Modernization efforts will bring  billions in new revenue to IRS, analysis finds

The IRS’s revenue is estimated to jump by as much as $561 billion over the next decade thanks to IT and customer service modernization and other Inflation Reduction Act funding measures for the tax agency, a new Treasury Department analysis found.

Previous projections for how IRA funding would impact the IRS’s revenue only took into account revenues that were directly connected to increased enforcement staffing. The new analysis added modernization investments — as well as information reporting for digital assets, enhanced services to boost voluntary compliance, advances in analytics to improve productivity and other activities — to the equation.

With the “diversified revenue strategies” assessed in the analysis, Treasury projects the IRS to take in $851 billion from fiscal year 2024 to fiscal year 2034. Accounting for IT modernization, the report noted, reveals “a wide array of potential revenue benefits.” 

“Expanded data intake capacity and productivity will help increase compliance; improved audit selection and collection planning can increase the productivity of enforcement activities,” the report stated. “IT investments can also increase the productivity of auditors by providing them with better access to data during the audit process and allow for quicker and more efficient communication between auditors and taxpayers. 

“IT and customer experience investments can also facilitate voluntary compliance by making it easier for taxpayers to communicate with us, enabling taxpayers to complete more tasks online, reducing the demand for direct contact with customer service representatives and allowing us to process returns more quickly and efficiently,” it said.

The analysis noted specifically how investments in IT infrastructure will better position the IRS to handle IT-related outages. During the 2018 tax season, for example, a massive outage took the system offline for 11 hours, leading to processing delays for millions of returns. 

The Treasury highlighted California’s Enterprise Data to Revenue initiative as a case study in how the IRS’s modernization funding infusion could play out. The Golden State saw an approximate 1% increase in collections during the initial phase of its project, which a senior state official attributed mostly to “technical and process improvements that allowed for increased taxpayer self-service.”

If the 1% efficiency increase held for the IRS, the agency would be looking at an extra $43 billion annually, the report said.

While the potential is there for a significant revenue boon for the IRS, the analysis notes that the agency must be prepared for the downside to “the integration of technology in administration.”

“While it significantly enhances government capability to reduce tax evasion through enriched data access, it concurrently presents sophisticated taxpayers, particularly those with high incomes, with novel opportunities to evade taxes,” the report said. “Therefore, as we modernize our IT infrastructure, we must also devise strategies to close these new loopholes, ensuring that the digital transformation leads to a more equitable tax system.”