IRS tackling big digital transformation and legislative challenges

Digital transformation at the IRS has been accelerated by COVID and new legislation

The COVID-19 pandemic forced government agencies to accelerate digital transformation efforts, and the Internal Revenue Service (IRS) was no exception. The IRS was already in a significant transition period, spurred by the Taxpayer First Act, which was signed into law in July 2019. The Act was designed to improve the taxpayer experience and ensure the IRS continues to enforce the tax law in a fair and impartial manner. The IRS will begin implementing aspects of the Act as early as 2021, building upon work already underway to expand digital services, reach underserved communities and improve proactive outreach.

For a session at next week’s virtual SAS Global Forum 2021, I spoke with Eric Hylton, the outgoing head of the Small Business/Self-Employed (SBSE) Division at the IRS, about the agency’s digital transformation journey. We took a deep dive into some of the challenges, successes and lessons learned along the way. We explored elements of the Taxpayer First Act as it relates to data strategy and using technology to enhance the taxpayer experience.

With (a delayed) Tax Week upon us, I want to share are some of the key points from our discussion. I encourage people register and view the session. It’s free and open to anyone. Register here.

The IRS has a huge “customer” base with high expectations for digital experience

In 2019, the IRS processed over 253 million federal tax returns. Approximately 651 million taxpayers visited and almost 10 million individuals used the service's app, IRS2Go. Tens of millions more were helped via phone or mail.

This high volume and numerous digital touchpoints mean the IRS is ahead of the game when it comes to digital transformation. In January, the IRS sent Congress its first Taxpayer First Act report, which emphasized “a taxpayer experience strategy that focuses on creating a proactive, convenient, seamless, personalized and effective interaction with taxpayers and the tax professional community.” Citizens, accustomed to the online experience at online retailers, expect digital services that are intuitive and offer quick, easy assistance. The IRS is making bold moves in that direction.

Has COVID increased the US tax gap?

The most recent IRS gross tax gap projected a loss of $458 billion for the United States. Looking globally, NGO Global Financial Integrity estimates that developing countries lose nearly $2 trillion a year to illicit financial flows. With massive economic disruptions, aggressive stimulus and changes to tax collection schedules, is the IRS operating differently and will the tax gap increase?

Technology has increased the amount of readily available data and information and improved reporting. Even with COVID’s upheavals, these improvements are expected to reduce the tax gap and increase compliance. Digital transformation, particularly the use of advanced analytics, is helping the IRS address noncompliance a lot more efficiently by integrating data sources, finding links between entities and individuals and identifying possible noncompliance or fraud.

But COVID fraud HAS been rampant

When there is crisis, there's always an opportunity, and that has been especially true for fraudsters. While we tend to hear more about stolen identities or unemployment insurance fraud, tax fraud comes in many forms. For instance, there might be a new business that popped up out of nowhere, boasting 1,000 employees and requesting employee retention credits or advanced funds from the IRS. Or maybe an employer requests tax credits for providing paid leave to non-existent employees who supposedly took time off following COVID-19 vaccinations.

Government stimulus programs and related policy changes have opened up a new world of possibilities. Fortunately, the IRS is fighting back. According to Eric Hylton, over $100 million has been protected thus far, and that number grows as criminals continue to try to take advantage of COVID-related programs.

Automation and AI to improve citizen experience and reduce demand

When I worked as an IRS auditor and criminal investigator, there were repetitive steps in every case and investigation. I always thought that a computer could take these steps for me, and my time could be better spent elsewhere. Thankfully, the IRS is looking at artificial intelligence and robotic process automation to improve efficiencies, reduce demand and help citizens.

For instance, they have a pilot project that monitors payments being made under compromise agreements. Since it only involves checking a couple of systems on a regular basis, that’s something that’s easily automated but will save people time. They’re also adding QR codes to mailed notices with balances due to make it easier for taxpayers to go straight from a mailed IRS notice to the secure website to make a payment or set up an installment agreement. And to reduce phone call traffic, the IRS is deploying AI-driven chat bots to answer various questions for taxpayers, as well as automated callbacks.

Much more to learn at SAS Global Forum

You can't read the news these days without hearing the latest on Dogecoin, Bitcoin and myriad other cryptocurrencies. We discussed international cooperation to help understand the ramifications of cryptocurrencies and non-fungible tokens (NFTs). Eric and I also covered the culture change underway at IRS, the move to a more remote workforce and increased hiring of data and behavioral scientists.

Learn more by joining us at SAS Global Forum!


About Author

Jeffrey Cooper

Principal Industry Consultant - IRS

A former senior executive for the Internal Revenue Service Criminal Investigation department, Jeffrey Cooper combines a passion for seeking data analytics solutions with global experience in tax administration and combatting tax fraud and financial crimes. As a SAS consultant within the financial technology (FinTech) sector he helps public sector finance organizations tackle issues such as tax administration, policy, fraud detection, identity theft, money laundering, public corruption, counterterrorism, crypto-currency, distributed ledger technology, the gig economy, and other emerging issues.

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