Stilted innovation, less efficiency: Former IRS executives explain the impact of DOGE cuts

From an outsider’s perspective, the Internal Revenue Service’s business modernization program has had a seemingly Sisyphean quality to it since its late 1990s launch, drawing criticism from lawmakers and government watchdogs for cost overruns, delays and continued reliance on obsolete legacy tech.

But over the past decade-plus, the tax agency’s team of tech professionals believe substantial strides have been made in ushering IRS systems to a far more digitized and better place, particularly with the support of the Inflation Reduction Act and the billions of dollars the 2022 law directed to modernization. 

That momentum is in danger of coming to a screeching halt in the months ahead, as Elon Musk’s Department of Government Efficiency continues its slashing of the federal workforce. The IRS has been targeted early and often in the nascent days of the second Trump administration, with more than 7,000 probationary employees dismissed from the agency and promises of much more to come. 

Late last month, DOGE placed 50 IRS IT staffers at the Senior Executive Service level on administrative leave. Most of those employees were associate chief information officers, with expertise covering cybersecurity, modernization, applications, contracts, networks, and data center operations, among other IT-related areas, according to an agency IT executive who left the IRS in March.

“There’s no criteria or rationale that appears to be evident to anyone at the IRS that’s been talking about this,” said the source, referring to DOGE’s job cuts. 

The Treasury Department says these workforce reductions are a corrective to the previous administration’s “hiring surges,” and have been done in the name of efficiency and improved customer services. 

In interviews with FedScoop, however, former high-ranking IRS executives shared several concerns about the effect these mass workforce reductions will have on the agency and its “remarkable progress” in modernizing its systems, including how cuts could hinder innovation, reverse advancements on artificial intelligence, embolden potential tax cheats and result in a much less efficient agency. 

Fraud fighters

Few people understand the impact drastic staff reductions at the IRS could have on modernization better than Barry Johnson. For 37 years, Johnson served the tax agency in a variety of roles, most recently as chief data and analytics officer. He left the IRS in January and is now a nonresident fellow with the Urban Institute and Brookings Institution’s Tax Policy Center.

As the agency’s CDO and analytics chief, Johnson oversaw a division called Research, Applied Analytics, and Statistics, or RAAS. That unit provides technical consulting services to all of the agency’s operating divisions, working to explore emerging technologies and methods to inform potential business applications and assess challenges and opportunities. 

“Outcomes can include things like intelligent automations, better statistical models that more accurately identify potential reporting issues on tax returns, and analytical tools that provide bigger picture/network analyses that help identify emerging tax administration issues, including scams and schemes,” Johnson said of RAAS’s work. 

In Johnson’s view, the IRS’s “remarkable progress in modernizing, despite tight resources over most of the last 15 years or so” can be traced in part to a RAAS-created data warehouse built in 1996 to support research and innovation in tax administration and tax policy research.

One team within RAAS, for example, specialized in behavioral science, using those insights to nudge taxpayers to claim benefits they were entitled to and help prevent at-risk taxpayers from becoming non-compliant, Johnson said. 

The IRS’s work with advanced analytics put the agency “at the forefront of identifying fraudulent returns filed by identity thieves and … preventing billions of dollars in fraudulent refund claims from being paid out,” he said.

Data and analytic initiatives of that kind have gone a long way toward leveling the playing field between the IRS’s limited audit staff and filers with complex finances backed by legal representation only the rich can afford. 

In July of last year, the IRS announced that $1.3 billion had been collected from 1,600 wealthy taxpayers who had skirted their debts. That initiative was made possible by the IRS’s investments in data to identify under-reporting in taxes, and “because additional resources had allowed [the agency] to bring on staff needed to pursue this unpaid tax,” Johnson said. 

A Treasury Department spokesperson told FedScoop that “staffing reductions that are currently being considered at the IRS will be part of — and driven by — process improvements and technological innovations that will allow the IRS to collect revenue and serve taxpayers more effectively.” 

“The roll back of wasteful Biden-era hiring surges, and consolidation of critical support functions are vital to improve both efficiency and quality of service,” they continued. “The Secretary is committed to ensuring that efficiency is realized while providing the collections, privacy, and customer service the American people deserve.”

In Johnson’s opinion, further reductions to the IRS workforce would “be a boon to sophisticated taxpayers” skilled at ducking tax laws. Losing that tax revenue wouldn’t be the first DOGE-induced move that seemingly undercuts longstanding agency priorities.

Roadmap to modernized systems

Though the IRS has been dinged for its labored transition away from legacy IT systems — including by inadvertently directing IRA funds for modernization toward legacy maintenance — there was a detailed plan in place to accelerate the digital shift.

According to the recently departed IT executive, the IRS has been following a roadmap for leveraging new technologies and embracing more common platforms, including Salesforce and ServiceNow. That approach, the source said, would allow the agency to greatly reduce the risks posed by using legacy systems.

“It’s a large portfolio … but we actually had a very cohesive plan to be going live this summer with a major, major part of the [Individual Master File] modernization,” the source said. There was also a “very distinct plan” within the agency’s Transformation and Strategy Office “for delivering tons of services that would allow us to be more like a commercial bank, where we were doing everything online, and you have bots and agents that can help you to get through things faster and so forth.”

Johnson said providing bank-like online services would lead to faster, more accurate service for taxpayers. And modern data systems would also enable the IRS to “more quickly integrate changes Congress makes to the tax system in ways that will reduce confusion, make it easier for taxpayers to comply and provide closer to real-time data and statistics on the update or impact of changes,” he said.

“So failing to modernize will likely mean that wait times for callers will again increase, new features and services will not be rolled out as hoped, and in general a return to (or even increase) in the challenges taxpayers experienced prior to the IRA investment,” Johnson added. 

DOGE shut down the Transformation and Strategy Office last month, according to the former IT executive. Of the 80 or so employees in the office — who were “hand-picked” to get the commissioner’s “vision implemented as fast as possible” — a few lower-level staffers were assigned to different agency components, while the rest either retired, took the administration’s deferred resignation offer or were laid off, the source said.

Despite that office’s closure, the IRS maintains that its modernization plans are ramping up. The Treasury spokesperson told FedScoop that the department has pulled together “a team of long-time IRS engineers who have been identified as the most talented technical personnel.”

“Through this coalition, they will streamline IRS systems to create the most efficient service for the American taxpayer,” the spokesperson added. “This week the team will be participating in the IRS Roadmapping Kickoff, a seminar of various strategy sessions, as they work diligently to create efficient systems. This new leadership and direction will maximize their capabilities and serve as the tech-enabled force multiplier that the IRS has needed for decades.”

A source familiar with the initiative said the roadmapping team is being led by a career IRS chief technology officer — emphasizing that it is not someone from DOGE. The kickoff event is described in a Wired story published last week as a “hackathon,” though the source pushed back against that characterization.

“A cornerstone of this modernization effort includes the implementation of a unified Application Programming Interface (API) infrastructure,” the source said. “APIs are secure, industry-standard technologies that facilitate effective and secure communication between various IRS systems. By consolidating systems through a robust API layer, the IRS will significantly improve its ability to manage taxpayer information securely, streamline data governance, enhance fraud detection capabilities, and reduce operational complexities.”

AI, data and efficiency

Under former Commissioner Danny Werfel, the IRS leaned into the use of AI tools, leveraging the technology to automate, lower error rates and scrutinize potential tax evaders. DOGE has plans of its own for AI across federal agencies, though much of the reporting about the Musk-led group’s aims centers on replacing humans with the tech.  

AI under Werfel and his predecessors took on various forms. Johnson said the IRS had been using chatbots to interpret taxpayer questions and provide “the best pre-curated response.” AI tools also used data that natural language processing produced from scanning call transcripts and text to identify pain points for customers and allow agency teams to address them. And the technology has been utilized to spot scams and schemes more quickly. 

Whether the IRS in the DOGE era continues down a similar AI path remains to be seen. Charles Rettig, the IRS commissioner from 2018 to 2022, said during an ACT-IAC webinar last week that the agency had plans to “reskill the workforce” for the AI age. DOGE doesn’t appear to be following that game plan.

“Automation can leverage human resources but not replace human resources,” Rettig said. “We were all in on getting the right technology, as much technology using AI to make ourselves better and more efficient — but not reducing the workforce.” 

Whatever direction the IRS takes AI policy under DOGE, Johnson said it’s crucial for the agency to have proper oversight mechanisms in place to ensure responsible use. 

“Subject matter experts need to be engaged in all phases of the AI lifecycle — development and training, implementation and then monitoring, evaluation and maintenance,” he said. “For AI use cases that impact individual rights, such as those that [support] audits, I believe that keeping a human in the loop who has a significant oversight/decision making role is essential to ensuring the AI functions as intended.”

“One impact of firing so many people is that those left behind may not have the bandwidth to fulfill these roles,” Johnson added, “delaying the rollout of innovation and potentially putting those who will be subject to the AI applications at risk.”

The former IRS IT executive said DOGE’s firings so far have been based on conclusions from “talking to people at the very, very, very top and at the very, very, very bottom.” The 50 IT executives who were put on administrative leave last month were skilled, technical strategists that had “the 100,000-foot view of what we’re doing,” the source added, and without taking that kind of expertise into account, DOGE is missing “the bigger picture.”

The Treasury spokesperson said the 50 IT executives, who were placed on “temporary paid administrative leave,” were “primarily non-technical personnel who were in technical decision-making roles.”

DOGE’s firings earlier this year included newly hired data scientists, employees who Johnson said were brought into the agency specifically to advance and implement numerous innovations.

“These innovations would have made [the] IRS more efficient, supporting cost savings in the future while still meeting the ever-growing needs of tax filers,” he said. “Improved chatbots reduce the number of phone calls that require a live assistor; better, faster information available to phone assistors means they can handle more calls per hour; better compliance models reduce the number of no change audits and allow auditors to focus on the highest dollar non-compliance. Automation and the advantages of better data integration reduce repetitive processes and makes existing workers more efficient.”

A potentially “erroneous” filing year

Despite the massive loss of technical brainpower over the past few months, the average taxpayer probably won’t know what they’re missing this filing season. But next year could be a different story. 

The longtime IRS IT executive said the planning cycle for the next filing season begins now, “a massive orchestration” that brings together business units and informs tech teams about everything from required software upgrades to cybersecurity patches. Every one of those updates must be integrated, tested and delivered.

Come late summer, the source expects the tax preparation industry to start noticing that they don’t have critical information provided by the IRS to update their systems with revised code and new tax credits. Without that information, taxpayers a year from now could be looking at all sorts of “erroneous” outcomes, they added.

“My prediction is like in August, they’re going to start realizing that there are many balls dropped. There are systems that haven’t been worked on or planned for,” the source said. “The people that do the planning are the ones that they got rid of.”