November 2, 2023
The IRS Business Systems Modernization Program: An
Overview
The Internal Revenue Service (IRS) collects 95% of the
The IRS began to develop a more advanced version of
funds needed to operate federal government programs and
CADE (CADE 2) in 2010. The initial plan was to develop
agencies. In FY2022, the agency collected $4.9 trillion in
the technology in three phases (or “transition states”), with
taxes, processed 263 million tax returns and other forms,
the first phase to be completed by January 2012 and the
and issued $642 billion in refunds.
second phase by January 2014. The GAO has reported that
the first phase was completed in January 2014, and that the
Critical to this output are the IRS’s information technology
deadline for the second phase was moved to 2023.
(IT) and business systems. Many have expressed long-
According to the latest IRS projection, full deployment may
standing concerns that those systems are outdated,
not happen until FY2028 to FY2030.
inefficient, and technically incompatible with
accomplishing the main goals of the FY2022-FY2026 IRS
The IRS repackaged and expanded the BSM program when
strategic plan, such as improving in-person, telephone, and
it issued a six-year plan for upgrading its IT systems in
online taxpayer assistance. To varying degrees, the IRS’s IT
April 2019, known as the IRS Integrated Modernization
and business systems rely on core legacy computer systems
Business Plan (IMBP). The initiative was focused on
from the 1960s that operate with outdated computer
improving taxpayer services and making enforcement
programming languages such as Common Business
activities more cost-effective through the deployment of
Oriented Language (COBOL) and Assembly Language
certain BSM technologies. These objectives were to be
Code. The Government Accountability Office (GAO) has
accomplished through a series of projects intended to (1)
stated in several recent reports that legacy systems like the
expand online access to taxpayer information and other IRS
IRS’s “contribute to security risks, unmet mission needs,
services, (2) reduce call-wait and case-resolution times, (3)
staffing concerns, and increased costs.”
accelerate tax return and refund processing times, (4)
simplify taxpayer identity verification, and (5) eliminate
Responding to these concerns, since the late 1990s, the IRS
millions of lines of legacy IT code. The IRS initially
has spent billions of dollars to modernize its IT and
projected that all IMBP projects would be completed in two
business systems through a program called business
phases (FY2019 to FY2021 and FY2022 to FY2024) at a
systems modernization (BSM). The program has focused on
cost of $2.3 billion-$2.7 billion.
developing an infrastructure for undertaking a number of
projects related to taxpayer services, such as online
Funding
accounts and case management. A primary goal of the
Congress set up a special account in FY1997 (the
modernization effort has been to replace the IRS’s COBOL-
Information Technology Investment Account) to facilitate
based Individual and Business Master Files, which are still
its oversight of BSM program spending and results. From
used to process individual and business returns.
the start of the program in FY1998, BSM funds have been
available only for the acquisition, development, and
Origin and Evolution of the BSM
implementation of products and services related to
Program
modernization projects. None of the funds may be used for
The BSM program launched several technology
the maintenance and operation of the IRS’s existing IT
development initiatives between FY1999 and FY2002.
systems.
Among them was the Customer Account Data Engine
(CADE), which was intended to replace the Individual
Initial BSM funding was $295 million in FY1998. Since
Master File with a faster, more efficient, and more secure
then, funding has fluctuated. It peaked in FY2002 at $406
data management system. In 2004 congressional testimony,
million and remained above $300 million until FY2005,
Robert F. Dacey of the GAO described the project as the
when it fell to $203 million. Funding then remained below
“linchpin modernization project” because most IRS
$300 million until FY2012, when it rose to $330 million.
information system applications and processes relied on
BSM appropriations stayed close to $300 million until
output from the Individual Master File.
FY2018, when they dropped to $110 million. Funding
steadily rose again until Congress approved no BSM
IRS officials initially estimated that CADE would cost $66
funding in FY2023. Enacted BSM funding has totaled $5.9
million and be ready to deploy by late 2001. After a string
billion from FY1998 to FY2023.
of delivery delays and cost overruns, the IRS stopped
working on CADE in 2009, after spending about $400
The then-National Taxpayer Advocate proposed in her
million on the project. It was used to process about 40
FY2018 Report to Congress that the BSM program ought to
million individual tax returns in FY2009.
be funded on a multiyear basis. Her rationale was that such
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The IRS Business Systems Modernization Program: An Overview
a schedule would enable the IRS to accelerate efforts to
Management system. Taxpayers and IRS employees
replace core legacy IT systems and migrate more taxpayer
currently use hundreds of applications, requiring employees
services to its website without the project interruptions and
to use multiple systems to perform similar tasks.
cancellations that single-year funding can cause. Congress
gave the IRS two years (from FY2022 to FY2024) to spend
The IRS also plans to integrate dozens of core applications
the $275 million in enacted BSM appropriations for
on secure, cloud-based platforms to speed up the delivery of
FY2022. In its FY2024 budget request, the Biden
taxpayer services.
Administration asks Congress to permit the agency to
obligate BSM funds over three years.
Congressional Oversight
The fluctuations in BSM program funding partly reflect
Recent Developments
congressional concerns about the IRS’s difficulties
In July 2022, according to a GAO report, the IRS was
managing complicated and risky IT modernization projects
working on 21 IMBP projects. Of these, 9 were targeted at
without repeated cost overruns, schedule delays, and project
retiring legacy computer systems, and the other 12 were
failures.
seeking to develop new digital pathways for assisting
taxpayers. As of September 2022, the IRS had suspended
Congress has several ways of overseeing BSM program
work on 6 of the 21 projects, including CADE 2 and the
spending. To obtain funding for a project, the IRS first must
retirement of the Individual Master File. The report noted
submit a request to the House and Senate Appropriations
that it was unclear when these projects might resume.
Committees for approval. Before the IRS submits a request,
it has to be reviewed by TIGTA, the Office of Management
In a 2022 report, the Treasury Inspector General for Tax
and Budget, and the GAO.
Administration (TIGTA) clarified that these suspensions
were needed to allow the IRS to reallocate $400 million of
Congressional oversight of the BSM program also includes
the $1 billion in funds for technology modernization
mandatory quarterly reports by the IRS to the House and
projects it received in the American Rescue Plan Act (P.L.
Senate Appropriations Committees on the cost, status, and
117-2). The transferred funds were used to pay for an
projected delivery dates of current and near-future BSM
urgent effort to eliminate the large backlog of paper tax
projects. These reports are supplemented by annual
returns and taxpayer correspondence from FY2021 and
mandated evaluations of the program by the GAO and
FY2022.
TIGTA.
In August 2022, Congress passed P.L. 117-115, known as
Policy Issues
the Inflation Reduction Act (IRA). Among other things, the
A recurring concern regarding the BSM program, many
act provided the IRS with nearly $79 billion in 10-year
contend, is the IRS’s periodic difficulties delivering specific
mandatory funding. Of that amount, $4.8 billion was
technology improvements on schedule and within budget
designated for the BSM program. These funds were in
and setting reasonable goals and strategies for achieving
addition to any BSM funding included in annual
them.
appropriations laws. The IRS has until the end of FY2031
to obligate the IRA money. Critics of this funding have
These difficulties, some argue, have been apparent in the
complained that too much of it is allocated to tax law
ongoing effort to replace the Individual Master File with
enforcement ($46 billion) and not enough to taxpayer
CADE 2, a project that began in FY2012. In a 2016 report,
services and business systems modernization. TIGTA has
the GAO recommended that the IRS develop a plan to
reported that the IRS had obligated $436 million of the IRA
finish the project with a timeline and key steps to be
BSM funds by June 30, 2023.
performed. No such plan was issued. The IRS’s FY2023-
FY2031 strategic plan for investing IRA funds sets a
In June 2023, Congress passed the Fiscal Responsibility
FY2028 completion date for replacing the Individual
Act of 2023 (P.L. 118-5). Among other things, the act
Master File but provides no details on the steps that need to
immediately rescinded $1.4 billion of the IRA funding. It
be taken to finish the project. According to a recent GAO
also included an unwritten agreement between the Biden
report, in July 2022, the IRS had suspended CADE 2 and
Administration and House leaders to repurpose another $20
another key project intended to replace the Individual
billion through future appropriations. It is unclear how
Master File. The report noted that after 10 years of trying, it
these reductions might affect IRA’s BSM funding
was still unclear when the IRS would replace the file.
TIGTA noted in its latest assessment (FY2022) of the IRS’s
In April 2023, the IRS issued a strategic plan for spending
IT systems that the IRS revised or rebased the delivery
the $79 billion in IRA funding. The plan offered some
schedule, cost, and scope of CADE 2 seven times between
details on how the agency intends to invest the $4.8 billion
FY2016 and FY2019.
for BSM projects, without providing specific cost estimates.
One of the plan’s priorities is the retirement of the Business

Master File by FY2027 and the Individual Master File by
FY2028.

Another priority is to invest some IRA funds in
Gary Guenther, Analyst in Public Finance
consolidating the IRS’s multiple case management systems
on a single digital platform called the Enterprise Case
IF12525
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The IRS Business Systems Modernization Program: An Overview


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https://crsreports.congress.gov | IF12525 · VERSION 1 · NEW

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