IRS takes another step toward digitizing its tax return process

·Personal finance writer
·4 min read

The Internal Revenue Service is inching closer to 21st century digitization.

Three companies — Ripcord, Brillient Corp., and Resultant/KSM Consulting — are moving forward to the next and final phase of the agency’s Pilot IRS program, which allows the IRS to test and implement tech solutions that speed up tax return processing and potentially could help it meet the December 2022 deadline for going paperless.

The progress comes as the IRS faces an unprecedented paper backlog and after the agency’s watchdog urged the IRS to implement machine-reading technology within the next two filing seasons.

“Our mission is to help make taxes as easy as ordering an Uber,” Sam Fahmy, president and CEO at Ripcord, told Yahoo Money. “The result of the program could improve future processes, such as audits, by catching patterns, redundancies and mistakes in filings, and set the stage for creating efficiency in the long run through digitalization.”

A woman walks out of the Internal Revenue Service building in New York. (Credit: Shannon Stapleton, Reuters).
A woman walks out of the Internal Revenue Service building in New York. (Credit: Shannon Stapleton, Reuters).

Background on program

In July, the IRS Pilot program released a request for proposals indicating the tax agency was looking to test innovative solutions — such as scanning-as-a-service (SCaaS) and optical character recognition (OCR) — to digitize and process various IRS documents and records.

Participating vendors were awarded $7.5 million contracts and included Ripcord, Resultant/ KSM Consulting, Brillient, Government CIO, and Xerox.

After fulfilling a 180-day, $200,000 first phase of IRS Pilot challenge – Ripcord, a robotic digitization company, has signed a $750,000, six-month contract with the IRS to securely digitize tax Form 709, which reports transfers of assets that may be subject to federal gift tax and certain generation-skipping transfer taxes.

Brillient, a full-spectrum digital transformation company, has been assisting the IRS in extracting machine-readable data from existing, low resolution digital images to make them compliant with IRS systems by using OCR tools. Finally, Resultant/ KSM Consultant has also entered the second phase of the SCaaS challenge.

According to IRS contracting officer on the project, Marcela Almeida, the Pilot IRS solution challenge only has two phases, while most challenges have three or four phases.

An IRS employee walks through tax documents in the staging warehouse at a Internal Revenue Service facility on March 31, 2022 in Ogden, Utah. (Photo by Alex Goodlett for The Washington Post via Getty Images)
An IRS employee walks through tax documents in the staging warehouse at a Internal Revenue Service facility on March 31, 2022 in Ogden, Utah. (Credit: Alex Goodlett for The Washington Post via Getty Images)

Implementing these technological solutions could help address the severe paper backlog the IRS is currently facing and save thousands of dollars by eliminating paper storage facilities. According to the National Taxpayer Advocate (NTA), as of March 18, the IRS faces 15 million tax returns backlogged from the 2020 and 2021 filing seasons.

“The delays in processing these returns result from the IRS’s archaic data intake process,” said National Taxpayer Advocate Erin Collins. “The IRS’s submission processing function today evokes images of what data transcription looked like in the 1960s – prior to the information age.”

In fact, vendors chosen for the IRS Pilot program are expected to process “upwards of 1 billion pages,” according to the IRS.

“Paper documents stand in the way of being digital-first,” Fahmy said. “They take time and effort to process, so taxpayers have to wait, workers have to perform mundane tasks and everyone suffers.”

H&R Block tax preparer Catherine Roman (L) helps Clair Czarecki (R) with her taxes at an H&R Block office in San Francisco, California. The IRS strongly urged taxpayers to file their taxes electronically this year to avoid delaying their tax refunds. Those that filed by paper face delays of up to 10 months.  (Photo by Justin Sullivan/Getty Images)
H&R Block tax preparer Catherine Roman (L) helps Clair Czarecki (R) with her taxes at an H&R Block office in San Francisco, California. The IRS strongly urged taxpayers to file their taxes electronically this year to avoid delaying their tax refunds. Those that filed by paper could face delays of up to 10 months as paper returns are processed on a 'first in, first out' basis. (Credit: Justin Sullivan, Getty Images)

Last month, Collins urged the IRS to take “immediate steps” to implement scanning technology to convert paper Form 1040-series returns to digital formats so the IRS can process them like e-file returns. The IRS should respond by May 13.

“If the IRS has implemented scanning technology, it is unlikely that the current processing backlog would exist,” said the directive.

According to Collins, the IRS has not made progress in reducing its backlog this year. As of March 19, 2021 the number of unprocessed original Forms 1040 reached 4.6 million. A year later, the number had increased to 4.7 million. Those filing paper returns could wait up to 10 months or longer to see their tax refund.

“By digitizing documents and turning them into smart data now, it reduces the IRS’ digital debt for further future modernization,” said Fahmy. “Given the IRS's current backlog of paperwork, this program is the first step to creating quicker, more efficient digital processes, and moving the IRS into a new, paperless era.”

Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.

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