The IRS announces a pause in technological updates to explore artificial intelligence integration, reshaping the future of U.S. tax administration.
Key Takeaways
- The IRS is reevaluating modernization strategies and investments, including the Direct File website initiated under the Biden administration.
- Advancements in generative AI are prompting the strategic pause to assess its integration potential into tax systems.
- Efforts focus on moving away from outdated legacy coding languages, like COBOL, to mitigate risk and modernize effectively.
- Outsourcing to multiple integrators has increased financial costs; plans aim to reduce reliance on such solutions.
- The IRS uses funds from the 2022 Inflation Reduction Act for technological improvements amidst challenges from Republican opposition.
IRS Reassesses Modernization Strategy
The IRS is reassessing its modernization strategy, stopping ongoing technological upgrades to explore AI in its tax administration. This pivot involves reviewing current projects and investments, such as the Direct File tax filing website established during the Biden administration. Embracing AI is seen as a strategic move to improve operational effectiveness and taxpayer service, aiming to keep pace with and anticipate future needs.
Technology advancements, particularly in generative AI, are at the core of this shift. The IRS recognizes the potential of AI to revolutionize tax administration, requiring a thorough review of existing strategies. By applying AI to extract logic from legacy code, the IRS can move from risk mitigation towards genuine modernization.
"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
Challenges of Legacy Systems
The IRS still relies on outdated technology, including a 1960s-era core processing system written in legacy code like COBOL. This dependence on old systems poses risks and operational limitations. The IRS is addressing this by adopting AI for better application integration and system upgrades, gradually shifting focus from multiple integrators.
“However, 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,” stated a senior career technology executive at the IRS.
Efforts are being made to mitigate increasing modernization costs driven by third-party solution integrators. Reducing reliance on these services is expected to streamline processes and address inefficiencies resulting from numerous integration hand-offs.
Funding Impacts and Future Plans
The agency is utilizing funding from the 2022 Inflation Reduction Act to support its modernization efforts. These efforts have faced challenges, including Republican opposition aiming to reclaim part of the investment. Despite these challenges, the IRS continues its progression towards modernization, with plans to potentially reduce its workforce by 20% to 25% to align with new business models.
The pause in technology modernization reflects the IRS’s shift from the original $80 billion investment from the 2022 Inflation Reduction Act. This review is seen as an opportunity to realign IRS efforts with modern business methods, ensuring the tax system remains reliable and effective.
