Is there a way to "undo" ATC choice (e.g. taxi VFR vs get IFR clearance)

No, there is no undo feature in the ATC feature of Microsoft Flight Simulator, however this use to be possible by reloading the flight plan (.pln) (or loading a different flight plan) and requesting clearance from ATC again.

The ability to load a new flight plan has been removed from the GUI (there is a work around that still works to load a .pln) but after having recently tested this in conjunction with ATC - the option to request a new clearance, once requested, no longer seems to be possible. I will test this again but I think it has been removed. I expect some reasoning behind this for further developing the feature, but the state has been incomplete for a long time.

So, in order to switch from VFR to IFR (or vice versa) and together with MSFS ATC, you will need to start a new flight, which means exiting your active flight to the menu and starting again.