How the IRS May Do More With Less
As the IRS modernizes with AI and other tech, it faces funding cuts and shifting enforcement priorities

by Brett Bissonnette and Jennifer Keegan
March 6, 2026
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Facing ongoing budget constraints and a significant reduction in workforce, the Internal Revenue Service is changing its approach to taxpayer service, enforcement, and collections. Taxpayers and tax practitioners are seeing early signs of how the IRS is leveraging technology and data analytics as well as returning to some old practices in the interest of efficiency. This article examines these trends and what taxpayers and tax practitioners may see in the future.

IRS Funding and Government Cuts

With the passage of the Inflation Reduction Act (IRA) in 2022, the IRS experienced its largest increase in funding in recent years. Congress originally appropriated nearly $80 billion in supplemental funding to be spent over the following decade. This funding was intended to transform the agency’s operations, modernize its technology, and strengthen its enforcement efforts. Funding was earmarked in four areas: enforcement ($45.7 billion), operations support ($25.3 billion), business systems modernization ($4.8 billion), and taxpayer services ($3.2 billion).1

Right away, the IRS began upgrading its technology, expanding digital services, and hiring new staff to improve taxpayer service and compliance. Notable achievements included launching new online portals for filing forms, increasing automation in processing returns, and digitizing millions of paper returns.2 The IRS also made strides in using data analytics to target enforcement efforts more effectively, aiming to close the “tax gap” and recover billions in unpaid taxes.3

Over the next few years, Congress rescinded over half of the funding due to some lawmakers’ concerns about government spending and skepticism about the efficacy or management of the IRS’ initiatives. By 2025, Congress had rescinded nearly $42 billion of the original IRA allocation, leaving the IRS with just under $38 billion in remaining funds, some of which was frozen or redirected.4 The enforcement budget was dramatically reduced, disrupting the IRS’ ability to pursue complex audits and compliance.

That said, during fiscal year 2024, with twenty-three modernization programs underway, the IRS remained committed to modernizing its technology.5 The most critical efforts included 1) modernizing the Individual Master File (IMF), the Business Master File (BMF), and the Enterprise Case Management (ECM) system and 2) general digitizing, to allow for faster processing by accepting electronic images of returns, correspondence, and other forms and by converting paper submissions into digital form.6 The common factor in these changes is the IRS’ improvement of the information it uses, which will likely play a critical role in its efforts toward efficiency.

The Evolution of IRS Taxpayer Services

As one of the world’s largest debt collectors, the IRS collected more than $5.1 trillion in tax revenue and more than $98 billion in enforcement revenue in fiscal year 2024.7 Media portrayals of stereotypical IRS examinations are embedded in the popular imagination, but not everyone knows that the IRS is involved in virtually all other aspects of federal taxation, including processing returns and other correspondence, carrying out examinations, and collecting overdue federal tax liabilities. These duties have remained fairly constant since the creation of the IRS. Nonetheless, how the IRS conducts its duties has changed over time and likely will keep changing.

Obsolete technology has hampered the work of the IRS, despite its significant mandate to act as the government’s debt collector. Almost three years ago, the Government Accountability Office noted, in the article “Outdated and Old IT Systems Slow Government and Put Taxpayers at Risk,” that the IRS relied on computer systems built in the late 1960s and that nearly eighty percent of the government’s $100 billion in annual information technology (IT) spending was directed toward operating and maintaining existing systems.8 Nonetheless, it’s clear that the IRS is dedicated to changing its approach to technology.

The IRS’ recent initiative to expand partnership compliance efforts illustrates how the agency is likely to deploy advanced technology and what those advancements may look like. In September 2023, following the injection of new IRA funding, the IRS announced a new effort to shift its focus from working-class taxpayers to wealthy taxpayers and sophisticated tax structures.9 In addition to tried-and-true tactics like developing teams of subject matter experts and releasing training programs for IRS staff, the agency also invested in artificial intelligence (AI) tools to assist this initiative. IRS announcement IR-2023-166 explained that the IRS had been piloting an AI tool to identify potential compliance risks in partnership structures.10

In January 2024, Treasury announced that the IRS had opened examinations of seventy-six of the largest partnerships in the United States, thanks to a machine learning tool developed by data science and tax enforcement experts.11 The deployment of AI in this initiative was generally considered successful, and by February 2024,12 the IRS had confirmed the use of AI in its Large Corporate Compliance program to identify cross-border and corporate transaction compliance risks. The rapid expansion of the IRS’ use of AI in multiple complex compliance initiatives suggests that its machine learning tools are highly effective and will likely be increasingly deployed.

Although nobody knows exactly how the IRS of the future will operate, it will certainly embrace more automation on newer systems—changing how taxpayers and tax practitioners experience the IRS, with a likely decrease in personal interactions with IRS staff. The IRS has developed its Office of Research, Applied Analytics, and Statistics to assist in developing programs to leverage technology so as to maximize efficiency.13

Return Submissions

Electronic filing began in 1986 as a pilot program for 25,000 taxpayers to submit income tax returns.14 Since then, e-filing has increased dramatically. For the fiscal year ending September 30, 2024, the IRS reported that nearly 220 million returns and other forms were filed electronically, representing nearly 82.5 percent of all filings.15 For that year, more than 93.3 percent of individual income tax returns were filed electronically.16

Naturally, the IRS can more efficiently accept electronic returns than paper returns. Electronic returns go directly into the IRS’ systems without human intervention. In contrast, IRS employees must manually transcribe paper-filed returns, a time-consuming process that can lead to errors. In recent years, the Taxpayer Advocate cited a study that found transcription errors in nearly twenty-two percent of all paper-filed returns.17 These errors lead to additional work for the IRS as well as for taxpayers and tax practitioners.

The sharp increase in electronic filing, despite its clear benefits, would not have occurred without mandates, however. All electronic filing was voluntary until 2006, when it became mandatory for taxpayers with assets of $50 million or more, an amount that would decrease to $10 million in 2007.18 In 2009, Congress passed a law requiring tax preparers who file more than ten returns per year to file all returns electronically.19 This threshold now applies to businesses as well, such that any business that files more than ten returns of any type must file electronically.20

It’s hard to see this trend reversing. With decreases in IRS funding and staffing levels, electronic filing must be adopted even more widely. Tax practitioners and taxpayers who file paper returns already experience significant delays in IRS processing,21 delays that certainly impact decisions on whether to file electronic or paper returns. It would not be surprising to see future mandates pushing even more electronic filing.

Although electronic filing is efficient for the IRS, taxpayers sometimes encounter roadblocks with e-filing that prevent filing and lead to later issues with the IRS. For example, for fiscal year 2023, the Taxpayer Advocate noted that more than 3.7 million taxpayers could not resubmit returns that had been rejected electronically, because the primary Social Security number had already been used.22 When an e-filed return is rejected, taxpayers have no choice but to submit on paper. Although ideally the IRS would continue to make exceptions for taxpayers’ technical difficulties, there are no guarantees. Taxpayers and tax practitioners will likely bear the burden of ensuring that the filing of tax returns meets with the approval of an ever more automated system, which determines when the submission requirements are met. Tax practitioners will need to ensure that they enter information into tax filing software correctly, and taxpayers will likewise need to spend extra effort to gather the information necessary for electronic filing.

Of course, increased e-filing will likely benefit taxpayers as well. The IRS has made significant strides in recent years to provide taxpayers and tax practitioners with better access to IRS data through online portals.23 These efforts assist taxpayers and tax practitioners significantly by allowing them to understand what data already exists before they take additional actions with the IRS. Taxpayers have also benefited in recent years from other technological advances at the IRS, including its “go paperless” effort to deliver tax notices electronically, a customer callback setup to reduce hold times, automated voicebots and chatbots to limit the need for human intervention, and the Modernized e-File (MeF) system.24

Enforcement

Most of the increased IRS funding under the IRA was intended for greater enforcement. Despite the revocation of much of that increase, enforcement is likely to remain a strong IRS priority. The IRS has long used computer scoring to select returns for examination, based on its analysis of certain undisclosed factors.25 As the IRS develops its use of AI,26 computer scoring will likely play a larger role in selecting returns for examination—and better identifying when an examination is likely to result in positive adjustments for the IRS.27 It’s also likely that the IRS will use the technology to conduct examinations more efficiently by targeting its efforts in areas that promise to increase tax liability or taxable income or to reduce credits or refunds.

Taxpayers may be selected for examination in other ways as well. In 2018, the IRS signed a contract with Palantir Technologies to “connect the dots in millions of tax filings, bank transactions, phone records, and social media posts.”28 These efforts are likely to accelerate, given the recent agreement between the General Services Administration and Elon Musk’s company xAI, which makes GrokAI models available to government agencies at little cost.29

The IRS will likely use technology to increase revenue in ways beyond examinations, using data it already has. The Internal Revenue Code contains numerous provisions requiring third parties to report payments and other transactions to the IRS.30 Despite possessing the data to identify deficiencies, the IRS has not always used it to locate errors in tax filings, particularly with respect to partnership reporting forms (Schedule K-1).31 Now, with access to AI and other new technology, it wouldn’t be surprising to see the IRS more efficiently identify errors on tax returns based on third-party reporting.

Collections

Taxpayers pay most debt voluntarily. For unpaid debt, however, the IRS must expend resources on collection. Again, the IRS is likely to continue to develop technology to collect tax debts more efficiently.

For example, data mining may help the IRS to identify targets of levied funds and revenue officers to prioritize their caseloads. Available data may also help the IRS to determine which tax debtors likely have funds for recovery and which do not. Advanced technology should further allow the IRS to send collection notices more efficiently, too.

Additionally, the IRS can offset federal payments to collect tax debts through the Federal Payment Levy Program.32 Taxpayers with overdue debts to the IRS who are federal contractors or who otherwise receive federal payments may see those payments offset until their tax debts are paid in full. Through the use of technology, the IRS may be able to more easily identify taxpayers against whom such offsets may be applied.

Conclusion

Outdated technology has encumbered the IRS for decades, but the agency appears committed to modernizing in ways that will benefit some taxpayers but may pose challenges for others. Clearly, however, these changes will likely transform how taxpayers and tax practitioners experience the IRS, with interactions likely to be more automated and to involve fewer direct interactions with IRS employees. This significant shift is best addressed by tax practitioners who willingly embrace the ways in which the IRS harnesses technical advances in the interest of efficiency.

Brett Bissonnette is a partner in Plante Moran’s Flint, Michigan, office, and Jennifer Keegan is a senior manager in Plante Moran’s Chicago office. Both focus on tax controversy.

Endnotes

  1. Brendan McDermott, IRS-Related Funding in the Inflation Reduction Act, Congressional Research Service, October 20, 2022, www.congress.gov/crs-product/IN11977.
  2. Internal Revenue Service, IRS Inflation Reduction Act Strategic Operating Plan, May 5, 2025, www.irs.gov/about-irs/irs-inflation-reduction-act-strategic-operating-plan.
  3. Internal Revenue Service IR-2023-166, IRS Announces Sweeping Effort to Restore Fairness to Tax System With Inflation Reduction Act Funding; New Compliance Efforts Focused on Increasing Scrutiny on High-Income, Partnerships, Corporations and Promoters Abusing Tax Rules on the Books, September 8, 2023, www.irs.gov/newsroom/irs-announces-sweeping-effort-to-restore-fairness-to-tax-system-with-inflation-reduction-act-funding-new-compliance-efforts.
  4. The Treasury Inspector General for Tax Administration, Quarterly Snapshot: The IRS’s Inflation Reduction Act Spending Through September 30, 2024, 2025-IE-R014, March 10, 2025, www.tigta.gov/sites/default/files/reports/2025-08/2025ier014fr.pdf.
  5. Government Accountability Office, GAO-25-107611, Information Technology: IRS Is Developing a New Modernization Framework, September 16, 2025, https://files.gao.gov/reports/GAO-25-107611/index.html.
  6. Id.
  7. Internal Revenue Service, IRS Publishes 2024 Financial Report; Resolves Longstanding Significant Deficiency, November 7, 2024, www.irs.gov/newsroom/irs-publishes-2024-financial-report-resolves-longstanding-significant-deficiency.
  8. Government Accountability Office, Outdated and Old IT Systems Slow Government and Put Taxpayers at Risk, February 15, 2023, www.gao.gov/blog/outdated-and-old-it-systems-slow-government-and-put-taxpayers-risk.
  9. Internal Revenue Service IR-2023-166, IRS Announces Sweeping Effort to Restore Fairness to Tax System With Inflation Reduction Act Funding; New Compliance Efforts Focused on Increasing Scrutiny on High-Income, Partnerships, Corporations and Promoters Abusing Tax Rules on the Books, September 8, 2023, www.irs.gov/newsroom/irs-announces-sweeping-effort-to-restore-fairness-to-tax-system-with-inflation-reduction-act-funding-new-compliance-efforts.
  10. Id.
  11. Department of the Treasury, IRS Ramps Up New Initiatives Using Inflation Reduction Act Funding to Ensure Complex Partnerships, Large Corporations Pay Taxes Owed, Continues to Close Millionaire Tax Debt Cases, January 12, 2024, https://home.treasury.gov/news/press-releases/jy2021.
  12. Internal Revenue Service, Fiscal Year 2025 Congressional Budget Justification & Annual Performance Report and Plan, Publication 4450, February 2024, www.eitc.irs.gov/pub/irs-prior/p4450–2024.pdf.
  13. Internal Revenue Service, Research, Applied Analytics & Statistics, Internal Revenue Service Careers, https://jobs.irs.gov/research-applied-analytics-statistics.
  14. Internal Revenue Service Fact Sheet FS-2011-10, IRS E-File: A History, June 2011, www.irs.gov/pub/irs-news/fs-11-10.pdf.
  15. Internal Revenue Service, Returns Filed, Taxes Collected and Refunds Issued, May 29, 2025, www.irs.gov/statistics/returns-filed-taxes-collected-and-refunds-issued.
  16. Id.
  17. TAS Directive Instructs IRS to Start Scanning Paper Returns, Tax Notes, March 28, 2022, www.taxnotes.com/research/federal/other-documents/other-irs-documents/tas-directive-instructs-irs-start-scanning-paper-returns/7dbbs#7dbbs-0000002.
  18. Brendan McDermott, IRS-Related Funding in the Inflation Reduction Act, Congressional Research Service, October 20, 2022, www.congress.gov/crs-product/IN11977.
  19. Id.
  20. Electronic-Filing Requirements for Specified Returns and Other Documents, 88 Federal Register 11,754 (February 23, 2023), www.federalregister.gov/public-inspection/2023-03710/electronic-filing-requirements-for-specified-returns-and-other-documents.
  21. TAS Directive Instructs IRS to Start Scanning Paper Returns, Tax Notes, March 29, 2022, www.taxnotes.com/research/federal/other-documents/other-irs-documents/tas-directive-instructs-irs-start-scanning-paper-returns/7dbbs#7dbbs-0000002.
  22. Lauren Loricchio, IRS Is Unlawfully Rejecting E-Filed Returns, Attorneys Say, Tax Notes, October 3, 2024, www.taxnotes.com/featured-news/irs-unlawfully-rejecting-e-filed-returns-attorneys-say/2024/10/02/7lst2.
  23. Internal Revenue Service, Online Account for Individuals, October 10, 2025, www.irs.gov/payments/online-account-for-individuals.
  24. Nancy Sieger, Modernizing Tax Processing Systems, Internal Revenue Service, July 28, 2022, www.irs.gov/about-irs/modernizing-tax-processing-systems.
  25. Internal Revenue Service Fact Sheet FS-2006-10, The Examination (Audit) Process, January 2006, www.irs.gov/pub/irs-news/fs-06-10.pdf.
  26. Government Accountability Office, Artificial Intelligence May Help IRS Close the Tax Gap, June 6, 2024, www.gao.gov/blog/artificial-intelligence-may-help-irs-close-tax-gap; and Michael Cohn, IRS Leveraging AI for Audits Amid Layoffs, Accounting Today, May 27, 2025, www.accountingtoday.com/news/irs-leveraging-ai-for-audits-amid-layoffs.
  27. Sohail Shaikh, Balancing Innovation and Oversight: AI in the U.S. Treasury and IRS: A Survey, Arxiv, September 19, 2025, https://arxiv.org/html/2509.16294v1.
  28. Siri Bulusu, Palantir Deal May Make IRS ‘Big Brother-ish’ While Chasing Cheats, Bloomberg Tax, November 15, 2018, https://news.bloombergtax.com/daily-tax-report/palantir-deal-may-make-irs-big-brother-ish-while-chasing-cheats.
  29. General Services Administration, GSA and xAI Partner on $0.42 per Agency Agreement to Accelerate Federal AI Adoption, September 25, 2025, www.gsa.gov/about-us/newsroom/news-releases/gsa-xai-partner-to-accelerate-federal-ai-adoption-09252025.
  30. See, for example, Internal Revenue Code Section 6031–6060.
  31. Government Accountability Office, Tax Administration: Better Coordination Could Improve IRS’ Use of Third-Party Information Reporting to Help Reduce the Tax Gap, December 15, 2020, www.gao.gov/products/gao-21-102.
  32. Internal Revenue Service, Federal Payment Levy Program, April 30, 2025, www.irs.gov/businesses/small-businesses-self-employed/federal-payment-levy-program.