The Internal Revenue Service (IRS) plays a crucial role in administering the federal tax system, processing over 240 million tax returns and collecting more than $3.5 trillion in taxes annually. Despite its essential functions, the IRS faces significant inefficiencies, particularly concerning the processing of standard versus itemized deductions and the management of electronic versus paper filings. These inefficiencies not only strain the agency’s resources but also impact taxpayer experiences. In addition, of the 16 listed federal government agencies listed below, only two garnered more unfavorable responses than favorable ones. Of them, the IRS, was the only agency of the list where a majority of respondents (51%) rated it unfavorably.

This soapbox post delves into these challenges and proposes strategies to enhance IRS efficiency, potentially reducing the need for a large workforce.

Understanding Deductions: Standard vs. Itemized

Taxpayers have the option to reduce their taxable income through either the standard deduction or itemized deductions. The choice between these methods significantly influences the IRS’s processing workload.

Standard Deduction

The standard deduction is a fixed dollar amount that reduces the income on which taxpayers are taxed. The amount varies based on filing status, age, and other factors. For the 2024 tax year, the standard deduction amounts are:

• Single Filers: $14,600

• Married Filing Jointly: $29,200

• Head of Household: $21,900

These amounts are adjusted annually for inflation.

Itemized Deductions

Itemized deductions allow taxpayers to deduct specific expenses, such as mortgage interest, state and local taxes, medical expenses, and charitable contributions. Taxpayers itemize when their total deductible expenses exceed the standard deduction. However, itemizing requires meticulous record-keeping and increases the complexity of tax returns.

Filing Preferences: Standard vs. Itemized

The Tax Cuts and Jobs Act (TCJA) of 2017 significantly increased the standard deduction, leading to a substantial shift in taxpayer behavior. Prior to the TCJA, approximately 30% of taxpayers itemized their deductions. Post-TCJA, this number dropped dramatically. For instance, in the 2020 tax year:

• Standard Deduction Claims: Approximately 87.5% of tax returns claimed the standard deduction.

• Itemized Deduction Claims: Only about 9.3% of tax returns were itemized.

This shift has simplified the filing process for many taxpayers and reduced the IRS’s burden in processing complex itemized returns.

Filing Methods: Electronic vs. Paper

The method by which taxpayers file their returns—electronically or on paper—significantly affects the IRS’s operational efficiency.

Electronic Filing (e-Filing)

e-Filing allows taxpayers to submit their returns online, offering numerous benefits:

• Accuracy: e-Filed returns have an error rate of about 1%, compared to 20% for paper returns.

• Processing Speed: Electronic submissions are processed faster, leading to quicker refunds.

• Cost-Effectiveness: Reduces the need for manual data entry, lowering administrative costs.

In the 2019 tax year, approximately 89.5% of individual tax returns were e-filed.

Paper Filing

Despite the advantages of e-Filing, a portion of taxpayers continue to file paper returns:

• Manual Processing: Paper returns require IRS staff to manually enter data, increasing the likelihood of transcription errors and processing delays.

• Resource Intensive: Handling paper returns demands more personnel and physical storage space.

In the 2019 tax year, approximately 10.5% of individual tax returns were filed on paper.

Inefficiencies Arising from Current Practices

The existing dynamics of deductions and filing methods contribute to several inefficiencies within the IRS:

1. Processing Delays: Paper returns require manual data entry, leading to longer processing times and delayed refunds.

2. Error Rates: Higher error rates in paper filings can result in additional correspondence with taxpayers to correct mistakes, consuming IRS resources.

3. Resource Allocation: Maintaining staff for manual processing of paper returns diverts resources from other critical IRS functions.

4. Operational Costs: Handling, storing, and processing paper returns incur higher operational costs compared to electronic processing.

Strategies for Enhancing IRS Efficiency

To address these inefficiencies and optimize operations, the IRS can implement several strategies:

1. Encouraging Electronic Filing

Increasing the adoption of e-Filing can significantly enhance efficiency:

• Public Awareness Campaigns: Educate taxpayers on the benefits of e-Filing, such as faster refunds and reduced errors.

• Incentives: Offer incentives, like expedited processing or small credits, to encourage electronic submissions.

• Mandates for Preparers: Require tax professionals to e-File returns, especially for clients who do not opt out.

2. Simplifying the Tax Code

A more straightforward tax code can reduce the need for itemization:

• Increasing the Standard Deduction: Further raising the standard deduction could make itemizing unnecessary for more taxpayers.

• Limiting Itemized Deductions: Capping certain deductions may simplify filings and reduce processing complexity.

3. Enhancing Digital Infrastructure

Investing in modern IT systems can dramatically streamline IRS operations, reducing errors and reliance on a large workforce. Key improvements include:

• AI-Powered Fraud Detection

• Implementing AI and machine learning can help detect fraudulent claims in real-time, reducing the $19 billion lost annually to fraudulent tax refunds.

• AI-driven audits can identify discrepancies more efficiently, allowing the IRS to allocate resources more effectively.

• Automation for Routine Tasks

• The IRS still relies heavily on manual data entry for paper filings. Optical Character Recognition (OCR) and AI-driven data processing could eliminate much of this need.

• Automating taxpayer correspondence (such as auto-generated responses for common inquiries) would reduce workload.

• Blockchain for Secure Transactions

• Blockchain technology could enhance the security and transparency of taxpayer records, reducing identity theft-related fraud.

4. Downsizing the Workforce Through Efficiency Gains

A major consequence of modernizing IRS systems is that fewer employees will be required to process returns and address taxpayer concerns. Currently, the IRS employs approximately 78,000 workers, but this could be reduced significantly through:

• Natural Attrition

• As employees retire, the IRS should limit hiring new personnel, instead reallocating resources to automation and AI-driven services.

• Restructuring and Cross-Training

• Some employees handling paper returns could be transitioned into compliance roles, fraud detection, or digital support.

• Reducing the Number of IRS Call Centers

• The IRS receives tens of millions of phone calls annually, many for questions that could be answered through enhanced digital self-service platforms.

5. Eliminating Redundant IRS Functions

The IRS spends billions of dollars annually on administrative overhead. A more streamlined structure could eliminate unnecessary expenses:

• Consolidating Regional Offices

• The IRS currently operates hundreds of offices across the country, many of which serve overlapping functions.

• Consolidating these locations while enhancing online services would reduce real estate and operational costs.

• Merging Redundant Audit Processes

• IRS audits can take months, if not years, due to bureaucracy and inefficient procedures.

• Creating a centralized AI-driven audit unit could increase efficiency and reduce the need for multiple layers of review.

6. Making Filing Even Simpler for Most Americans

Many developed countries, including Sweden and Japan, offer pre-filled tax returns for their citizens, where the government automatically fills out most of the information, and taxpayers simply confirm or correct it.

• The IRS already collects most of the data needed to do this through employers, banks, and other financial institutions.

• If implemented, this could eliminate the need for 50-60 million taxpayers to file their own returns, reducing IRS processing needs significantly.

7. Privatizing Some IRS Services

While the IRS must retain core enforcement responsibilities, some functions could be outsourced to private sector firms to improve efficiency:

• Outsourcing IT Upgrades

• Partnering with tech firms like Google, Amazon Web Services, or IBM to modernize the IRS’s IT infrastructure would ensure more efficient and secure processing.

• Using Private Collection Agencies for Overdue Taxes

• The IRS already uses private firms to collect unpaid tax debts, and expanding this initiative could reduce the need for IRS staff dedicated to collections.

Potential Outcomes of IRS Modernization

By implementing these strategies, the IRS could achieve:

• A 30-40% Reduction in Workforce Needs

• Automation and simplification could reduce IRS staffing requirements by at least 20,000-30,000 employees over the next decade.

• $50-$100 Billion in Annual Savings

• Between fraud reduction, administrative cuts, and technology upgrades, the IRS could save billions annually, reducing taxpayer burden.

• Faster Refund Processing

• With fewer paper returns and streamlined audits, taxpayers could receive refunds in days instead of weeks.

• A More Transparent, User-Friendly IRS

• With digital-first services and automated filing options, taxpayers would face fewer frustrations while complying with tax laws.

Conclusion: A Leaner, More Efficient IRS for the Future

The IRS is one of the most critical agencies in the federal government, but its inefficiencies lead to wasted time, money, and frustration for both taxpayers and government workers. By modernizing its technology, streamlining tax filing, reducing reliance on paper-based processes, and optimizing its workforce, the IRS can operate with fewer employees while improving service quality.

The goal is not to eliminate the IRS but to make it leaner, more responsive, and technologically advanced—ultimately benefiting both taxpayers and the federal budget. If properly executed, these changes could pave the way for a 21st-century tax system that is simpler, faster, and more efficient for all Americans.