In October 2025, the Treasury Department announced that it would shut down Direct File, the IRS’s free, two-year-old online tax preparation tool.

It cost too much to maintain and was used by too few people, the Treasury claimed, and would be discontinued in favor of increased reliance on volunteer tax preparation and a combination of free and paid services provided by the private sector.

The end of Direct File is a fitting symbolic conclusion to the Biden administration’s efforts to modernize the IRS. The Inflation Reduction Act of 2022 provided a historic $80-billion infusion of funds to strengthen enforcement and modernize IRS operations. This investment came after a decade of underfunding and operational challenges arising from the pandemic had pushed the agency to the brink. In 2022, only 21 percent of callers reached a live agent or received automated assistance, and the inventory of unprocessed paper returns peaked at over 20 million.

While modest in terms of the human and financial resources involved, Direct File captured the ambitions of the reform effort. It was a slick online tool that made the taxpayer experience simpler and easier, offering hopes of helping to incubate a new IT culture in the agency along the way. At the same time that a small team was working on Direct File, many more employees were pursuing a host of other critical modernization efforts, most of which were decidedly less visible.

By October 2025, however, Congress had rescinded essentially all of the money for enforcement, the IRS had spent most of the funds specified for taxpayer service and the Trump administration had pushed out or fired roughly 25 percent of the IRS workforce. All that remained was a portion of the funds the IRA had made available for IT, which Congress cut further in February 2026. One more cycle of budgetary feast and famine at the IRS had concluded.

Why the IRS Matters

Revenue collection, it hardly needs saying, is a fundamental governmental responsibility. The IRS collects taxes that fund everything from national defense to Social Security, consumer protection and environmental regulation. The agency gathers nearly $5 trillion in taxes each year, 16 percent of the GDP. The IRS also has a uniquely sensitive role in government as it possesses (and is legally obliged to protect) personal and financial information for nearly every American business and household.

In a country as large as the United States, tax administration operates at a vast scale. More than 160 million families file individual income tax returns each year. The IRS estimates that on average these households spend 12 hours record-keeping, planning and filling out forms, and pay $290 out of pocket for assistance in preparation. And those numbers do not include anything that comes after the return is filed, such as responding to IRS notices if something is wrong with the return or payment.

But the tax system extends far beyond individual income taxes – think business income taxes, employment taxes and estate and gift taxes, among others. The IRS processes 2 million corporate tax returns, 6 million S corporation returns, 5 million partnership returns and 34 million employment tax returns each year. And to make this system work, the IRS handles 4.6 billion information returns. Information returns, such as W-2s, which report wages paid and taxes withheld, make it easier for individuals to file taxes accurately and for the IRS to determine whether the correct tax is paid. In total, the federal tax system imposes an estimated paperwork burden of 7 billion hours and $148 billion in out-of-pocket costs annually.

The voluntary compliance rate is 85 percent, but that means that more than $700 billion owed each year is not paid in a timely fashion (or ever). To discourage noncompliance and collect unpaid tax, the IRS has an escalating series of enforcement actions ranging from computer-generated notices to audits and criminal enforcement in partnership with the Department of Justice. But the current reach of enforcement is light, to say the least: in recent years, the individual audit rate has been just three in 1,000 returns filed.

We all have an interest in efficient collection. People who do not pay their taxes impose costs on everybody else, because one way or another someone bears the shortfall. Congress must either increase other people’s taxes, reduce the provision of public services or run higher budget deficits that cut into the pace of investment and economic growth. Not collecting also undermines trust in the rule of law. And honest businesses shouldn’t have to compete against those who cheat on their taxes to gain an advantage.

More effective tax administration would deliver tangible benefits to the public in the form of less time and money filing returns as well as lower rates of tax evasion. Today, roughly 13 percent of taxes owed are never collected – in the range of what the federal government spends on the means-tested Medicaid and Children’s Health Insurance Programs, or more than enough to deliver a $2,000 payment annually to every person with income below $100,000.

What could taxpayers look forward to if the IRS were fully modernized? You would be able to complete your return online easily and for free. The IRS would use data it already collects on your income to help you complete your return. You would have confidence that your taxes were done correctly because there would be clear answers to your questions, and follow-up from the IRS would therefore rarely be necessary. When there was a need for follow- up, the system would be tuned so that all correspondence is clear and provides concrete steps to resolve the issue. Meanwhile, better service from the IRS would drive shady (and often inaccurate) tax preparers out of business, as well as companies preying on people with tax debt.

Business as Usual

For the overwhelming majority of taxpayers who file electronically, the system operates smoothly. They have tax withheld from paychecks, make any required estimated payments online and receive refunds directly to their bank accounts. Preparing and filing taxes takes more time and is more expensive than it needs to be, but the system works.

Moreover, the agency is capable of quickly delivering specialized services at scale in a crisis. During the pandemic, for example, the IRS processed three rounds of relief payments, known as Economic Impact Payments, and implemented the Employee Retention Tax Credit and the advance Child Tax Credit, among other emergency policies adopted by Congress. It issued the first Economic Impact Payments in 2020 within two weeks of the enactment of the authorizing legislation and delivered 160 million payments to all individuals believed to be eligible within nine weeks.

However, while the IRS routinely moves mountains, the mechanisms by which it works are often far from efficient – especially when paper submissions are involved or there are problems with returns. Delays in processing paper documents consistently run several months or more. As of January 2026, the IRS was processing paper-amended individual tax returns and letters from individual taxpayers received in September 2025. (Paper original returns are processed more quickly because the IRS prioritizes them.)

Problems are not limited to the paper chase, however. Identity theft affidavits – filed when taxpayers believe they have been victims of identity theft – are more than a year behind in processing even though they can be filed online. And access to knowledgeable advice and action by phone is hit and miss.

Moreover, it is often difficult to determine whether your taxes have been calculated correctly, even if you pay a preparer. Congress has written a complex tax code, and that code must be applied to the widely varying and ever-evolving realities of millions of families and businesses. In cases where the IRS has yet to issue regulations translating Congressional intent into concrete guidelines, it may not be willing or able to provide detailed responses to questions.

Unless Congress acts, the quality of taxpayer services will likely deteriorate further in the coming years as the last of the funding from the IRA runs out. The outlook for compliance is, if anything, even more bleak. Audit rates for individuals with incomes above $5 million and for corporations with assets above $1 billion both fell 71 percent from 2010 to 2020. The audit rate for partnerships was never high – only five in a thousand returns were audited in 2010. But that paltry rate has been cut by more than 80 percent, meaning that even partnerships engaged in very aggressive tax evasion face a low risk of audit.

Using IRA funds, the IRS hired about 8,000 compliance personnel in 2024 to bring the compliance workforce to nearly 39,000 – a level last reached in 2013. However, with many of these employees still in their probationary period in early 2025, they were particularly exposed to the Trump administration’s indiscriminate layoffs of probationary employees.

When staff were laid off, reports quickly surfaced about audits dropped or adrift. It’s still not clear what ultimately happened to prominent cases such as the audits of 76 of the largest partnerships with average assets over $10 billion that the IRS announced in 2024. However, available reporting suggests many cases have been closed. It is also unclear what will happen with some of the signature enforcement initiatives undertaken with IRA funding, such as those targeting high-income non-filers.

Turning to information technology, Direct File was not the only casualty of the DOGE chainsaw. Many IT modernization projects were cancelled in early 2025, and while the Trump administration’s rhetoric emphasizes the priority of information technology in government, most of its current work is simply the continuation of Biden-era efforts that were haphazardly paused and restarted.

Moreover, the current administration is Second Quarter 2026 49 making the IT challenges more severe. With federal government salaries uncompetitive with the private sector in IT, it has always been a stretch for agencies to build in-house expertise. And one of the few advantages the federal government could offer has been stable employment – until now, anyway. Adding to the burden, the Trump administration is reportedly favoring IT contractors owned by political allies, which may lead to inferior products.

On another front, the Trump administration has undermined trust in the IRS, which is critical to obtaining voluntary compliance. For one thing, the administration is requiring the agency to share information with ICE – sharing found to be illegal in one court case. For another, the administration continues to push the agency to politicize audits. Not to mention to nullify the impact of audits when evasion is found: President Trump has issued several pardons to people convicted of tax crimes, including reality TV stars Julie and Todd Chrisley, whose family members endorsed Trump at the 2024 Republican convention, and Paul Walczak, a health care executive who pled guilty to tax crimes and whose pardon application recounted what his family had done to support the Trump campaign.

As this article is being written, it is still too early in the 2026 filing season to see what impact the administration’s mismanagement of the IRS will have. However, many of the harms will come not in this filing season but in the years that follow, whether it is encouraging noncompliance or failing to deliver improvements in the tax filing experience that would make it easier and cheaper to file.

Why IRS Reforms Fail

Modernizing the IRS is inherently difficult because of the complexity of the tax code and the size and diversity of the United States economy. Some barriers to efficiency are unavoidable – tax administration will never be simple and will always face sabotage from politically potent interests – while others can and should be taken on as part of reform efforts. We walk through some of the more specific challenges below.

Hollowed out IT. Like other federal agencies, the IRS struggles with limited IT capacity. The agency relies on contractors to complete IT projects and lacks adequate technical talent internally to assess the quality of these contracts, let alone execute the work itself. This delays modernization and creates misaligned incentives. Notwithstanding these difficulties, IRS reform plans always put technology at their very center because automation is what enables the agency to do more with fewer resources, to make its workers more productive, and to offer easy ways for the public to interact with the agency.

Reliance on external contractors. The IRS depends on external contractors for far more than IT. Using contractors enables the agency to scale up or scale down quickly in response to changes in funding and to avoid hiring and firing – but at a significant cost to the quality of the work. In addition, dependence on contractors makes ongoing maintenance more difficult and makes it more complicated to adapt specific projects to evolving contexts.

Inadequate and inconsistent funding. Despite the well-established reality that the return on investment in enforcement can be spectacularly high and there is a critical need for tech upgrades, Congress has cut the IRS’s base budget by 40 percent since 2010, and many members are seeking even deeper cuts. Inadequate funding guarantees inadequate service and more noncompliance. Almost as bad, inconsistent funding makes long-term planning difficult and encourages the IRS to spend money as fast as possible when it is available, reducing the effectiveness of the spending it does do.

Contested visions for enforcement. IRS reforms often involve calls for improved enforcement, but there is no shared vision of what that would look like. Proponents of the IRA cash infusion advocated stronger enforcement with respect to high-income and high-wealth individuals, large corporations and complex partnerships. But many critics of the IRA view recent enforcement declines as a good thing – a counterblow to The Deep State. In contrast, after years of claiming that the Biden administration was planning to audit families with incomes under $400,000, and sharply criticizing the administration for it, House Ways and Means Committee Chair Jason Smith released a draft tax bill that would effectively audit millions of low-income families.

Political weaponization. During the Obama years, Republicans accused the administration of politicizing the review of applications for nonprofit status by conservative organizations. In fact, while there was serious mismanagement of the review process, there’s no evidence of involvement by the White House. Under the Trump administration, by contrast, IRS Criminal Investigation agents have been pulled from investigating serious tax and financial crimes to do immigration enforcement. Even more sobering, the administration is pressuring the IRS to audit its perceived political enemies.

Management obstacles. One consequence of underfunding is to encourage power centers within the IRS to compete for scarce resources in pursuit of separate needs, undermining cooperation and modernization efforts. Interminable delays in hiring staff and contracting services from vendors stretch reform initiatives by years. Career officials at the IRS often view reform efforts as political contrivances that will be swept away by the next election. Unfortunately, that perspective proved to be correct in 2025.

Turning the Page

Congress bears substantial responsibility for the failures of IRS reforms, first and foremost by failing to provide adequate, sustained funding. But beyond starving the IRS of money, Congress has failed to give the agency the flexibility to recruit top talent or even to communicate clear goals. To ensure taxpayers pay what they owe and provide taxpayers the service they deserve, Congress should:

Fund the IRS. Base-operation funding is now smaller than any year since the 1980s, adjusted for inflation. The inadequacy of the IRS’s budget drove deterioration in IRS service, and necessitated the substantial infusion of one-time, long-term funding from the IRA when the agency’s mission was plainly in jeopardy. But Congress has now pulled back most of that money. Congress has done this even though funding the IRS is the rare form of spending that pays for itself. The task now is to generate a legislative consensus behind a sustainable commitment to long-term funding.

Provide direct-hire and critical-pay authorities. The IRS must compete for talent with accounting and law firms that pay far more. Many of the lawyers and accountants at those firms spent time at the IRS, where they gained valuable experience, and then left to play for the other team. Short-circuiting traditional government hiring processes would help, and allowing the agency to pay competitively for specialized talent would help even more. This flexibility should be provided across key functions, but in practice the IRS would likely use it where it is most handicapped, in information technology and legal expertise.

Strengthen enforcement. Maximizing voluntary compliance is the goal, but credible enforcement is critical to get from here to there. Congress could improve compliance by toughening penalties – for example, by making repeated failure to file tax forms a felony for people with substantial tax liability. It could also consider providing the IRS with more flexible authorities for collecting information on emerging tax avoidance issues, which recent court decisions have made more costly.

Going It Alone

The IRS’s challenges are more severe than ever, with the agency facing both longstanding problems and the added challenges of the Trump administration’s inclination to sabotage government institutions. Success is not possible without sustained adequate funding. But even if Congress does not provide the cash, the IRS will still need to push forward with what it’s got. While many of the changes suggested below are consistent with the Trump administration’s stated goals for the IRS, others, especially those related to compliance and restoring public trust, are not consistent with this administration’s statements or actions. It appears taxpayers will need to wait for a future administration for the IRS to take on those projects.

Update the mission. The IRS has historically been a reactive agency. It processes returns that taxpayers submit. It sends notices where there is a problem with those tax returns. It examines returns for errors and inconsistencies. It responds to installment agreement requests and other collection issues. It considers appeals. And it defends agency decisions in court.

Those are all important aspects of the work, but they are insufficient. A modern IRS should be proactive, endeavoring to minimize the burden of filing, preventing mistakes on returns before they occur and deterring evasion before it happens. The IRS will continue to process the returns it receives and examine the returns it processes. But these responsibilities ought to be subsumed by the broader mission to reduce the tax gap and make it easier for taxpayers to meet their obligations and claim credits they are eligible for.

Clarify funding constraints. The IRS has numerous can’t-fail responsibilities, notably processing returns and payments. But it also has numerous shouldn’t-fail responsibilities that will nonetheless fail if Congress does not increase funding. For example, the agency will not be able to provide adequate levels of phone service, respond adequately to mail inquiries or conduct adequate examinations without more money. Where Congress provides insufficient funding, the IRS must communicate that reality, explaining the size and consequences of the deficit, accepting there will be political blowback, and attempting to communicate that the responsibility ultimately lies with Congress.

Address internal management and capacity shortfalls. The IRS must develop and implement a plan to build internal capacity. As part of this, the agency needs to rethink how it funds, governs and oversees large-scale digital product delivery, especially for work that cuts across offices of the organization. There are multiple options for delivery, but they all require attracting digital talent that works directly for the organization and collaborative executive support from across the agency. The IRS must also expand legal capacity to ensure the agency is able to adequately enforce the law at the top, where highly complex fact patterns and access to top advisors can make it hard to determine the line between lawful tax avoidance and noncompliance or evasion.

Improve internal data collection. Available data on IRS activities often lacks the granularity necessary to guide modernization efforts. The IRS needs a specific focus on data supporting strategic decision-making. Among other innovations, the agency should collect detailed information on why people call or write the IRS and on whether their problems are resolved when they do contact the agency, along with more granular information on enforcement and collections activities.

A Road Map to Reform

The IRS must modernize regardless of the level of funding Congress provides – the level of funding should only affect the pace. The IRS should prioritize initiatives that will make employees more productive, reduce the need for services that are expensive to provide (e.g., reduce the number of incoming phone calls) or directly follow through on commitments in the mission. Immediate priorities should include:

Restore free online filing. Making it possible to file directly online at no cost should be the bare minimum goal now. It is no different than providing paper tax forms in 1913. The IRS should also use information it already receives to make filing as quick and easy as possible. Moreover, resuscitating Direct File would provide the IRS with important data about what guidance is needed by taxpayers filing their returns, not to mention giving taxpayers greater peace of mind when filing.

Provide self-service options that allow taxpayers to avoid phone calls and letters. There are many routine tasks today that cannot be completed without phoning or writing the IRS. The resulting contacts are expensive and slow to process.

Digitize incoming information. Paper returns and correspondence require expensive manual entry. Moreover, only some of the information on those documents is extracted into electronic systems; the information that is not extracted remains invisible to service and compliance systems.

Automate processes to the maximum extent possible. Processes that are entirely automated, including individual tax filing for most families, are quick and efficient. Processes that require manual intervention are not. The IRS should publicize a list of priority functions to automate and work through it.

Provide additional guidance to improve voluntary compliance. Guidance can dramatically increase the productivity of enforcement personnel by taking issues that would be resolved in a time- and resource-intensive audit and instead relying on voluntary compliance with published guidance to achieve similar results.

Better align business audit rates with risk across segments. At present, audit rates for different types of businesses are largely driven by IRS capacity rather than by calculations of potential gains in revenue. Partnerships are rarely audited because it is difficult for the IRS, while C corporations are audited at much higher rates because it is easier. In practice, aligning audits with the risk of noncompliance almost certainly means increasing audit rates for partnerships, especially those embedded in complex business structures. At the same time, the IRS should endeavor to improve the models that it uses for case selection with increased attention to the likely tax harvest.

Explain how cases are selected for audit. It would be counterproductive to provide public information about the specific risk assessment algorithms the IRS uses to select audit cases because that would simply be a roadmap for tax evaders to escape detection. But it would make sense to provide greater detail about the broad strokes of why audits are initiated and the number of audits selected as a way of building trust in the fairness of the selection process.

What Is To Be Done

Fights about IRS funding mirror broader fights about the role of government in our lives, and the ongoing failure of Congress to adequately fund the IRS reflects the lack of consensus on that issue. But the consequences of starving the IRS hardly fulfill anyone’s idea of fairness or efficiency. A tax system that offers little in the way of assistance in meeting legal obligations and rewards clever evasion imposes unnecessary burdens on the public, undermines trust in government and forces Washington to borrow what it cannot collect.

Even if Congress fails to provide adequate, sustained funding, the IRS needs to plow forward, recognizing the priority of making the taxpayer experience as easy and seamless as possible and improving compliance among those taxpayers with the most complex filings.

Unfortunately, the Trump administration is making the challenges of IRS modernization more daunting rather than less. Senior leaders and experienced staff across the organization have been pushed out, and IT projects shut down. Moreover, sharing confidential tax information with the Department of Homeland Security in violation of taxpayer privacy laws and reportedly pressuring the IRS to target enforcement against the administration’s perceived political enemies risk undermining the rule of law and trust in the IRS.

In the long run we will all pay the price.