As the IRS gears up for the upcoming filing season and implements provisions of the new Tax Act, recent efforts to modernize decades-old technology may face challenges, said former IRS Commissioner Danny Werfel – but AI could help.
Werfel, who led the IRS from March 2023 until President Trump took office, noted the original $80 billion allocation under the 2022 Inflation Reduction Act. That full amount was not available for modernization – with “a big portion” allocated for enforcement and another “small portion” for taxpayer services, he explained. But even so, the IRS technology budget was “strong and robust” after the Inflation Reduction Act, said Werfel, speaking at an August 21 American Institute of CPAs town hall.
That Inflation Reduction Act funding has since been cut back, with further cuts ahead. According to an August 11 Treasury Inspector General for Tax Administration (TIGTA) report, IRS Inflation Reduction Act funding was reduced to just $37.6 billion as of March 2025.
More Budget Cuts Ahead
But it’s not just cuts in additional allocation that have Werfel worried. “In all scenarios, we’re looking at a cut in the technology budget,” said former IRS Commissioner Danny Werfel.
The House financial services and general government fiscal year 2026 appropriations bill would cut IRS technology and operations annual funding, reducing it to just $3.7 billion. And President Trump’s fiscal year 2026 budget request would reduce IRS technology and operations support funding even more, dropping it to just under $2.6 billion.
According to the Treasury Department’s IRS budget-in-brief, the president’s request would be a 37% reduction from fiscal year 2025 level of $4.1 billion. The president’s request also calls for a 59% reduction in tech staff.
Modernization Goals
Werfel said that as commissioner, his modernization goal was “a very customer-focused or taxpayer-service focused vision.” His specific goal was that “all taxpayers should be able to do all interactions with the IRS digitally or virtually, if they choose.” He equated the ideal IRS-taxpayer interaction to working with an online bank. Further, Werfel said he strived to provide continual enhancements “every time someone comes back to the website or the app platform.”
Werfel described his “200-plus” page Strategic Operating Plan (SOP) – first issued in 2023 and updated in 2024 – that detailed how the agency would achieve these goals and make use of Inflation Reduction Act funding.
According to TIGTA’s recent report, the IRS spent about $5.7 billion of Inflation Reduction Act funding on tech transformation as of March 2025. But that month, Treasury “announced a strategic pause of IRS modernization efforts,” said TIGTA, with work under the SOP “put on hold.”
Despite budget cuts and a modernization “pause,” the Trump administration’s Treasury has still indicated a focus on IRS tech modernization. The IRS launched its Technical Roadmapping Initiative on April 8, with the stated aims of modernizing infrastructure and enhancing taxpayer services.
And according to the budget-in-brief, current goals for the IRS include “expanding automation, enhancing data integration, and improving system interoperability.” In particular, the budget-in-brief indicates the IRS aims to “better focus audit resources on more significant pockets of non-compliance” and “use modern technology applications to provide taxpayers secure, 24/7 online access to their own tax information.”
The agency has a short timeline for completing these efforts. The IRS “is working to substantially complete most key IT modernization initiatives in the next two years,” per the budget-in-brief.
AI’s Role
Just how the IRS will achieve these lofty goals with reduced funding and staffing remains to be seen. Werfel noted the agency has yet to reveal the details of its new modernization plan.
But the former commissioner left open the possibility that AI could streamline IRS operations and aid in modernization efforts. “I do think there’s some exciting innovations in AI,” he said.
AI can be used by call centers, Werfel said, and “you’ll get an answer quick from a computer or robot, versus a human.” He suggested that “it’ll be a good answer if the IRS does it right.”
Beyond that, AI could be “embedded in the process by which they update the code,” said Werfel. “And if it’s done well, we should see a significant acceleration to move the IRS infrastructure into a modern environment.”
But Werfel cautioned that the recent loss of IRS talent could hamper AI innovation at the agency. “When you launch a new technology, especially in a high-stakes environment like the IRS, you’ve got to test it,” he explained. But the agency has lost many of the people who “know where the potholes are.”
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