IRS Modernization: What Pros Need to Know

Hey — It’s Edna.

Welcome to this week’s edition of The Growth Ledger is a 5-minute read.

As we gear up for the 2025 tax season, the landscape is shifting—and with it, new opportunities to grow your practice. From changes in IRS systems to evolving audit strategies, staying ahead means prioritizing the right moves now.

This week’s focus includes:

• AI chatbots transforming IRS customer service—and freeing up your time.

• IRS Direct File expansion and what it means for client retention.

• New equity initiatives in audit strategies and how they affect high-income clients.

• TCJA expiration prep: what your clients need to do before the 2026 tax cliff.

• IRS modernization and workflow adjustments for a smoother tax season.

Bottom Line: The 2025 season is a turning point.

Let’s dive in:

IRS Modernization

A Game-Changer for Tax Pros The IRS is embracing automation with chatbots that can now handle payment plans, transcript requests, and even multilingual support with the introduction of ITA, the Interactive Tax Assistant. While these tools help reduce call wait times for basic queries, they don’t replace the value you bring to clients facing complex scenarios—like managing audit risks, navigating TCJA expirations, or tackling intricate tax strategies. Clients still need your strategic guidance for their most important tax decisions. By embracing these tools for efficiency and doubling down on advisory services, you can stay ahead and elevate your value in a changing tax landscape.

Compliance Gets a Fairer Shake

Equity is taking center stage in the IRS’s revamped audit strategies.

Updates to audit algorithms aim to reduce racial disparities that have historically targeted EITC claimants. The IRS has pledged a 50% reduction in correspondence audits for EITC cases while piloting AI to focus on high-income taxpayers. Focus on Complexity: Audit efforts are shifting toward high-value, complex cases, but there’s no confirmation of an overall reduction in total audit volume.

The IRS is piloting AI-driven tools to better target high-income taxpayers and complex cases while significantly reducing audits of EITC claims.

Immediate Impact For Middle-Income Clients: Reduced audit risk, giving them greater peace of mind. For High-Net-Worth Clients: Increased scrutiny, especially in areas like crypto transactions, offshore accounts, and intricate tax strategies.

Strengthen Audit Defense for High-Income Clients: Review protocols for red-flag areas such as cryptocurrency reporting, foreign asset disclosures, and pass-through entity income.

Update Engagement Letters: Clarify audit support tiers, offering differentiated services (e.g., basic support for routine inquiries vs. premium coverage for complex audits). Educate Clients: Proactively communicate these IRS changes to reassure middle-income clients while preparing high-net-worth clients for increased audit attention.

Direct File Program

By 2025, the IRS Direct File program will expand from 12 to 24 states, offering more taxpayers a free, direct e-filing option.

The program now includes Alaska, Connecticut, and Wisconsin, covering over 30 million taxpayers.

More Tax Situations Covered: Support now extends to Health Savings Accounts, Premium Tax Credits, and more .

Action steps:

• Audit client lists to identify who might migrate to Direct File.

• Proactively reposition services toward complex filings (e.g., pass-through entities, international income, HSA/Premium Tax Credit optimization ).

• Offer free "Post-Filing Review" consultations to catch errors in self-filed returns.

Big Tax Law Changes and Funding Challenges:

With key provisions of the Tax Cuts and Jobs Act (TCJA) set to expire on December 31, 2025, major shifts are coming:

Tax Rate Reversion: Individual tax rates will return to pre-2017 levels, with the top rate rising to 39.6%. [Add hyperlink to source 41/42/47]

Shrinking Standard Deduction: The standard deduction will shrink by approximately 50% for married couples, which could significantly impact filing strategies. [Add hyperlink to source 42/47]

Pass-Through Deduction Phaseout: The popular 20% deduction for pass-through income will also phase out, affecting small business owners. [Add hyperlink to source 7/43]

The IRS is working to prepare for these changes, with infrastructure upgrades underway to handle post-TCJA complexity. However, funding challenges loom large: While modernization efforts have made strides, the funding cliff expected post-2026 could jeopardize progress. [Add hyperlink to source 12/14/50]

Funding and Modernization

A Mixed Picture The IRS has allocated $80B from the Inflation Reduction Act toward: AI-Driven Compliance Tools: Automating audits and improving taxpayer support. [Add hyperlink to source 4/25/32] Digitizing Paper Returns: Over 1 million paper returns were processed digitally in 2024, signaling an important step forward. [Add hyperlink to source 13/32]

But there’s a catch: 72% of allocated funds remain unspent, with critical projects like cloud migration still incomplete. [Add hyperlink to source 12/14] A 2026 funding crisis threatens to stall or reverse these improvements, just as tax law changes increase system demands. [Add hyperlink to source 12/14/50]

The tax landscape will look very different in 2026. As tax professionals, it’s critical to stay ahead by understanding how these changes will impact your clients and workflows.

Funding and Priorities

IRS Looks Ahead Despite funding uncertainties, the IRS is prioritizing modernization and service improvements: Enhanced Digital Services: AI-driven compliance tools and digitized paper returns are streamlining taxpayer interactions . Funding Challenges: 72% of Inflation Reduction Act funds remain unspent, with critical projects like cloud migration delayed . 🌟 Key Takeaway: Improved tools and services align with your mission to deliver exceptional client outcomes.

Strategic Opportunities for 2025 Change isn’t a roadblock—it’s a launchpad.

Leveraging technology, specialize in high-value services, and stay proactive in communication and planning, so your firm is positioned to not just adapt but thrive in this evolving tax landscape.

Automate repetitive tasks: Use AI tools for data entry or document sorting to free up 10-15 hours/week .

Upskill teams: Invest in training for international tax, crypto, or ESG reporting to capture emerging niches.

Communicate proactively: Send monthly "Tax Change Alerts" to clients via email/SMS to reinforce your advisory role. The 2025 season is a pivot point. Tax pros who streamline commoditized services, deepen specialization, and guide clients through TCJA transitions will retain relevance—and revenue—amid rapid changes.

What IRS updates are you most excited—or concerned—about? How are you preparing for these shifts?

Let’s navigate these changes together and lead the tax profession into its next chapter.

Have a great week,

Edna