I.R.S. Unveils $80 Billion Plan to Overhaul Tax Collection

WASHINGTON — The Internal Revenue Service on Thursday unveiled an $80 billion plan to transform itself into a “digital first” tax collector focused on customer service, laying the groundwork for an ambitious overhaul of one of the most scrutinized arms of the federal government.

The long-awaited road map is a centerpiece of President Biden’s economic agenda, which aims to narrow the nation’s $7 trillion of uncollected tax revenue and use the funds to combat climate change, curb prescription drug prices and pay for other initiatives prized by Democrats.

The infusion of funds into the I.R.S. was included in the Inflation Reduction Act, the sweeping climate and energy legislation that Democrats pushed through last year. Efforts to bolster the agency have drawn strong opposition from Republicans, who have long accused the I.R.S. of improperly targeting them.

The report released Thursday, which was requested by Treasury Secretary Janet L. Yellen, offers new details about how the I.R.S. intends to use the additional funding over the next decade. The Biden administration has been focused on highlighting improved taxpayer service and responsiveness, but the report indicates that more than half the money will be dedicated to cracking down on big companies and wealthy individuals that evade taxes.

In a memorandum to Ms. Yellen that accompanied the report, Daniel I. Werfel, the new I.R.S. commissioner, said he would focus new enforcement resources on “hiring the accountants, attorneys, and data scientists needed to pursue high-income and high-wealth individuals, complex partnerships and large corporations that are not paying the taxes they owe.”

The I.R.S. has about 80,000 full-time employees, which is about 20 percent fewer than it had in 2010 despite a larger U.S. population and a more complex tax system. The agency’s resources have also declined over the years, as Republicans have sought to cut its funding and, in some cases, have called for its abolition. The financial strain has led to backlogs of tax filings, delayed refunds and long waits for taxpayers who call the agency with questions.

In recent months, the I.R.S. has ramped up hiring to improve its “customer service” capacity and has been racing to complete the processing of old tax returns, most of which were filed on paper rather than electronically.

The plan released on Thursday details how the I.R.S. intends to become a “digital first” organization that provides “world class” service to taxpayers. That includes the replacement of antiquated technology and the introduction of systems that will allow taxpayers greater access to their financial information, easier communication with the I.R.S. and new ways to correct errors as returns are being filed.

The most sweeping and politically sensitive changes involve enforcement. The I.R.S. plans to introduce more data analytics and machine-learning technology to better detect cheating, and it aims to bolster its teams of revenue agents and tax attorneys so that the agency is not overwhelmed when auditing complicated business partnerships or corporations.

The I.R.S. plan repeatedly emphasizes that it will honor Ms. Yellen’s directive that the new money will not be aimed at increasing audit rates for taxpayers who earn less than $400,000 a year — a pledge meant to align with Mr. Biden’s promise not to raise taxes on low- and middle-income Americans. The plan echoes Ms. Yellen’s language that those audit rates will not rise above “historical levels,” but does not specify the levels, suggesting that audit rates could rise above their existing levels.

In a briefing with reporters on Thursday, however, Mr. Werfel said that in the near term, audit rates for those making less than $400,000 will not rise at all.

“We have years of work ahead of us, where we will be 100 percent focused on building capacity for higher-income individuals and corporations,” he said. “During this time, the audit rates for average taxpayers will not be increasing and as a result, we will not come close to hitting or exceeding any historic average rate.”

Honoring that commitment while enforcing the tax code could be complicated.

Janet Holtzblatt, a senior fellow at the Urban-Brookings Tax Policy Center, said it would be a challenge for the I.R.S. to determine whether taxpayers reporting an income under $400,000 are doing so legitimately, without being able to audit some of them initially. Ultimately, she said, the agency will need to decide on an acceptable audit rate for people under that income level.

Mr. Werfel acknowledged that the I.R.S. would have to be alert in instances where taxpayers earn, for example, $5 million in a given year and $399,000 a year later.

“We might take a second look at that,” he said.

The plan lays out benchmarks for many of its goals but it leaves unanswered questions.

The I.R.S. is in the midst of a $15 million study to determine if it can create its own system that would let more taxpayers file their federal returns online at no cost. This idea has met resistance from lobbying groups representing the tax preparation industry.

The agency has faced criticism this year after the publication of a study that showed that Black taxpayers are at least three times as likely as other taxpayers to face I.R.S. audits, even after accounting for the differences in the types of returns each group is most likely to file. The plan includes using data to support “equity analyses” and says a key project will be developing procedures to evaluate the fairness of I.R.S. systems.

“We will conduct research and partner with others to understand any potential systemic bias and identify disparities across dimensions including age, gender, geography, race and ethnicity,” the I.R.S. plan said.

The Treasury Department said earlier that the investment in the I.R.S. would lead to the hiring of 87,000 employees over 10 years, doubling the agency’s staff. But the operating plan does not give an estimate for the agency’s eventual head count.

Mr. Werfel batted down claims by Republican lawmakers that the I.R.S. would be hiring thousands of armed “agents” to scrutinize middle-class taxpayers and small businesses. He said that only 3 percent of the I.R.S. work force was in the criminal investigations division, which has access to weapons, and that there were no plans to increase that percentage.

Despite efforts to focus on technology and taxpayers services, the plan is likely to stoke renewed criticism from critics of the I.R.S. and from Republicans in Congress.

The report notes that if the agency’s annual funding is curtailed over the coming years, some of the $80 billion might be needed to maintain its basic operations. That would force the I.R.S. to scale back some of the ambition of its modernization plans.