At his confirmation hearing in May, IRS Commissioner Billy Long committed to developing a comprehensive modernization plan for the IRS. The Trump administration’s budget sets a goal of substantively completing modernization within two years. That’s an ambitious commitment, given the decades-long IRS history of incomplete modernization efforts. 

But thus far, as my TPC colleague Janet Holtzblatt recently noted, the administration has not provided a detailed vision of what a modernized IRS will look like or revealed how the IRS will be able to transform itself in the face of a proposed 2026 $2.5 billion budget cut and Treasury’s pause of already in flight modernization efforts. 

The IRS was making significant progress toward a fundamental digital transformation that, when fully realized, would greatly improve all aspects of the IRS’s work. This transformation has three key elements that are essential to modernizing the IRS.  

1. Expand electronic filing options and digitization of paper documents

The heart of IRS modernization plans in recent years has been eliminating manual processing of the approximately 50 million paper tax returns and 135 million pieces of paper correspondence, notices, responses, and non-tax forms it receives annually. At a May 6 hearing, Treasury Secretary Scott Bessent testified that paper processing required 6,500 employees at an annual cost of $450 million, and promised that modernization and automation—presumably leveraging Artificial Intelligence (AI)—will nearly eliminate this expense. However, the path forward must accommodate taxpayers who continue to interact with the IRS through paper and via the mail. 

Since 2022, the IRS has made great progress in expanding self-service online options for taxpayers. These alternatives to paper interactions include expanding features and capabilities available through online accounts for individuals and businesses, and making about 30 forms accessible by cell phones or tablets. It also includes a new document upload tool that permits taxpayers to receive and respond online to IRS correspondence, which has already been used for 1.6 million transactions. And the IRS increased the types of tax forms (including amended returns) that can be filed electronically (eFiled).

But some taxpayers, out of necessity or preference, will continue to submit paper forms and correspondence. So in its 2023 and 2024 strategic reports, the IRS aimed to scan (i.e., take a digital image of a document) all paper documents as they are received to reduce the volume of paper that must be managed and stored.

In 2023, the Treasury Inspector General for Tax Administration (TIGTA) raised concerns that the IRS was not on track to meet this goal.  In 2024, IRS replaced older scanners and by the third quarter of the fiscal year, had scanned more than 2 million documents, including some paper-filed 1040s and employment tax forms.  

2. Extract data

As the IRS scans a paper document, it must automatically and accurately extract data from the image to enable tax administration functions, like processing a tax refund or determining whether a return complies with applicable tax laws. Usable data are also essential to facilitate automation, including AI. 

Absent automated data extraction, IRS employees would still have to manually enter tax data into IRS databases to support basic tax administration. Before such efforts were paused, the IRS aimed to scan and extract data from all paper Form 1040s by the end of 2025. 

More recently, the IRS announced a contract with Iron Mountain to scan 20 million paper-filed tax returns. The contract includes extraction of all data for just those returns made up solely of forms and schedules that can be eFiled. At best, these represent about 40 percent of all the paper-filed tax forms processed in 2024, according to the most recent IRS Data Book (Tables 2 and 4). The contract, which ends in July, has an option to be extended until October 2026.

The IRS has not publicly specified when this work will be completed or why Treasury paused scanning and extraction for all paper Form 1040s. Nor has it offered a plan for paper-filed individual, business, and other returns currently ineligible for eFile, all of which will be a significant technical challenge.

3. Integrate data

To realize the benefits of data extraction and digital images, the IRS must also ensure that existing or newly designed employee-facing tools can tap data and scanned images. For example, a taxpayer service representative must easily access and review scanned images and data with other legacy account information to effectively aid taxpayers. Taxpayer 360 and Enterprise Case Management projects, described in the 2024 Strategic Plan Update, set out to accomplish this. They were well underway prior to the modernization pause. 

Absent such integration, employees will be forced to continue working with multiple systems when assisting taxpayers, manually typing in information from one database to another, or resorting to printing scanned documents to complete case files. None of these options will support high-quality service with fewer resources.  

Ongoing: The IRS must regularly and precisely report modernization progress 

Digitization—replacing paper documents with scanned images, where employees key in data or print documents—is not digital transformation. But in the past, IRS leaders have sometimes used these terms interchangeably, making it difficult to understand the impact of technology changes on IRS costs or services. Digitization alone will realize very few benefits for taxpayers. 

The promised IRS modernization plan must specify goals that recognize and build on progress already made toward the fundamental digital transformation of the IRS. The agency must then provide regular, accurate progress reports as it works toward achieving them.