Challenges Facing the IRS

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The Internal Revenue Service (IRS) plays a critical role in U.S. government operations by collecting trillions in revenue each year to fund federal programs. It processes hundreds of millions of tax returns and issues timely refunds to taxpayers. In carrying out this mission, the IRS must also enforce tax laws fairly and provide assistance to taxpayers navigating a complex tax code. However, the agency has struggled with a range of challenges – from a growing “tax gap” (the difference between taxes owed and paid) to customer service shortfalls, antiquated technology, budget constraints, and frequent tax law changes. These issues have developed over decades, and only recently have policymakers begun addressing them through funding boosts and reform initiatives.

Tax Enforcement and Compliance Difficulties

Ensuring that taxpayers pay what they owe is a core IRS function, yet tax enforcement has become increasingly difficult. The tax gap has been large and growing – the IRS estimates that for tax year 2021, about $688 billion in taxes owed went unpaid on time (gross tax gap), a sharp rise from prior years. Even after late payments and IRS enforcement actions, the annual net tax gap was still around $625 billion, meaning a substantial amount of revenue slips through cracks each year. A major contributor to this compliance gap is the decline in audit and enforcement rates over the past decade. Between 2010 and 2019, the overall audit rate for individual tax returns fell from about 0.9% to 0.25% – a nearly 75% drop. This decline was most pronounced for high-income filers: for those earning .4 billion was immediately cut in 2023, and additional cuts are slated for 2024 and 2025. This still leaves the IRS with roughly $58 billion of the IRA boost, but it highlighted the uncertainty of future resources – a change in Congress or priorities can quickly alter the agency’s financial outlook.

Opportunities for improvement in funding and resource management include:

• Stabilizing and sustaining IRS funding: A crucial step is to ensure the IRS has consistent, adequate budgets going forward. The past cycle of cuts followed by emergency infusions is not an ideal way to run an agency that requires long-term planning. Budget experts and the IRS’s own Oversight Board (when it existed) have recommended that the IRS receive multiyear funding commitments or at least be funded to meet the demands placed on it. The recent boost under the Inflation Reduction Act is a positive development, but Congress needs to resist undercutting the IRS in future appropriations. Every dollar invested in the IRS tends to raise several dollars in revenue – the Congressional Budget Office has estimated that enforcement spending yields a high return on investment in collected taxes. Cutting the IRS, on the other hand, “costs” revenue by widening the tax gap. A steady funding trajectory would let the IRS confidently hire staff (knowing it can pay them beyond a year or two) and commit to multi-year technology projects. Policymakers could consider partially insulating the IRS from the regular appropriations grind – for example, by providing a dedicated mandatory funding stream for certain functions, or by setting its budget as a small percentage of the revenues it collects (recognizing it consistently collects over $4 trillion annually). At the very least, Congress should avoid drastic swings and last-minute budget provisos that disrupt IRS operations.
• Targeted resource allocation and management within the IRS: With limited resources, the IRS must continuously prioritize where to deploy people and money for maximum effect. The agency should refine its internal resource management strategies by using data to drive decisions. For enforcement, this means focusing on areas that produce the largest revenue impact or have the greatest noncompliance (e.g. audits of high-income evaders, as opposed to low-dollar cases that consume similar time for little return). The IRS has started initiatives to improve audit selection models and to stand up specialized teams (for example, a new office dedicated to large partnership compliance, since that’s a known gap). For customer service, it might mean balancing the workforce between answering phones and processing correspondence in real-time based on demand – essentially flexing employees to where the backlog is growing fastest. The Taxpayer Advocate noted that if too many staff are moved to phones, paper backlogs grow, and vice versa, so the IRS must perform a “difficult balancing act” until staffing is sufficient for both. Better data on incoming workloads can inform these shifts. Additionally, the IRS should keep improving its project management for IT upgrades so that funds in that area are well spent and not wasted on projects that don’t pan out (following GAO recommendations to have clear milestones and legacy system phase-out plans). By squeezing the most value out of every dollar – whether through smarter case selection, process improvements, or cross-training staff – the IRS can partly mitigate funding shortfalls. However, there is no substitute for having enough overall resources, so efficient management must go hand-in-hand with adequate budgets.
• Workforce development and succession planning: The IRS H million or more, audit rates plummeted by about 75% as well. According to the Government Accountability Office (GAO), the IRS attributes this fall-off primarily to reduced staffing due to budget cuts, which left fewer auditors to examine complex returns.

Enforcement has been especially challenging for complex business entities and wealthy individuals. For example, the number of large partnerships (those with over $100 million in assets and 100+ partners) has exploded – increasing nearly 600% from 2002 to 2019 – yet the IRS has audited only a tiny fraction of them. In 2019, just 54 large partnerships were audited (around 0.27%, or less than 0.5% in recent years). Moreover, over 80% of those partnership audits found no change to the taxes owed, suggesting the IRS may not have the tools or capacity to effectively identify noncompliance in these complex entities. By contrast, the IRS has continued to conduct many audits of low-income individuals claiming the Earned Income Tax Credit (EITC) – these audits are relatively automated correspondence reviews, which the IRS can still do even with limited staff. In fact, EITC claimants face a higher-than-average audit rate (about 0.77% in 2019) despite their modest incomes. This disparity occurs because auditing simple credit claims is less resource-intensive than examining complex returns of high earners. The overall result is a system where compliance among wealthy taxpayers and large businesses has become harder to police, potentially undermining the fairness of the tax system and incenting some to push the envelope on avoidance or evasion.

Opportunities for improvement in enforcement and compliance include:

• Rebuilding the IRS’s enforcement workforce: With new funding authorized by legislation, the IRS can hire and train more revenue agents and tax attorneys to increase audit coverage, especially for high-income individuals, large corporations, and complex partnerships. Audit rates have room to rebound – even a modest increase could yield significant revenue and deterrence. For instance, restoring audit coverage closer to 2010 levels (around 1%) from the current 0.25% would signal that noncompliance is more likely to be caught. In May 2022, GAO warned that steep drops in audit staffing had directly led to fewer audits and recommended Congress boost resources. The 2022 Inflation Reduction Act began to address this by providing about $45 billion for IRS enforcement over a decade, allowing the agency to start hiring additional examiners. Ensuring these funds are used to recruit skilled personnel (and replacing retirees) will be key to closing the tax gap.
• Leveraging data analytics and technology: Modern tools can help the IRS enforce the law more effectively. The agency holds vast amounts of tax data, but much of its analysis is still done with aging systems. Investing in advanced data analytics, machine learning, and AI could help the IRS detect patterns of underreporting or flag high-risk returns for audit more efficiently. In fact, the IRS has announced that part of its modernization funding will go toward developing such analytics to improve tax enforcement. For example, algorithms could cross-reference incomes, deductions, and third-party reports to better identify likely evasion (similar to how credit card companies flag fraud). By upgrading its technology, the IRS can target its limited enforcement resources where they yield the highest compliance impact.
• Expanding information reporting and third-party compliance: Studies consistently show that when income is subject to third-party reporting (like W-2 forms for wages or 1099 forms for interest), people report and pay taxes on it at much higher rates. Compliance is even stronger if the income is also subject to withholding. In contrast, income that is self-reported with little or no third-party verification (for instance, business income, rents, or some digital economy earnings) has much higher noncompliance. Policymakers have started to respond by broadening reporting requirements – for example, payment apps and online marketplaces will soon report even small transactions (over $600) on Form 1099-K due to recent legislation, closing a loophole where gig economy and casual sales often went unreported. Similarly, proposals have been made to require reporting of cryptocurrency transactions and foreign bank accounts. Increasing such transparency would shrink the opportunities to hide income. The IRS notes that certain areas like offshore assets, digital assets, and complex passthrough entities are not fully captured in current tax gap estimates, meaning improved reporting in these areas could substantially improve compliance. Of course, any new reporting rules should balance taxpayer privacy concerns, but there is significant room to gather more data that can help the IRS verify tax filings.
• Simplifying the tax code and closing loopholes: While broad tax reform is a larger undertaking, any steps to simplify tax provisions or eliminate opaque tax shelters would help enforcement. Complexity is the ally of tax avoidance – when the law is simpler and income is defined more clearly, it’s easier for both taxpayers and the IRS to comply and enforce. Policymakers could consider simplifying overly complex deductions and credits or clarifying gray areas that aggressive tax planners exploit. A historical parallel is the Tax Reform Act of 1986, which closed many loopholes and broadened the tax base, making it easier for the IRS to administer. More recently, closing known tax shelter schemes (for example, certain abusive conservation easements or profit-shifting arrangements) through legislation or regulation can directly improve compliance. In short, policy reforms that make the tax system more straightforward and fair will support the IRS’s enforcement efforts by reducing the avenues for legal avoidance and making outright evasion easier to spot.

Customer Service and Taxpayer Support Challenges

In addition to enforcement, the IRS is responsible for helping taxpayers understand and meet their tax obligations. This includes answering taxpayer inquiries, processing returns and refunds promptly, and resolving issues like identity theft or disputed bills. In recent years, however, customer service performance has suffered, especially during the COVID-19 pandemic. One stark indicator is the IRS’s telephone assistance record. In Fiscal Year 2022, the agency received about 173 million calls from taxpayers seeking help – but only 13% (roughly one in eight calls) reached a live IRS employee for assistance. Most callers simply couldn’t get through, often encountering continuous busy signals or being stuck on hold until the system dropped the call. Those who did get in queue waited an average of 29 minutes before speaking with a representative. For tax professionals calling on a dedicated Practitioner Priority Line, service was even worse: in 2022 only 16% of those calls were answered, with about 25 minutes average hold time. These dismal levels of service have been record lows, prompting frustration among taxpayers and tax preparers alike. The National Taxpayer Advocate reported that the past several filing seasons “pushed tax professionals to their limits” and eroded taxpayer trust in the system.

Customer support challenges go beyond the phones. Backlogs in processing paper returns and correspondence have caused lengthy delays for millions of taxpayers. During the pandemic, IRS mailrooms and processing centers were forced to shut down for periods of time, creating a backlog of unprocessed tax returns that carried over year to year. Even as of the 2022 filing season, the IRS was still digging out: about 13 million taxpayers filed paper individual returns in 2022, and most of them faced refund delays of six months or more due to slow paper processing. In total, the IRS began 2022 with a backlog of roughly 11 million original and amended returns awaiting processing. By the end of 2022, it had whittled that down significantly – to about 2–3 million – by redirecting staff and adding overtime. But clearing the backlog took a heavy effort, and new incoming paper still requires attention. Additionally, millions of electronically filed returns each year get “suspended” for manual review due to discrepancies (for example, a typo triggering an identity verification or an IRS anti-fraud filter flagging a return). In late 2022, nearly 6 million returns were suspended awaiting employee review, further delaying refunds. Cases of suspected identity theft have been especially troublesome: the IRS had 2.9 million identity-theft cases in its inventory in December 2022, with an average resolution time of about 360 days – a full year – to resolve those cases. Such delays are understandably upsetting for taxpayers who did everything right but are caught in bureaucratic limbo. Likewise, when the IRS sends out notices (e.g. for missing information or underreported income) and taxpayers reply with additional information, those replies often sat unopened for months due to staffing shortages in the IRS correspondence units. In some instances, automated systems even took adverse actions (like assessing tax or sending collection notices) because the IRS had not processed the taxpayer’s timely response in the backlog – a nightmare scenario for the taxpayer.

The root causes of these service struggles are tied to resource constraints and outdated processes. The IRS workforce that handles taxpayer services was downsized over the last decade, just as the number of taxpayers grew. Between 1991 and 2020, the IRS workforce fell by about one-third while the U.S. population grew by roughly one-third. In effect, fewer employees are serving more taxpayers, which contributed to overwhelmed phone lines and processing backlogs. Budget cuts also deferred investments in modernizing customer service technology – for example, as of 2022 the IRS still lacked widespread customer callback systems that are common in private-sector call centers, and it had limited ability to scan paper returns into digital format (much data entry was still being done by hand). The pandemic added an unprecedented workload: the IRS was tasked with delivering several rounds of economic stimulus payments and a new program of monthly advanced child tax credit payments in 2020–2021. The agency managed to send out most payments quickly (helped by a special $3 billion appropriation for these efforts), but doing so required diverting resources and adapting systems in the middle of tax seasons, which exacerbated delays in traditional customer service areas. All these factors culminated in what the National Taxpayer Advocate called the “most challenging year” for taxpayers in memory, with millions of frustrated filers unable to get answers or waiting endlessly for their refunds.

Opportunities for improvement in customer service and taxpayer support include:

• Boosting staffing and training for taxpayer assistance: Reversing the decline in customer service starts with having more people available to answer calls and process cases. Recent legislation has provided funds to increase IRS customer service staffing. In fact, toward the end of 2022 the IRS went on a hiring surge, bringing on about 4,000 new customer service representatives and aiming to hire 700 more personnel for in-person help at Taxpayer Assistance Centers. This bolus of hiring is already making a difference – by the 2023 filing season, the IRS reported significantly improved phone service levels, thanks to the additional staff on the lines. Continuing to fill positions in call centers, processing centers, and walk-in offices will help the IRS handle higher volumes of taxpayer inquiries. However, the IRS must also ensure proper training for these new employees. As the Taxpayer Advocate noted, there are “growing pains” whenever staff increases – experienced employees have to be pulled from their normal duties to train new hires. This can temporarily strain service, but it’s a necessary investment. Over time, a larger trained workforce should dramatically improve the IRS’s responsiveness. Congress can assist by sustaining funding for these service positions in future budgets, so the gains are not lost.
• Modernizing telephone and online services: The IRS can harness technology to make taxpayer interactions smoother. One priority is implementing callback technology on IRS phone lines so callers don’t have to wait on hold for long periods – instead, they could receive a return call when an agent is free. Pilot programs have shown callbacks improve customer satisfaction and save time. Similarly, expanding online self-service tools will reduce the need for many calls in the first place. The IRS has begun improving its online account system, which allows taxpayers to check their balance, make payments, and access transcripts. But compared to many state tax agencies (and private financial institutions), IRS online offerings remain limited. The Taxpayer Advocate has urged the IRS to study successful digital services offered by over 40 states and other countries to adopt best practices. Going forward, the IRS plans to enable taxpayers to respond to certain notices online and to securely message IRS representatives through an online portal, rather than relying solely on paper mail. Enhanced web chat functions, interactive FAQs, and even AI-powered virtual assistants could also handle common questions. By investing in a robust online infrastructure, the IRS can provide quick answers to many taxpayers 24/7, alleviating the burden on live assistors.
• Continuing to reduce backlogs and streamline processing: The progress made in clearing the paper return backlog by the end of 2022 was encouraging, and the IRS needs to keep that momentum. A key improvement is the adoption of scanning and optical character recognition (OCR) technology to digitize paper returns upon receipt. Historically, each paper return had to be manually keystroked into IRS systems – an incredibly labor-intensive process. In 2023, the IRS began rolling out new scanning initiatives, reportedly processing 80 times more paper returns via scanning than the year before. This allows much faster capture of data and earlier error-flagging. The IRS should expand this digitization of paper and also push for more e-filing of returns and forms (for instance, the Taxpayer First Act mandated the creation of an online portal for businesses to e-file 1099 forms by 2023). The more submissions that arrive electronically, the fewer that pile up in mailrooms. Additionally, the IRS must dedicate sufficient staff to work through correspondence and identity theft cases to bring those inventories down. Management might consider temporarily shifting employees from less urgent duties to surge through the correspondence backlog, or hiring additional seasonal staff, so that taxpayer letters don’t languish unanswered. The recent direct-hire authority given to the IRS (which cuts through some of the red tape in federal hiring) could help bring new personnel onboard quickly for these roles. By promptly addressing backlogs and automating where possible, the IRS can avoid another cycle of delayed refunds and unanswered letters in future filing seasons.
• Improving taxpayer communication and education: Another aspect of service is how well the IRS helps taxpayers before problems arise. Simplifying and clarifying IRS notices and forms can prevent confusion that leads people to call or write for help. The IRS has been working on using clearer language in notices and providing more understandable instructions. Continuing this effort will reduce unintentional errors. The agency can also expand outreach and education, working with community organizations, tax clinics, and preparer groups to disseminate information about tax law changes or common mistakes to avoid. For example, each year the IRS runs a campaign about the Earned Income Tax Credit to encourage eligible low-income workers to claim it, since a significant number miss out. Similar outreach about new credits or about preventing identity theft (like how to guard your e-filing PIN) can empower taxpayers and preempt issues. The easier it is for taxpayers to do the right thing and get answers through self-help resources, the less strain on IRS customer service. Overall, a combination of more human support and smarter use of technology will be needed to restore the IRS’s reputation for assisting taxpayers promptly and accurately.

Technological Limitations and Modernization Efforts

Many of the IRS’s woes in enforcement and service trace back to its aging technology infrastructure. The IRS relies on computer systems that in some cases date to the 1960s and 1970s, operating on millions of lines of outdated code. The core database for individual taxpayer accounts, the Individual Master File (IMF), was established around 1970 and still runs on antiquated Assembly Language Code and COBOL. This system is the backbone for processing tax returns and issuing refunds, yet it is over 50 years old. Likewise, the Business Master File (for business tax accounts) is decades old. According to a recent GAO analysis, about 33% of IRS applications, 23% of software instances, and 8% of hardware assets are considered “legacy,” meaning outdated but still in use. Some applications are 25 to 64 years old. This heavy reliance on obsolete technology creates multiple problems: increased security vulnerabilities, higher maintenance costs, difficulties in finding IT staff who know archaic programming languages, and inability to readily adapt to new tax laws or provide modern services. For example, making a simple change to accommodate a new credit or deduction can be a daunting task when it involves altering COBOL code from the 1970s. Real-time data access is limited, and integrating newer applications with these legacy systems is complex. The outdated systems also contributed to recent issues – for instance, the IRS’s fraud detection filters sometimes flagged legitimate returns but had limited ability to dynamically update and resolve those cases quickly, partly due to system rigidity.

The IRS has attempted modernization efforts for over two decades, with mixed results. A major push in the late 1990s and early 2000s (the Business Systems Modernization program) led to some improvements like the development of the modernized e-File system, but fell short of replacing the core master files. In the mid-2000s, the IRS launched the Customer Account Data Engine (CADE) project to replace the IMF. CADE encountered difficulties and was revamped into CADE 2, which has made incremental progress (for example, CADE 2 enabled daily processing of most tax returns, whereas the old IMF originally processed updates weekly). Still, as of the early 2020s, the IRS had not fully transitioned off the IMF. GAO has repeatedly flagged the IMF replacement as a high-risk area. In fact, the IRS had set a target of 2030 to complete the IMF replacement, but in 2022 it suspended work on some key modernization initiatives due to resource constraints, casting doubt on that timeline. Six out of nine major IT projects tied to legacy system replacement were paused, as staff were reallocated to other urgent priorities. This included two projects critical to the IMF overhaul, meaning the 2030 goal to retire the old master file is now uncertain. Every year of delay keeps the IRS dependent on a fragile system. To illustrate, the IRS had to implement the 2017 Tax Cuts and Jobs Act changes and the 2020 CARES Act provisions on systems initially designed decades prior – a bit like updating a rotary phone to handle smartphone tasks.

Despite these setbacks, there have been some modernization successes and current plans. The IRS has improved its online services infrastructure gradually (for example, the “Where’s My Refund?” tracking tool and the online taxpayer account feature are products of newer development). The 2019 Taxpayer First Act required the IRS to develop a comprehensive IT modernization plan and a roadmap for improving cybersecurity and identity protection. In response, the IRS drafted plans to overhaul many legacy applications. More recently, the Inflation Reduction Act of 2022 dedicated nearly $5 billion specifically for business systems modernization over the next decade. The IRS’s April 2023 Strategic Operating Plan set ambitious goals: for instance, it aims to fully retire the Individual Master File by 2028 (a couple years earlier than the previous 2030 goal) and replace the Business Master File by 2027, leveraging the new funds. Achieving this would be a monumental milestone, finally moving taxpayer data to modern, cloud-compatible databases. The plan also includes deploying new customer callback systems, upgrading IRS web applications, and improving cybersecurity defenses with the latest technology. Treasury officials have described the IRA funding as a chance to bring the IRS “into the 21st century” after decades of underinvestment.

Opportunities for improvement in technology and modernization include:

• Executing the IRS’s modernization plan on schedule: The IRS now has a detailed roadmap (the IRA Strategic Operating Plan) and funding specifically allocated to technology upgrades. The top priority must be to replace the core legacy systems (IMF and BMF) within the planned timeline. This means sticking to milestones for developing the new systems, testing them thoroughly, and migrating data off the old mainframes. Given the past delays, strong project management and oversight are essential. GAO recommends that the IRS set firm time frames for decommissioning legacy systems and not let this slip. Meeting the goal of retiring the IMF by 2028 would address a root cause of many IRS problems – enabling faster processing, easier updates, and better taxpayer account access. It’s a challenging task, but with the dedicated funding and lessons learned from previous attempts, it is achievable. Success here would free the agency from its 60-year-old “technical debt.”
• Adopting modern software practices and cloud infrastructure: Part of modernization is not just replacing old code with new code, but transforming how the IRS builds and deploys technology. The IRS can take advantage of cloud computing to improve the scalability and reliability of its systems. For example, cloud-based systems could allow the IRS to handle surges in usage (like millions checking refund status on April 15) without performance issues. GAO found that the IRS has made progress on cloud adoption but needs to better evaluate user needs and experiences in its cloud strategy. By fully embracing cloud services, agile development methodologies, and modular system design, the IRS can avoid future technology stagnation. New systems should be built to be flexible, secure, and easier to maintain or upgrade. Additionally, ensuring strong cybersecurity is paramount – legacy systems often have security limitations, so modernization is a chance to bake in higher security standards (multi-factor authentication for internal access, encryption of taxpayer data at rest, etc.). Modernization funds are being used to enhance identity verification tools to prevent data breaches and fraudulent access, which will protect taxpayers.
• Deploying innovative technology for compliance and service: Upgrading IT systems gives the IRS an opportunity to introduce cutting-edge tools to further its mission. For enforcement, that could mean using machine learning models to detect tax evasion patterns or identify fraudulent returns in real time. Former IRS Commissioner Charles Rossotti has advocated for the IRS to integrate machine learning for compliance even as it replaces legacy systems, rather than waiting until all old systems are gone. This parallel approach can yield benefits sooner. On the customer service side, improved technology could enable personalized taxpayer communication, such as sending alerts if the IRS detects an error in your return so you can correct it proactively. The IRS has also discussed using secure messaging systems so taxpayers (or their accountants) can correspond with IRS staff digitally instead of via physical mail, which would be faster and easier to track. Overall, by the time the modernization funding is spent, the IRS aims to have a technology ecosystem that rivals that of leading financial institutions. This would include robust data analytics, intuitive online services, and internal systems that allow employees to easily access taxpayer account information and history (something that is surprisingly cumbersome with current systems). Embracing these innovations will require not just money but also a cultural shift and training within the IRS’s IT workforce, which leads to another point.
• Building and maintaining a skilled IT workforce: Modernizing technology also means modernizing the skill set of the people who develop and maintain it. The IRS historically had many employees expert in legacy programming languages; going forward, it needs to attract top talent in software engineering, cybersecurity, and data science. This is a challenge in a competitive tech labor market. The IRS has some special hiring authorities (like streamlined critical pay) that it can use to bring in experts at higher pay scales for limited terms. Using contractors and private sector partnerships is another way to get specialized skills for projects. Training existing IT staff in new technologies is equally important so that the knowledge of tax systems carries over to new platforms. Essentially, the IRS must transform its IT workforce alongside its IT systems. If successful, the agency will not only have newer technology but also the human expertise to continually improve and keep its systems up to date, avoiding the kind of stagnation that led to the current legacy backlog.

Upgrading IRS technology is an investment that underpins all other improvements – better IT will yield faster service, more effective enforcement, and efficiency gains in the long run. The IRS now has a historic chance, with dedicated funding, to overcome past technology limitations. The main tasks will be to follow through on plans, manage projects adeptly, and resist the temptation to divert modernization funds to short-term needs (a practice that caused previous delays). With modern IT, the IRS can meet the demands of a 21st-century tax system and be more responsive to both taxpayers and policymakers.

Funding Constraints and Resource Management

Underpinning the challenges in enforcement, service, and technology has been the issue of insufficient funding and resources for the IRS. For much of the past decade, the IRS was asked to do more with less. Between 2010 and 2022, Congress steadily reduced the IRS’s appropriated budget in real terms. After accounting for inflation, the IRS budget in 2022 was about 24% lower than in 2010. Enforcement funding was hit particularly hard – the enforcement account saw a 28% cut over that period. These cuts had very tangible effects: the agency was forced to implement hiring freezes, offer buyouts to shrink staff, and curtail training and modernization. The total number of IRS employees dropped from about 113,000 in the early 1990s to around 79,000 by 2022 – a decline of 30% in workforce size. More than half of that decline happened since 2010, as many experienced employees retired and were not replaced. This loss of human capital translated directly into fewer auditors, fewer customer service reps, and fewer support personnel to handle the IRS’s workload.

At the same time, the IRS’s responsibilities were expanding. The U.S. population grew (more taxpayers to serve), the economy became more complex, and Congress assigned the IRS new duties. For instance, the IRS now administers a variety of social benefit programs through the tax code – such as the Earned Income Tax Credit, Child Tax Credit, education credits, and healthcare subsidies – which require outreach and compliance efforts. Major tax legislation like the Tax Cuts and Jobs Act of 2017 required the IRS to update countless forms, create new schedules, and reprogram systems virtually overnight. But when such laws passed, the IRS typically did not receive commensurate budget increases to cover the extra workload. The COVID-19 pandemic relief laws were a notable exception: Congress gave the IRS around $3 billion for administering stimulus payments and the advance Child Tax Credit, acknowledging the massive new task. Even so, the strain of these programs combined with budget cuts led to the service and enforcement declines discussed earlier. Essentially, the IRS was asked to “do everything with almost nothing more,” and it had to triage. It prioritized essential filing season operations and automated enforcement (like sending collection notices) but scaled back in areas that require more staffing, such as audits and in-person assistance. Over years, this eroded the agency’s capacity and institutional knowledge. By 2021, the IRS was auditing the fewest returns in memory, answering the fewest taxpayer calls, and using some of the oldest IT in government – all symptoms of an under-resourced organization.

This trajectory began to change recently when lawmakers recognized that starving the IRS was counterproductive. In 2022, the Inflation Reduction Act injected nearly $80 billion of additional funding for the IRS spread over ten years. This was a significant course correction aimed at restoring IRS capabilities. The funding is allocated across enforcement, operations support, taxpayer services, and modernization, intended to supplement (not replace) the regular annual appropriations. Plans for this money include hiring tens of thousands of employees (to replace retiring staff and add new capacity), upgrading technology, and ramping up audits of high-income taxpayers. However, soon after, the political winds shifted: in mid-2023, as part of a debt-ceiling deal, Congress and the White House agreed to rescind or reallocate about $21 billion of the IRS’s new funding. $1.4 billion was immediately cut in 2023, and additional cuts are slated for 2024 and 2025. This still leaves the IRS with roughly $58 billion of the IRA boost, but it highlighted the uncertainty of future resources – a change in Congress or priorities can quickly alter the agency’s financial outlook.

Opportunities for improvement in funding and resource management include:

• Stabilizing and sustaining IRS funding: A crucial step is to ensure the IRS has consistent, adequate budgets going forward. The past cycle of cuts followed by emergency infusions is not an ideal way to run an agency that requires long-term planning. Budget experts and the IRS’s own Oversight Board (when it existed) have recommended that the IRS receive multiyear funding commitments or at least be funded to meet the demands placed on it. The recent boost under the Inflation Reduction Act is a positive development, but Congress needs to resist undercutting the IRS in future appropriations. Every dollar invested in the IRS tends to raise several dollars in revenue – the Congressional Budget Office has estimated that enforcement spending yields a high return on investment in collected taxes. Cutting the IRS, on the other hand, “costs” revenue by widening the tax gap. A steady funding trajectory would let the IRS confidently hire staff (knowing it can pay them beyond a year or two) and commit to multi-year technology projects. Policymakers could consider partially insulating the IRS from the regular appropriations grind – for example, by providing a dedicated mandatory funding stream for certain functions, or by setting its budget as a small percentage of the revenues it collects (recognizing it consistently collects over $4 trillion annually). At the very least, Congress should avoid drastic swings and last-minute budget provisos that disrupt IRS operations.
• Targeted resource allocation and management within the IRS: With limited resources, the IRS must continuously prioritize where to deploy people and money for maximum effect. The agency should refine its internal resource management strategies by using data to drive decisions. For enforcement, this means focusing on areas that produce the largest revenue impact or have the greatest noncompliance (e.g. audits of high-income evaders, as opposed to low-dollar cases that consume similar time for little return). The IRS has started initiatives to improve audit selection models and to stand up specialized teams (for example, a new office dedicated to large partnership compliance, since that’s a known gap). For customer service, it might mean balancing the workforce between answering phones and processing correspondence in real-time based on demand – essentially flexing employees to where the backlog is growing fastest. The Taxpayer Advocate noted that if too many staff are moved to phones, paper backlogs grow, and vice versa, so the IRS must perform a “difficult balancing act” until staffing is sufficient for both. Better data on incoming workloads can inform these shifts. Additionally, the IRS should keep improving its project management for IT upgrades so that funds in that area are well spent and not wasted on projects that don’t pan out (following GAO recommendations to have clear milestones and legacy system phase-out plans). By squeezing the most value out of every dollar – whether through smarter case selection, process improvements, or cross-training staff – the IRS can partly mitigate funding shortfalls. However, there is no substitute for having enough overall resources, so efficient management must go hand-in-hand with adequate budgets.
• Workforce development and succession planning: The IRS HR challenges are acute – a large segment of its workforce is at or near retirement age, and the freeze years meant few mid-career employees were in the pipeline. To avoid a brain drain, the IRS needs a robust hiring and training program over the coming years. The agency has already begun recruiting new talent with the IRA funds, but it should also emphasize knowledge transfer from veteran employees before they leave. Mentorship programs, detailed documentation of institutional knowledge, and rehiring recent retirees on a temporary basis to train new staff are possible strategies. The IRS can also partner with universities and professional organizations to attract younger employees into federal tax administration careers (for example, expanding the IRS internship and honors programs). In fields like cybersecurity and analytics, where government salaries are less competitive, the IRS might leverage fellowships or term appointments that bring in experts for a few years of public service. Ultimately, investing in the IRS workforce’s skills and continuity will pay off in better tax administration. A motivated, well-trained staff is essential for the IRS to improve in all areas – enforcement agents who understand complex business transactions, customer service reps who are knowledgeable and empathetic, and IT specialists who can innovate solutions. As the IRS rebuilds its ranks, it should strive for a culture of service and integrity, reinforcing its dual mission of taxpayer assistance and fair enforcement.
• Accountability and performance metrics: With increased funding comes the need to demonstrate results. The IRS should continue to report on key performance measures (like the tax gap, audit rates, call level of service, refund timeliness, etc.) to show how improvements are being achieved. Transparent tracking of how the new funds are used – for example, publishing updates on hiring progress and technology deployments as they did in the 2023 operating plan – helps build trust that resources are managed wisely. If certain initiatives are not yielding expected outcomes, the IRS and Congress should be willing to recalibrate. For instance, if a new enforcement program is not cost-effective, funds might be better spent on taxpayer education or systems modernization. By closely monitoring outcomes, the IRS can ensure that resource boosts translate into tangible improvements like more revenue collected, shorter wait times, and higher voluntary compliance. This accountability will be important to maintain political support for adequate IRS funding in the future. The agency’s leadership has acknowledged this, with the IRS Commissioner pledging that the organization will show real improvements (such as faster refunds and more equitable enforcement) as a result of the IRA investment. Delivering on those promises will help overcome the legacy of underfunding and set the IRS on a sustainable path.

Legislative and Policy Changes Impacting IRS Operations

Frequent changes in tax laws and various policy constraints have significantly affected IRS operations over the years. The agency doesn’t set tax policy, but it must implement and enforce whatever laws Congress passes – and it must do so often on short notice. This has led to some whiplash in priorities and procedures whenever major tax legislation is enacted. A clear example was the Tax Cuts and Jobs Act (TCJA) of 2017, which was the most sweeping tax overhaul in decades. It reduced tax rates, overhauled deductions and credits, and created entirely new regimes (like the pass-through business deduction). The IRS had to scramble to update approximately 450 tax forms, instructions, and publications and reprogram its systems to reflect the changes, all before the next filing season. Forms like the 1040 were redesigned, and guidance had to be issued to both taxpayers and IRS staff on the new rules. This was a heavy lift under tight deadlines, accomplished successfully but straining the organization. Similarly, the flurry of legislation during the COVID-19 pandemic – the CARES Act (2020), COVID relief acts, and the American Rescue Plan (2021) – introduced things like the Paycheck Protection Program (administered by the SBA but intersecting with tax), three rounds of Economic Impact Payments (stimulus checks) to be delivered by the IRS, special tax credits for employers (Employee Retention Credit), and a one-year experiment in monthly Advanced Child Tax Credit payments delivered by the IRS. The Tax Policy Center notes that these were novel programs outside the traditional annual tax collection cycle. The IRS had to stand up new payment distribution systems essentially from scratch and communicate to the public about eligibility – all while juggling its normal filing season duties. The fact that most Americans did get their stimulus checks quickly is a testament to the IRS’s capacity to act fast when needed, but doing so redirected resources away from core tax administration (contributing to backlogs as noted).

In addition to new tax laws, other legislative and policy decisions have shaped the IRS’s operating environment. The IRS Restructuring and Reform Act of 1998 was a landmark law that reorganized the IRS and put a new emphasis on “customer service” after congressional hearings on IRS abuses. It created the IRS’s current structure of divisions by taxpayer type (Wage & Investment, Small Business/Self-Employed, etc.), strengthened taxpayer rights, and established the Office of the Taxpayer Advocate. One effect was a cultural shift where the IRS became less enforcement-heavy for a time and more focused on improving service and relations with taxpayers. While generally positive, some commentators believe the pendulum may have swung too far, making auditors more cautious and contributing to declining enforcement against high-income evasion in subsequent years. Another policy factor is Congress’s imposition of certain restrictions – for instance, annual appropriations riders have prohibited the IRS from using funds to create its own online tax filing software that would compete with private products (this was related to the “Free File” program partnership with industry). Such a restriction arguably slowed the IRS’s digital offerings for filing. However, that may be changing: the Inflation Reduction Act instructed the IRS to study and potentially pilot a “Direct File” free online tax return system for taxpayers. In 2023, the IRS announced it would run a limited pilot of Direct File, signaling a policy shift toward providing a government-run option for simple tax filing. If successful, this could make tax filing easier for millions and reduce reliance on paid preparers for straightforward returns.

Another significant policy area is the IRS’s authority (or lack thereof) to regulate tax preparers. After discovering that many tax return errors and fraud cases originated from untrained or unscrupulous paid preparers, the IRS attempted about a decade ago to institute minimum competency standards and a licensing exam for tax preparers. That effort was struck down in court in 2013 (the court ruled the IRS didn’t have statutory authority to regulate preparers in that way). Since then, the IRS has asked Congress for explicit authority to oversee preparers, but legislation has not passed. As a result, today anyone can charge to prepare tax returns with no qualification required (except for representing clients in disputes). This policy gap continues to impact compliance – taxpayers may inadvertently hire bad preparers who make errors or commit fraud, and the IRS can only react after the fact. Granting the IRS the power to set standards for paid preparers is a potential reform that could prevent problems upstream.

The political climate and legislative oversight also play a role. In recent years, the IRS has found itself in the crosshairs of political debates, which can lead to sudden policy swings. For example, after the IRS’s inappropriate scrutiny of certain nonprofit applications came to light in 2013 (the so-called Tea Party targeting scandal), the agency faced intense criticism and tighter oversight on how it handles tax-exempt status and political activity, even as it tried to implement corrective actions. More recently, when the Inflation Reduction Act boosted IRS funding in 2022, some opponents mobilized public sentiment around fears of an “army of 87,000 IRS agents” harassing taxpayers. While that figure was a mischaracterization (it included all staff over a decade, many replacing retirees, and a large portion for customer service), it became a political talking point. According to the Tax Policy Center, this contributed to the compromise in 2023 to cut back some of the IRS’s funding increase. The lesson is that the IRS’s fate is often subject to the ebb and flow of politics – which can be counterproductive if misperceptions drive policy changes. Continuous congressional oversight is important to ensure the IRS uses its funds appropriately and treats taxpayers fairly, but it is also important that short-term political battles do not derail long-term improvements to the tax system.

Opportunities for improvement through legislative and policy changes include:

• Simplifying and clarifying tax laws: Lawmakers have the power to make the tax code more user-friendly and easier to administer. By enacting simplification measures, Congress could reduce the burden on both taxpayers and the IRS. This might involve streamlining overlapping incentives, raising de minimis thresholds (so the IRS doesn’t have to chase very small amounts), and drafting tax provisions with clear intent to minimize ambiguities. Every new exception or special rule adds complexity that the IRS must learn and implement. A simpler code means fewer errors, fewer questions from taxpayers, and more straightforward enforcement. While sweeping simplification is tough, even incremental steps – like simplifying the family tax benefits or standardizing definitions across provisions – would help. The IRS can contribute by identifying particularly troublesome areas of complexity in its annual reports (the Taxpayer Advocate does this as well), giving Congress a roadmap of where law changes could ease administrative difficulties.
• Providing resources with new mandates: When Congress assigns the IRS new tasks, it should also provide the necessary funding and lead time for implementation. The Tax Policy Center highlights that the experience of the pandemic relief programs showed that the IRS can deliver quickly if given resources (e.g., the $3 billion for stimulus payments helped the IRS update systems and pay out money at unprecedented speed). In the future, if there are new tax credits or one-time programs, aligning them with realistic implementation schedules and appropriating administrative funds will set them up for success. Moreover, Congress could build in more permanent support for IRS administrative functions. For example, if a law expands eligibility for a tax benefit, it might also include a provision for the IRS to conduct outreach and compliance for that benefit (ensuring those who qualify know to claim it, and those who don’t are deterred from improper claims). A current example is the Employee Retention Credit: it was expanded in 2021 and has led to a cottage industry of aggressive promoters pushing ineligible businesses to claim it, overwhelming the IRS with dubious refund claims. With more upfront guidance and enforcement funding tied to that credit, the wave of improper claims might have been less. Integrating policy goals with administrative practicality will lead to smoother outcomes.
• Following through on IRS funding reforms: The Inflation Reduction Act’s funding surge was a pivotal legislative change; the key now is to protect and wisely use that funding. The Tax Policy Center recommends that lawmakers should resist rescinding further IRS funds beyond the agreement already made, as the remaining needs (hiring, IT projects, etc.) depend on that money. In addition, Congress can use its oversight function to monitor the IRS’s progress on the Strategic Operating Plan that lays out how IRA funds will be spent. Regular hearings or reports on hiring numbers, audit rates, technology rollouts, and customer service metrics will keep the IRS accountable to its promises (e.g., boosting audit rates on wealthy taxpayers without increasing audits on those under $400k, as Treasury has pledged). If the IRS demonstrates success – say, drastically improved phone service and measurable narrowing of the tax gap – it may build a case for making some of the funding permanent. Conversely, if certain initiatives aren’t working, Congress can help redirect efforts. Ultimately, a constructive partnership between the IRS and Congress can ensure that the agency’s modernization stays on track and that the public sees real benefits from the investment.
• Empowering the IRS to enhance compliance (within appropriate limits): There are specific legal authorities that, if granted by Congress, could help the IRS do its job better. One is the regulation of paid tax preparers mentioned above – giving the IRS power to set minimum standards and sanction unethical preparers would likely improve the accuracy of returns and curb fraud. Another area is information reporting requirements: Congress can expand requirements for third parties to report income and transactions to the IRS in emerging areas of the economy. For example, the 2021 American Rescue Plan Act already lowered the threshold for reporting gig economy payments on Form 1099-K, and further proposals have suggested banks report aggregate inflows/outflows for accounts over certain thresholds (though controversial, such measures aim to catch unreported business income). As new financial instruments arise (cryptocurrencies, digital assets), updating laws to ensure the IRS isn’t completely blind to those transactions is crucial. In fact, starting in 2024, crypto brokers will be required to report sales of digital assets to the IRS due to a 2021 law change, which should help the IRS track gains that were previously often unreported. Policymakers should continue to look for compliance boosters like this that can be implemented with minimal burden but high payoff in closing the tax gap. Of course, any expansion of IRS authority should be balanced with taxpayer rights and privacy protections. Strong oversight and transparency can prevent misuse of data or overreach in enforcement. By carefully calibrating laws to support compliance, Congress can strengthen the IRS’s hand against tax evasion while maintaining trust that the agency is not abusing its power.
• Strengthening taxpayer rights and dispute resolution: Alongside giving the IRS more tools, it’s important to maintain protections for taxpayers. Laws like the Taxpayer Bill of Rights (formalized in 2015) and the establishment of the independent Taxpayer Advocate have been positive. Going forward, legislative tweaks could further improve the IRS’s interaction with taxpayers – for example, simplifying the offer-in-compromise program (which lets struggling taxpayers settle debts) or adjusting interest and penalty rules to be fairer in situations where IRS delays caused the problem. Congress could also revisit the structure of the IRS Oversight Board (created in 1998 but effectively dormant since 2015 due to unfilled seats) to see if a reconstituted board could help provide strategic guidance and accountability. These policy considerations ensure that as the IRS gets more resources and authority, it also remains service-oriented and fair. The ultimate goal of any legislative change should be a tax administration system that is both robust against noncompliance and respectful of taxpayers’ rights.

Conclusion

The IRS’s recent challenges did not arise overnight – they are the product of years of underinvestment, increasing demands, and sometimes conflicting policy mandates. Tax enforcement became tougher as sophisticated evasion grew and audit resources shrank, leading to a large tax gap. Taxpayer service deteriorated when budget cuts left the agency without enough staff or modern tools to assist the public, a situation made worse by the pandemic. Outdated technology, some of it dating back to the Apollo moon landings, has hampered the IRS’s efficiency and adaptability. Yet, there is now room for optimism that the IRS can turn a corner. The Tax Policy Center reports Congress has started to restore funding, and the IRS is embarking on a once-in-a-generation modernization effort. With continued support, the IRS is poised to hire new talent, upgrade its systems, and improve the taxpayer experience.

The analysis above highlights that meaningful improvements are achievable in each of the key areas: stronger enforcement of tax laws (focusing on the biggest evaders and using smarter techniques), better customer service (so that honest taxpayers can get help and resolve issues quickly), modern technology (to replace failing systems and enable new capabilities), prudent resource management (getting the most out of every dollar and every employee), and sensible policy adjustments (to support the IRS’s mission and simplify compliance). These reforms are interrelated – success in one area reinforces success in others. For example, a modern IT system will enhance both enforcement and service; adequate funding will allow both technology upgrades and more hiring.

For the general public, the implications are significant. An IRS that functions effectively means a fairer tax system where everyone pays what they owe, no more or less. It means faster refunds, fewer errors, and accessible assistance when you need it. It also means more revenue collected with less hassle, which benefits all citizens by funding government operations and reducing deficits. Achieving this vision will require persistence. The IRS will need to execute its improvement plans diligently, and lawmakers will need to provide consistent oversight and support rather than using the IRS as a political football. Past experience shows the agency can accomplish great feats (like quickly implementing huge tax programs) when given the tools and trust to do so. If the current momentum is maintained, the IRS of the coming years could overcome the “legacy of neglect” and emerge as a more modern, taxpayer-centric institution.