-party integrators.
- Proposed workforce cuts could streamline IRS operations.
IRS Rethinks Modernization Strategy
The IRS is taking a “strategic pause” in its ongoing technology modernization to explore AI integration within its tax administration processes. This pause is intended to reassess its tech approach, particularly in light of new advancements in AI. The aim is to enhance processing efficiency and taxpayer service quality. The IRS is reassessing its modernization projects, including the Direct File portal launched during the Biden administration to ensure alignment with today’s technological standards.
Efficient tax administration requires moving away from outdated systems. The core tax processing system, composed of 60s-era legacy code such as COBOL, represents a significant hurdle. By introducing generative AI, the IRS plans to extract logic from legacy code, shifting focus from mere risk mitigation towards true modernization, setting a robust foundation for long-term technological advancement.
Cost of Integration
External vendors have been heavily involved in the IRS’s system upgrades, leading to inefficiencies and increased costs. According to a senior technology executive, “We have heavily relied on outsourcing to third-party solution integrators… But that comes with its own cost and drastically drives up the financial cost of modernizing.” Addressing the issues with numerous integrators and multiple hand-offs could hasten improvements and offer financially viable solutions for the IRS’s modernization.
The agency intends to tackle the challenges associated with outdated technologies, including incompatibility and reliance on multiple third parties. With the new approach, not only will the financial burden decrease, but streamlined strategies will also yield more efficient outcomes.
Impact on Workforce and Beyond
Integrating AI into IRS operations might lead to a leaner workforce. Although no final figures have been confirmed, potential reductions in workforce by 20% to 25% have been suggested. IRS sees this as an opportunity to realign its staffing strategy with evolving business methods and technological advancements. By 2025, tax filing is expected to remain unaffected, maintaining operational capacity for processing tax returns and issuing refunds efficiently.
This reconsideration reflects a significant shift in approach from the $80 billion IRS investment funding from the 2022 Inflation Reduction Act. Republican opposition has targeted these funds, emphasizing concerns about taxpayer harassment. However, these measures aim to keep the IRS aligned with innovation while translating into potential revenue exceeding $561 billion over the next decade.
