I discussed the expansion of digital service options to improve taxpayers’ experiences interacting with the IRS. Here, I will discuss the desperate need for multi-year funding to modernize IRS computer systems and infrastructure. Tax administration is at risk, and the country and the IRS need a solution now more than ever.
A Supreme Court justice famously opined that “taxes are the life-blood of government.” In that vein, the IRS is responsible for collecting approximately $3.5 trillion in taxes each year – roughly 95 percent of federal revenue. In addition, the agency is tasked with administering recurring social benefits programs like the Earned Income Tax Credit, and one-time financial relief programs like Economic Stimulus Payments in 2008 and Economic Impact Payments in 2020. Despite these enormous and critical responsibilities, the IRS is overwhelmingly reliant on “legacy” information technology (IT) systems – which the IRS’s IT function has defined as systems that are at least 25 years old, use obsolete programming languages (e.g., COBOL), or lack vendor support, training, or resources to maintain. A recent report published by the Treasury Inspector General for Tax Administration found that 231 IT systems used by the IRS are legacy systems.
In order to provide first-rate taxpayer service, the IRS will require a substantial overhaul of its IT systems. Over the past 50 years or so, the IRS has developed hundreds of software programs to meet the needs of its business units. But these programs generally lack the ability to interface with each other to provide a seamless taxpayer experience, nor are they nimble enough to integrate new technologies, with the consequence that data from one system must be re-entered into another (e.g., when a taxpayer’s case moves from Exam to Appeals).
Example: When a custodial parent wishes to amend her 2019 tax return to allow the non-custodial parent to claim a child as a dependent and to claim various credits, she can file an amended return electronically, but must mail the Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, along with Form 1040-X, Amended U.S. Individual Income Tax Return. The return-processing arm of the IRS does not have the capability to accept the Form 8332 electronically, so it must scan and upload the data from a paper form received. The delay resulting from mailing and processing of a paper Form 8332 could cause complications for the taxpayer or the non-custodial parent if the audit arm of the IRS acts on the amended return based on outdated return information of either parent.
Regardless of how the IRS organizes its business units and its behind-the-scenes processes, taxpayers will benefit if IRS systems can communicate with each other, in real time, to better serve both individual and business taxpayers.
In Section 2101 of the Taxpayer First Act (TFA), Congress directed the IRS Chief Information Officer to develop and implement a multi-year strategic plan for IT. Prior to the passage of the TFA, the IRS had embarked on a mission to modernize its IT systems. In April 2019, it released an Integrated Modernization Business Plan that outlines the IRS leadership’s vision to improve the taxpayer experience by modernizing core tax administration systems, IRS operations, and cybersecurity over a six-year period, but does not fully address all of its IT needs.
The IRS has also established a new Enterprise Digitalization and Case Management office to oversee its efforts to develop a more taxpayer-centric approach to management. The Enterprise Case Management initiative has the dauting task of overcoming the challenges the IRS currently faces from having casework taking place on more than 60 aging systems, most of which are incapable of communicating with each another, onto a cloud-based case management system.
We can all envision the benefits of IT modernization, but core IT upgrades are more than just about improving taxpayer service – they are also required to reduce the chances of a catastrophic breakdown. Modernizing technology is no longer a luxury; it is a necessity, and it is needed now. Imagine the panic and pandemonium that would ensue if the IRS’s IT systems crashed and could not be recovered quickly. In 2018, some systems crashed for just a few hours; although the IRS was able to recover quickly this time, it happened on the filing deadline, prompting the agency to give panicked taxpayers and practitioners an extra day to file their returns. With a more significant crash, the IRS might be unable to collect tax payments or issue tax refunds. Just this year, we have seen a further glimpse of the IRS’s IT systems limitations, as IRS operations have been impacted by COVID-19 (see my earlier blog post).
It is incumbent upon Congress to fund the technological upgrades the IRS requires to provide an enhanced level of service and improve its overall operations. The IRS estimates it requires approximately $2.5 billion over six years to implement its modernization plan. Yet Congress appropriated only $150 million in fiscal year (FY) 2019 and $180 million in FY 2020 for business modernization efforts. In order for the IRS to properly implement its modernization plan, as a whole and not in pieces, it is imperative to provide multi-year funding, along with sufficient flexibility to use IT funds sensibly. The IRS cannot implement its modernization plan unless Congress gives it the multi-year support it needs for necessary long-term contracts. Absent adequate funding, IRS infrastructure will face increasingly greater risks, and the IRS will have to unnecessarily extend its IT modernization efforts, while continually expending resources to support its current systems. Money that would be better spent on its modernization efforts.
In this year’s Annual Report to Congress, I plan to offer legislative and administrative recommendations to improve IT systems and infrastructure, which are essential to taxpayer rights and taxpayer service. But the time to act is now.
Correction (9/3): Blog has been updated to reflect the correct year of 2019 in the “Example”. Initial version incorrectly stated 2018.