The IRS is pausing its tech overhaul to consider integrating AI in tax administration, a move that could transform the agency’s operations.
Quick Takes
- The IRS is reassessing its modernization strategy, including Direct File, launched under the Biden administration.
- The agency seeks to incorporate AI to streamline processes, reduce errors, and improve taxpayer interactions.
- There is a strategic move from relying on outdated legacy coding languages to true modernization.
- IRS is re-evaluating its modernization efforts due to advancements in generative AI.
- Outdated systems, like the 1960s core tax processing system, are a focus of replacement.
IRS Presses Pause for AI Exploration
The U.S. Internal Revenue Service is revisiting its technology modernization investments. This pause allows the agency to evaluate how AI can be integrated to improve tax systems. Current modernization projects include the Direct File tax filing website, operational through the Biden administration. Key decisions are expected to align with the onset of “the great AI revolution,” as noted by Treasury Secretary Scott Bessent.
This reassessment follows advancements in AI. Generative AI’s ability to extract logic from legacy code, such as COBOL, offers a path beyond risk mitigation. As noted by a senior IRS executive, “the landscape has changed today, especially with the advances in [generative artificial intelligence]. We’re now able to apply gen AI to extract that logic from the legacy code, and therefore our approach had to also change from risk mitigation to true modernization.” Sources point to the integration of AI as a critical component in upcoming tech upgrades.
"Artificial intelligence is really still in the future," Urban-Brookings Tax Policy Center's Vanessa Williamson says when discussing the "huge investment in modernization" for the IRS, adding: "They were using computers and technology that dated to the Kennedy administration." pic.twitter.com/FLRy2lWNph
— Yahoo Finance (@YahooFinance) March 13, 2025
Modernization and Challenges
The IRS modernization drive faces hurdles due to reliance on outdated technology systems. Notably, the use of a 1960s-era core tax processing system persists, despite internal efforts to modernize. IRS officials are focused on reducing dependency on multiple integrators. There is potential for significant financial savings by limiting hand-offs and involvement of numerous third-party contractors.
This perspective was echoed by an official: “We have heavily relied on outsourcing to third-party solution integrators to help us achieve the intended outcomes. But that comes with its own cost and drastically drives up the financial cost of modernizing.”
The IRS is using funds from the 2022 Inflation Reduction Act for tech improvements. However, Republicans have challenged these investments, which they see as potentially funding taxpayer harassment. Nonetheless, tax filing processes remain unchanged for the 2025 season. The agency assures operational readiness for handling returns and processing refunds by tax time.
Implications of a Strategic Pause
The pause is an opportunity to align the workforce with emerging business methods. No specific workforce reduction numbers are confirmed, but there are plans to potentially cut 20% to 25% of the IRS workforce. The move seeks to offset the costs of modernization and realize efficiency gains. As the IRS navigates through these changes, it aims to leverage AI for improved customer service and tax collection methodologies. Bessent highlights AI’s potential, noting its transformative impact on IRS operations.
Overall, the IRS’s move reflects a strategic endeavor to integrate AI into its operations, reshaping not just the technological landscape, but also taxpayer interactions and operational efficiencies. As this unfolds, keeping an eye on the outcomes of this reassessment will be crucial for both stakeholders and taxpayers alike.
