Cuts to IRS Enforcement Arm Make Tech Modernization More Urgent

The Trump administration’s aim to slash of thousands of jobs from the IRS enforcement arm ramps up the pressure on the agency’s longstanding efforts to modernize its decades-old systems.

Elon Musk’s advisers to the administration are pushing the IRS to cut 18,141 jobs, with the largest reduction in enforcement workers. That number includes the roughly 12,000 employees already terminated as part of the new-hire layoffs and those who took a deferred resignation offer. The goal is to half the agency workforce, previously at 100,000 employees, by the end of the year.

At the same time, the Treasury Department said Friday it was reassessing the IRS’s modernization efforts and saw major opportunities for more technology in the enforcement division.

Shrinking the IRS adds urgency for the agency to move toward more sophisticated technology to avoid disrupting taxpayer services and revenue collection. Practitioners said major cuts to the agency could foreshadow longer wait times and embolden wealthy tax cheats.

The key will be how the IRS achieves the balancing act of relying more on technology while making sure there are still enough people for oversight of those systems, former agency officials and tax practitioners said.

“AI can help the IRS detect work better, but you still need people to do the work, unless we’re all going to somehow get comfortable with AI doing audits,” said Tom Cullinan, a tax attorney at Chamberlain, Hrdlicka, White, Williams & Aughtry and former counselor to the IRS commissioner.

Evaluating Modernization Efforts

The IRS has had a longstanding goal to modernize its legacy systems, many of which rely on outdated coding languages.

The 2022 tax-and-climate law, which Democrats passed without GOP support, earmarked almost $5 billion for business systems modernization. The agency has spent about 41% of that money, according to the Treasury Inspector General for Tax Administration.

Republicans have railed against the 2022 law, and sought successfully to claw back enforcement funds. GOP lawmakers have been more sympathetic to the funding tagged for tech modernization and the initial job cuts don’t target technology workers.

Treasury said it’s doing a “strategic pause” on the IRS modernization efforts and will reassess some of the agency’s major initiatives. There are opportunities to use technology in enforcement to select taxpayers as well as for internal workflows, senior Treasury officials said in a press call.

The IRS said in its 2024 update of the strategic operating plan that investing in the agency’s underlying technology infrastructure and data analytics made it possible to deploy new technology to assist taxpayers, including replacing decades-old mail sorting machines and updating digital services.

The IRS also received $24 billion for enforcement from the 2022 law. Those funds allowed the IRS to use AI and data analytics to go after complex partnerships and identify large corporate taxpayers for audits, according to the plan update.

Improving technology would allow the IRS to better handle a workforce reduction, said Lisa Zarlenga, a partner at Steptoe LLP, who worked as a tax counsel at the Treasury Department during the Biden administration.

“I’m not sure they’re at the point yet to rely fully on technology,” Zarlenga said. “But they’ve developed tools over the years because they’ve faced other cuts before.”

Balancing People and Technology

Billy Long, a former congressman and nominee for IRS commissioner, will have to help the agency navigate technological improvements while making sure workers can still carry out the necessary oversight, said Mark Everson, an Alliantgroup vice chairman who served as IRS commissioner between 2003 and 2007.

Protecting taxpayer data and making sure that the tax system itself remains operational are the biggest challenges to modernization, Everson said.

The balancing act will be particularly important in the IRS enforcement arm.

For example, Andrew Weiner, a Kostelanetz LLP counsel, said automatic notices of penalties and errors on tax returns often frustrate low-income taxpayers.

“It’s those automated systems that I think much more often leave taxpayers feel like the system is not addressing their situation, or is failing them,” Weiner said.

Technology can help tailor those automated notices to better target errors in returns, said Rochelle Hodes, principal at Crowe LLP. But taxpayers still need people to answer questions about the notices and to shepherd audits from start to finish.

Plus, a fully staffed IRS is still important to tackle tax scams proliferating through promoters on social media, Cullinan said. When he was at the IRS between 2018 and 2022, he said there were cases that were relatively easy to take on but the agency wasn’t able to pick up because they didn’t have enough people.

“With an undermanned, understaffed IRS, I’m not sure how you hope to deal with the amount of noncompliance,” Cullinan said.