With reduced staff and smaller budget, the Internal Revenue Service (IRS) has to do more with less. Central to that is modernizing the IRS’s main taxpayer databases, which were deployed in the 1960s and are among the oldest legacy systems in use across the federal government.
A new Government Accountability Office (GAO) report highlights the ongoing challenges in the IRS efforts to update these platforms. Accelerating modernization progress will help ease IRS administrative burdens and improve taxpayer services.
Background on GAO’s Report
GAO was asked by the House of Representatives Committee on Oversight and Government Reform to report on the federal government’s legacy information technology (IT) systems most in need of modernization and to evaluate agencies’ plans to update them. GAO surveyed major federal departments and agencies to identify their top three most outdated systems. From this, GAO compiled a list of 69 legacy systems and identified 11 as the highest priority for modernization.
GAO noted that maintaining federal legacy systems can pose significant challenges. The risks occur as the legacy systems age, and they include increased expenses, greater vulnerability and exposure to cybersecurity risks, and limited ability to effectively accomplish their intended purposes.
GAO’s publication is the public version of a more detailed redacted report, noting, “Due to sensitivity concerns, GAO substituted a numeric identifier for the system names.”
The Two IRS Systems in Critical Need of Modernization
As a recent report from NTUF’s Taxpayers for IRS Transformation project explained, the IRS modernization process started in the 1970s, and, with the exception of the Restructuring and Reform Act of 1998 (RRA), its modernization efforts have been largely slow-going despite tens if not hundreds of billions of dollars spent. Over the past 15 years, Congress has passed several laws that included provisions to modernize certain tasks and services performed by the IRS, but these often resulted in schedule delays, cost overruns, and minimal achievements. These issues are intensified given that the IRS relies on outdated legacy technology to perform a wide range of essential operations.
Although GAO requested departments to identify three legacy systems, the Department of the Treasury submitted four programs, three of which belong to the IRS. Two of these were included in GAO’s most critical list as System 9 and System 10, indicating that they are the 9th and 10th systems most in need of modernization.
Business Master File
System 9 is described as:
. . . a batch file processing system that contains all tax data and related information pertaining to individual business income taxpayers. The system also reflects a continuously updated and current record of each taxpayer’s account.
According to IRS officials, System 9 is one of several systems the agency relies extensively on to carry out tax return processing and enforce tax laws. These systems were deployed in the 1960s and 1970s in the early days of computer mainframe tax processing data centers.
This refers to the Business Master File (BMF). The BMF was initially implemented in 1965, and it has over a million records of tax data and related information pertaining to individual business income taxpayers. The system reflects a continuously updated and current record of each taxpayer’s account. With a reported annual operating cost of $332 million, the BMF plays a vital role in tax return processing and enforcement. Despite its importance, the system is outdated and in urgent need of modernization.
The IRS’s initial 2024 modernization cost estimate was $549 million. However, an independent assessment from April 2024 pegged the cost at $1.25 billion, reflecting assumptions about increased scale and complexity.
According to GAO, the IRS has documented plans to modernize the BMF, but those plans only include short term completion milestones and details of the necessary work. For example, the IRS had planned to release a portal for employees to access system data by 2024 and then modernize half of the legacy code by 2026. There are no plans in place to address how the legacy system will be retired. The modernization plan does not go beyond 2026, so IRS officials are shifting their focus to refine the plans to include releases for 2027 through 2029.
Integrated Data Retrieval System
System 10 is described as providing for:
. . . systemic review and consistency in case control, issues notices to taxpayers, and allows taxpayers to see the status of refunds. According to the agency, System 10 is one of several systems the IRS relies extensively on to deliver customer services for tax return processing and to enforce tax laws. These systems were deployed in the 1960s and 1970s in the early days of computer mainframe tax processing data centers.
This is a clear reference to the Integrated Data Retrieval System (IDRS). The IDRS enables IRS employees in offices around the country to have instantaneous visual access to certain taxpayer accounts. It allows them to research account information, request returns, enter transactions such as adjustments, enter collection information for storage and processing in the system, and automatically generate notices, collection documents, and other outputs.
The report assessment of the IDRS states:
The agency has documented modernization plans that partially include milestones to complete the modernization, descriptions of the work necessary to modernize the legacy system, and partially includes plans for the disposition of the legacy system.
While IRS developed the system’s retirement strategy in January 2022 that included the current and target state of capabilities that are to be modernized, this strategy did not include specific time frames. For example, the strategy included roadmaps detailing how the components of the capabilities would be modernized and decommissioned across nine releases, but the roadmaps did not include specific dates or identify the duration of a release.
The cost of System 10 modernization is not yet estimated, but GAO reports that $72 million is needed to develop a plan, prototypes, and investigational work.
The GAO reports that the IRS does not have a plan with specific dates because its officials are working to identify and analyze a cost-effective path for delivering tax services. Additionally, this could in part be due to staff reorganization and ongoing efforts to identify modernization priorities under the new Administration.
Additional Critical IT Systems Reported by the Department of the Treasury
A third legacy system identified by Treasury is included in Appendix III as System AF. GAO provides little information about the system apart from noting that it is 41 years old.
Treasury’s fourth IT platform is referred to as System AG. GAO notes that this is included in its 2019 report on the most critical systems. In that report, Treasury’s only system is described as System 6:
System 6 contains taxpayer data. Many IRS processes depend on output, directly or indirectly, from this data source. System 6 was written in a now outdated assembly language code and Common Business Oriented Language (COBOL). The department and we have raised a number of concerns related to this system’s reliance on assembly language code and COBOL, the maintainability of the system, and staff attrition.
This could reference the Individual Master File (IMF). Over 60 years old, the IMF is the IRS’s most essential tax-processing application. It is used to store and process all individual tax data. The IRS had planned to transfer the IMF to a project called Customer Account Data Engine (CADE) but this effort was abandoned in 2009. Taxpayer data has been transferred to modern data storage platforms through a successor known as CADE-2 which has also failed to replace the IMF and is not expected to be completed until 2030.
According to IRS officials, modernizing the IMF would improve the agency’s ability to respond to legislative changes and taxpayer needs, reduce IT costs and system complexity, enhance analytics to improve compliance and issue resolution, and ease manual workloads by allowing for automated functions that the current system is unable to support.
NTUF’s Recommendations to Expedite IRS Modernization
Without effective modernization of IRS legacy technologies that contain tax data and taxpayers’ sensitive information, the IRS remains vulnerable to security breaches, failures, and delays. NTUF emphasizes how this “contributes to security risks, unmet mission needs, staffing issues, and higher costs.” Additionally, it results in inefficient and outdated processing methods. NTUF asserts that IRS technology modernization would dramatically improve nearly every aspect of IRS operations, resulting in an immense benefit for taxpayers.
NTUF proposed five recommendations that enable successful IRS modernization:
Produce an Enhanced Modernization Plan with Cost Analysis. The IRS should provide more details on its modernization plans beyond those included in the Strategic Operative Plan (SOP) and the supplemental document released in 2024. The plan should include itemized cost analyses along with any relevant deadlines, deliverables, and benchmarks for each of its modernization initiatives.
Provide More Transparent Updates and Metrics. The IRS should be much more transparent when reporting on its various modernization and service initiatives. Any successes or failures should be expressed though clearly defined metrics that accurately reflect any progress being made. Whenever possible, such data should be released on a rolling basis, giving taxpayers and policymakers updates at a pace that is close to real-time.
Accelerate the Pace of Modernization. Any new tools employed by the IRS should match current IT standards and be readily updatable or replaceable to keep pace with future advancements. IRS staff should have access to subject matter expertise to ensure algorithms and other processes are well informed in customer service, enforcement, and other areas. When advanced technologies are used for enforcement and compliance, taxpayers must also have access to prompt and accessible dispute resolution procedures that provide information about why the action was taken.
Use Some Enforcement Funds for Supportive Modernization Efforts. IRS administration should shift an appropriate portion of the IRS’s recently augmented funding from enforcement to modernization and technology improvements. If necessary, the IRS should work with Congress to amend any restrictions on the IRA’s funding that could hinder a shift to more important priorities.
Add a Strategic Accountability Entity to the IRS Structure. Congress and the IRS would benefit from a high-level panel of experts who provide ongoing, independent, non-adversarial guidance to the IRS and the commissioner, particularly on medium- and long-term projects.
Conclusion
The IRS needs to identify and execute a detailed modernization plan so it can successfully update or retire its outdated legacy systems. In light of the recent IRS staffing departures, which includes the departure of 23% of its IT workforce, NTUF encourages the next IRS commissioner to find the most efficient and effective way to use the IRS’s resources to complete the decades-long modernization process, so the IRS can offer taxpayers a more secure and taxpayer-friendly experience.