IRS delay on key system could cost up to $70 million

The decision to wait until after the 2025 filing season to move to a new processing engine for administering individuals’ tax accounts will cost the IRS up to $70 million, according to a September watchdog report.

The current system, called Individual Master File, dates from the 1960s. The IRS has long tried to modernize it, and the effort constitutes “one of the most complex modernization programs in the federal government,” writes the inspector general of the Treasury for the tax administration in the report.

The agency has been testing a new processing engine since April, which could possibly be used before the next filing season, but IRS Commissioner Danny Werfel said Nextgov/FCW last month, the agency abstained “out of an abundance of caution”. The new goal is to move to the new processing engine as the system of record next summer.

The report said a six-month delay from the January go-live of the new system, mentioned throughout the report, could cost up to $70 million.

“It’s important to take the time to make this transition right…especially during filing season,” the IRS said. Nextgov/FCW in a statement, calling the IMF “an essential system, vital to the health of the work of the country’s tax administration as well as to the service of individual taxpayers.”

The new TIGTA report provides insight into the reasons that led to this choice, detailing the type of testing and defect remediation processes used by the IRS, as well as the risks introduced by the move to parallel processing – or enforcement simultaneous implementation of the old and new systems – when the IRS did it.

To accommodate the planned January go-live, the IRS had planned to conduct parallel operations with the old and new systems between April and December 2024.

But to do that, the team first had to run a certain number of cycles on the new system without defects, and the IRS realized in August 2023 that it might not be able to complete the work and respond to this requirement. start parallel operations in April due to issues with code and data format defects.

The agency tried to remedy as many defects as possible to be able to meet the commissioning date of January 2025 and started its parallel operations in April 2024.

TIGTA says this “has introduced additional complexity and risks, for example challenges in proving operational readiness in parallel operations while defects are still being mitigated.”

Another risk: the fact that the planned schedule for parallel operations would not cover the peak of the tax declaration season.

This is an issue that the IRS itself also highlighted in its decision to push the changeover until after the next filing season.

Additionally, multiple agency modernization efforts are happening at once, as the IRS seeks to spend the tens of billions it received through the Inflation Reduction Act, Werfel said . Nextgov/FCW previously.

“What I didn’t want was if we had some sort of launch failure with the IMF, what would happen is you throw all the resources into it and then you lose momentum,” Werfel said. “Since we’re doing multiple modernizations at the same time, we have to make some of these tradeoffs. »

At the time, Werfel also emphasized that the agency could still leverage the best data generated by the new processing engine, even without formally relying on it as a system of record.

Regarding cost, the decision to move to the new system after the 2025 tax season “helps the agency meet a robust set of production, functional and operational readiness criteria before the agency moves to the modernized system said the IRS. Nextgov/FCW.

“This will ensure smooth progression – for the benefit of taxpayers and the tax system,” they said. “The IRS is very careful to ensure that this happens in a way that is transparent to taxpayers and the tax system.”

The report also includes recommendations for the tax agency. More details such as outcomes and key results are requested in the IRS plans for Inflation Reduction Act resources. TIGTA and other watchdog organizations have issued similar recommendations in the past. The IRS accepted both recommendations.