IRS vows to digitize all taxpayer documents by 2025 [Updated]

Today, the US Treasury Department announced that taxpayers will have the choice to go paperless for all Internal Revenue Service (IRS) correspondence in the upcoming 2024 filing season.

By 2025, the IRS plans to achieve paperless processing for all tax returns, still accepting paper documents but immediately digitizing them, to "cut processing times in half" and "expedite refunds by several weeks," the Treasury Department said.

"The IRS receives about 76 million paper tax returns and forms and 125 million pieces of correspondence, notice responses, and non-tax forms each year, and its limited capability to accept these forms digitally or digitize paper it receives has prevented the IRS from delivering the world-class service taxpayers deserve," the Treasury Department said.

By accelerating paperless processing, the IRS expects to simplify how Americans access their taxpayer data and save millions historically spent on storing more than a billion documents. Digitization can also help eliminate errors, the Treasury Department said, which can "result from manually inputting data from paper returns." And it will help taxpayers more quickly get answers to questions, as IRS customer service employees "do not currently have easy access to the information from paper returns." Starting in 2024, they will.

Next filing season, taxpayers will have the option to e-file 20 additional tax forms among the most commonly submitted when amending returns, including forms used to submit information on things like identity theft or proof of eligibility for "key credits and deductions that help low-income households."

"Taxpayers who want to submit paper returns and correspondence can continue to do so," the Treasury Department said, but "all paper will be converted into digital form as soon as it arrives at the IRS." In 2024, the IRS estimates that "more than 94 percent of individual taxpayers will no longer ever need to send mail to the IRS."

Once taxpayers arrive at the 2025 filing season, they'll have the option to e-file "an additional 150 of the most used non-tax forms," the Treasury Department said, which "will be available in digital, mobile-friendly formats that make them easy for taxpayers to complete and submit."

The IRS prioritized mobile-friendly formats because the agency estimates that "15 percent of Americans rely solely on mobile phones for their Internet access."

Crunching data to audit wealthy tax evaders

Seemingly not everyone will be stoked to see the IRS go totally paperless. The Treasury Department said that combining paperless processing with "an improved data platform" will make it easier for data scientists to extract and analyze data—potentially detecting tax evasion that the IRS has long overlooked due to a lack of resources.

"When combined with an improved data platform, digitization and data extraction will enable data scientists to implement advanced analytics and pattern recognition methods to pursue cases that can help address the tax gap, including wealthy individuals and large corporations using complex structures to evade taxes they owe," the Treasury Department said.

In April, the Treasury Department said that "improving enforcement among high-income and high-wealth individuals, complex partnerships, and large corporations that are not paying the taxes they owe" could end up flagging $160 billion owed but evaded annually.

"Due to a lack of resources and loss of top talent, audits of the wealthy and large corporations have plummeted over the last decade, and the amount of taxes evaded by the top 1 percent has exploded to $160 billion per year," the Treasury Department reported in April. "Audit rates for millionaires fell by 77 percent, audit rates for large corporations fell by 44 percent, and audit rates for partnerships fell by 80 percent between 2010 and 2017."

Treasury Secretary Janet Yellen said that updating the IRS technology was crucial to reduce the tax gap and ensure that "high earners play by the same rules as working and middle-class families."

Ars reached out to several organizations representing tax professionals and accountants to see how the IRS going paperless would impact individuals and corporations during the next filing season and will update this report as more information becomes available. [Update: The Senior Manager for Tax Policy and Advocacy for the American Institute of CPAs (AICPA), Peter Mills, told Ars that the IRS’s paperless processing initiative reflects recommendations submitted by the AICPA and the AICPA-led coalition, Tax Professionals United for Taxpayer Relief Coalition. Mills said that the AICPA is "encouraged to see the IRS taking steps to modernize its operations" by increasing the number of documents that can be submitted electronically and digitizing the documents it receives. The AICPA is "optimistic that these steps will lead to reduced processing times and better experiences overall for taxpayers,” Mills said.]

The IRS updates are funded by provisions included in the Inflation Reduction Act (IRA), which provides separate funds from the IRS annual budget funds that Republicans in Congress are actively seeking to slash, Reuters reported. However, last month, IRS Commissioner Danny Werfel warned that budget cuts could reduce the IRS's ability "to ramp up tax collections on millionaires," Reuters reported.

Yellen has said that budget cuts could also slow down the digitization process and hamper efforts to improve customer service.

Beefing up IRS data security

Recently, popular e-filing services have come under fire over data privacy concerns. Last month, Congress said that H&R Block, TaxAct, and TaxSlayer could be fined billions for "recklessly" sharing potentially hundreds of millions of taxpayers' sensitive personal and financial data with Google and Meta "for years" in apparent violation of laws.

To some taxpayers, e-filing and conducting all correspondence online directly with the IRS could provide more assurances of data privacy and security.

The Treasury Department said in April that recent technology investments include funds that will "also allow the IRS to continue to meet and enforce industry and government-wide cybersecurity standards and ensure continued protection of taxpayer data." That includes "system-wide technology upgrades the IRS has lacked the resources to do" in the past.