When unusual activity shows up on a credit card, the company calls the holder – generally the same day. That kind of time frame will soon apply to routine Internal Revenue Service audits – which now happen years after you file your taxes.

IRS Commissioner Doug Shulman imagines a day in the not-too-distant future when, on the same day a tax return is filed electronically, IRS software can detect missing income or stock dividends.

It’s taken a while but it largely worked. It’s not a common story today in government. You usually highlight failures but this is somewhat of a success from my perspective.” – James Thompson

Like the credit card company, the IRS could then call the customer and update the return right away. No painful audit 18 months later, no back taxes, no penalties.

Today, the IRS might not audit a return for the tax year 2012 until 2014 or 2015, on activities that happened in 2012.

“That’s ineffective for us, and a burden for you. Then you have to go recreate all those 2012 transactions in 2015,” Shulman said in an interview.

The IRS is close to completing a database modernization effort that will lead to a “real time tax system.”

“If there is any issue, you can resolve it, you pay your taxes right then, and we have no issues on the back end with compliance,” Schulman said.

Other innovations are bringing the IRS closer to the taxpaying public as well, all in an effort to lift the veil of secrecy that once seemed to cloak the agency.

They include:

  • IRS2Go 2.0. This mobile app lets taxpayers keep tabs on their return, get information on filing, get hard copies of tax records, get IRS news and instructional videos. The new iteration of the application builds on the earlier version which already allows filers to check on “Where’s My Refund,” status, get tax updates on rules and regulations and follow the IRS on Twitter.
  • Online Volunteer Income Tax Assistance (VITA) program. This tool, available 24/7 on IRS.gov, makes it easier to get free help in filing taxes. Volunteers at VITA locations generally offer to help prepare forms for filers who earn less than $50,000 a year. The help doesn’t come via the web. The tool directs a taxpayer to a location nearby, where they can go for help.
  • E-Filing. Fifteen years ago, only 16 percent of tax returns were filed electronically. Last year, it was 77 percent and Shulman expects the number to top 80 percent this year. E-filing saves the government substantial amounts of money – it costs $3.50 to process a paper return and only 77 cents to process an electronic one – and filers also get refunds faster with fewer processing errors.
  • New emphasis on customer satisfaction. Gone are the days when the IRS stood ready to cut off your toes if you stepped over the line – the popular view of the agency back then. In 1998, Shulman said in a recent speech to the National Press Club, the customer satisfaction index was 32 percent. Now, it’s up to 73 percent and rising, something Shulman attributes in large part to the customer-friendly services offered on smart phones and videos on YouTube.
  • YouTube videos. Ok, so it’s late on the night before the deadline (This year April 17). Taxpayers can now turn to YouTube for videos of friendly IRS employees who can offer advice.

James Thompson, a professor at the College of Urban Planning and Public Affairs at the University of Illinois, Chicago, has studied the IRS’ tech-savvy trend and says the agency is making great strides.

“I started watching them in the mid 1990s when they were under attack from all quarters, especially from Congress,” he said. “They have made a massive transformation.”

He said the entire culture of the agency has changed to focus on the external, rather than the internal pressures.

“It’s taken a while but it largely worked,” he said. “It’s not a common story today in government. You usually highlight failures but this is somewhat of a success from my perspective.”

Much of the progress has come due to the implementation of CADE 2, a database modernization system being brought online by IRS. CADE 2 stands for Customer Account Data Engine, which is aimed at eventually completely replacing the 1960s-era data processing system. While modifications have been made to that system, its core still embodies ancient technology.

The most recent leap forward in the data processing system is that the IRS now has gone from a weekly processing cycle to a daily processing cycle for basic taxpayer information such as current account balance, whether outstanding amounts are due and whether any payments have been made recently.

The system also allows the IRS to sort out tax returns prepared by commercial tax preparers that have serious compliance issues and to get in touch with those preparers rapidly in time to fix the errors. The IRS also has implemented a training program for non-CPAs who prepare tax returns to bolster efficiency and competence, Shulman said.

It’s unclear if the federal budget problems will affect innovation at the IRS.

Shulman told the National Press Club (see video above) that the agency currently spends less than 3% of its budget on long-term technology enhancements. The Obama administration’s budget request for next fiscal year calls for increasing the IRS budget by more than 21%, but wrangling on Capitol Hill is putting that budget in jeopardy and this year’s budget is being cut, like all other federal agencies, resulting in staff reductions of 3,600 full-time employees, according to Federal News Radio.

At the same time, the ultimate goal of innovation at the IRS is to produce efficiency and savings that could offset at least some of the budget cuts.

The “real time” process to process and catch errors on tax forms on a daily basis, for example, will increase efficiency, and eventually save administrative money from the IRS budget. In addition, the Fresh Start effort will help keep taxpayers in the system, which helps allow limited IRS enforcement resources to be focused elsewhere.

Shulman told the House Ways and Means Committee last month, “We could shift resources to spend more money on getting it right in the first place, and focus back-end auditing resources on more complex issues. There are huge compliance and service benefits associated with such a system, not to mention burden reduction for taxpayers.”

Shulman also testified: “From FY 2009 through the FY 2013 proposed Budget, the IRS will have achieved nearly $1 billion in budget savings and efficiencies. These savings and efficiencies reflect an across-the-board commitment to finding better and more efficient ways to administer the tax system. They come from a variety of sources, including reductions in outside contracts, training and non-case-related travel.”

Meanwhile, the IRS is implementing two other innovations which are aimed at helping collect taxes from those who simply cannot pay, and those who have been avoiding taxes with offshore shelters. The first, called “Fresh Start,” is aimed at helping the unemployed. The program was expanded in 2012.

The new version of Fresh Start allows those who have been unemployed for more than 30 days to avoid “failure-to-pay” penalties, if their income is below $100,000 for individuals and $200,000 for heads of households. It also allows taxpayers to pay in installments to catch up on back taxes, even if they owe up to $50,000.

“It’s the right thing to do for taxpayers to help them through tough times,” Shulman said. “It is also the right thing to do for the tax system. People genuinely couldn’t pay (because of the recession),” Shulman said. “When they get a job again, they are in the system for 40 years.”

The Offshore Voluntary Disclosure Program doesn’t let tax cheaters off the hook, but it does let them stay out of jail if they pay up. They have to pay a penalty of 27.5% of the worth of their assets hidden overseas.

Again, Shulman stressed the win-win aspect of the program. “What’s important is that they are paying now,” Shulman said, “And they are in the system long term.”

The goal of all of the efforts, Shulman says, is to look at them as a long-term process.

“My view is that any time you are doing innovation you are trying to say ‘is there a difference lens we can put on how we do our job?’” he said. “The key is having a long term relationship.”