IRS Takes Another Step Towards Digitizing Its Tax Filing Process

The Internal Revenue Service is getting closer to the digitalization of the 21st century.

Three companies – Ripcord, Brillient Corp. and Resultant/KSM Consulting – move on to the next and final phase of the agency IRS pilot programwhich allows the IRS to test and implement technology solutions that speed up the processing of tax returns and could potentially help it meet the December 2022 deadline for dematerialization.

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

“Our mission is to help make taxes as easy as ordering an Uber,” Sam Fahmy, president and CEO of Ripcord, told Yahoo Money. “The outcome of the program could improve future processes, such as audits, by detecting patterns, redundancies and errors in repositories, and set the stage for creating long-term efficiencies through digitization.”

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

Program Context

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

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

After completing an initial 180-day, $200,000 phase of the IRS Pilot Challenge – Ripcorda robotic scanning company, signed a $750,000 contract, six months contract with the IRS to digitize taxes securely Form 709which captures transfers of assets that may be subject to federal gift tax and certain generation-skipping transfer taxes.

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

According to Marcela Almeida, IRS contracts manager on the project, the Pilot IRS solution challenge has only two phases, whereas most challenges have three or four phases.

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

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

“The delays in processing these returns are a result of the IRS’ archaic data entry process,” said Erin Collins, National Taxpayer Advocate. “The IRS’ submissions processing function today conjures up images of what data transcription looked like in the 1960s – before the information age.”

In fact, vendors chosen for the IRS Pilot program are expected to process “more than a billion pages,” according to the IRS.

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

Catherine Roman (L), tax preparer at H&R Block, helps Clair Czarecki (R) pay his taxes at an H&R Block office in San Francisco, California.  The IRS has strongly urged taxpayers to file their taxes electronically this year to avoid delaying their tax refunds.  Those who filed by paper face delays of up to 10 months.  (Photo by Justin Sullivan/Getty Images)

Catherine Roman (L), tax preparer at H&R Block, helps Clair Czarecki (R) pay his taxes at an H&R Block office in San Francisco, California. The IRS has strongly urged taxpayers to file their taxes electronically this year to avoid delaying their tax refunds. Those filing on paper could face delays of up to 10 months, as paper filings 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 1040 series returns to digital formats so that the IRS can process them as electronic file returns. The IRS is expected to respond by May 13.

“If the IRS has implemented scanning technology, the current backlog is unlikely to exist,” the directive said.

According to Collins, the IRS has made no progress in reducing its backlog this year. As of March 19, 2021, the number of unprocessed original Form 1040s reached 4.6 million. A year later, the number had risen to 4.7 million. Those who file paper returns could wait up to 10 months or more to see their tax refund.

“By digitizing documents and turning them into smart data now, it reduces the IRS’ digital debt for future modernization,” Fahmy said. “Given the current backlog of IRS paperwork, this program is the first step to creating faster, 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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