The Internal Revenue Service (IRS) is undergoing a major transformation, driven by the need to modernize operations in the face of budget constraints and workforce reductions. A key component of this transformation is the implementation of Artificial Intelligence (AI) and automation technologies. This move follows significant layoffs within the agency, prompting a restructuring aimed at maintaining efficiency and effectiveness in tax collection and taxpayer services.

The IRS is planning to leverage the "AI boom" to address workforce gaps resulting from the layoff of thousands of tax agents. The Treasury's budget proposal includes the removal of another 40,000 jobs. According to Treasury Secretary Scott Bessent, smarter IT and AI can enhance collections even with a reduced budget and staff. The IRS already uses AI for various functions, including operational efficiency, compliance, fraud detection, and taxpayer services. AI is being used to automate internal processes, improve taxpayer services, and detect potential fraudulent returns. Applications include computer vision, natural language processing, and predictive analytics. A common application is automating data retrieval and reducing manual data entry. For instance, the IRS's Modernized e-File (MeF) system uses optical character recognition to extract data from paper returns, reducing manual input and backlogs. The Department of Treasury recovered $375 million in fiscal year 2023 by using AI to mitigate check fraud and strengthen processes to reclaim potentially fraudulent payments, demonstrating that when used appropriately it can improve the agency's efficiency and effectiveness.

However, the rapid integration of AI also raises concerns about potential disruptions and worker displacement. The IRS should ensure that AI complements rather than replaces human workers and that dedicated staff are involved to detect unintended consequences. As AI is further integrated, the agency can focus on upskilling and reskilling employees to work with these new tools. The IRS is also implementing Robotic Process Automation (RPA) to automate tasks such as formatting financial data, consolidating information from multiple sources, and extracting data from documents. Introducing automation impacts how people perform their duties, and the IRS CFO office and the IRS Procurement office are focusing on upskilling and reskilling their employees to work with automation tools. IRS leadership has taken steps to enhance soft skills among employees such as active listening, problem-solving, and open communication and collaboration.

These changes are occurring against a backdrop of significant workforce reductions. Driven by the Trump administration's Department of Government Efficiency (DOGE), led by Elon Musk, the IRS plans to cut up to 40% of its workforce by the end of 2025. This will shrink the agency from about 102,000 employees to between 60,000 and 70,000. The audit division has been particularly hard hit, losing 31% of its revenue agents. The layoffs follow the conclusion of the 2025 tax filing season, raising concerns about the agency's ability to meet taxpayer needs. The IRS is reducing its staff through layoffs, including nonvoluntary departures and deferred resignation offers. The agency expects to cut about 8,000 more employees as part of additional reductions in 2025.

With fewer human resources, the IRS may accelerate the adoption of automated systems, artificial intelligence, and online self-service tools to handle routine inquiries and tax processing. As customer service options dwindle, taxpayers may find themselves relying more on third-party tax professionals to navigate increasingly complex tax matters. The sudden reduction in staff could lead to delays in refunds, particularly for those who rely on them for financial stability and longer wait times for customer service. The IRS has struggled with customer service issues for years, and this reduction in workforce is likely to exacerbate the problem.

To ensure the responsible use of AI, policymakers should establish clear guidelines on data protection. Sufficient staff training is also crucial to ensure that the IRS can efficiently leverage AI while adequately securing data. The IRS has taken the initiative to stand up a new organization to govern its AI projects and has designated its Chief Data and Analytics Officer as its official whose responsibilities include monitoring and overseeing AI at the IRS.

While AI can be effective in detecting fraud, there are also concerns it will be used by scammers to aid in tax fraud or scams. A bipartisan group of senators has raised concerns about the role of AI in conducting sophisticated tax scams and requested that the agency identify plans to intervene in cybercrime, educate the public, and prepare for the evolution of these scams. As the IRS moves forward with its automation and workforce restructuring plans, it will be critical to balance the potential benefits of AI with the need to protect taxpayer rights and maintain a skilled workforce.