Updated March 24, 2024
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standing concerns that those systems are outdated,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from the 1960s that operate with outdated computer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
the $4.8 billion for BSM projects, without providing
replace core legacy IT systems and migrate more taxpayer
specific cost estimates. One of the plan’s priorities is the
services to its website without the project interruptions and
retirement of the Business Master File by FY2027 and the
cancellations that single-year funding can cause. Congress
Individual Master File by FY2028.
gave the IRS two years (from FY2022 to FY2024) to spend
the $275 million in enacted BSM appropriations for
Another priority is to invest some IRA funds in
FY2022. In its FY2024 budget request, the Biden
consolidating the IRS’s multiple case management systems
Administration asks Congress to permit the agency to
on a single digital platform called the Enterprise Case
obligate BSM funds over three years.
Management system. Taxpayers and IRS employees
currently use hundreds of applications, requiring employees
According to a 2024 GAO publication, the IRS reported
to use multiple systems to perform similar tasks.
investing $3.3 billion in IT in FY2022, with $0.9 billion
going to development and modernization and $2.4 billion to
The IRS also plans to integrate dozens of core applications
operations and maintenance. The IRS’s IT spending rose to
on secure, cloud-based platforms to speed up the delivery of
$4.4 billion in FY2023, nearly $2.0 billion of which came
taxpayer services.
from the Inflation Reduction Act (see below for more
details).
In its 2024 report, the GAO maintained that the IRS’s
technology modernization efforts were at “the risk of cost
Recent Developments
overruns, schedule delays, and overall project failure”
In July 2022, according to a GAO report, the IRS was
unless the agency updates its strategic operating plan to
working on 21 IMBP projects. Of these, 9 were targeted at
clarify how it plans to use IRA funding to achieve its
retiring legacy computer systems, and the other 12 were
modernization goals.
seeking to develop new digital pathways for assisting
taxpayers. As of September 2022, the IRS had suspended
Congressional Oversight
work on 6 of the 21 projects, including CADE 2 and the
The fluctuations in BSM program funding partly reflect
retirement of the Individual Master File. The report noted
congressional concerns about the IRS’s ability to manage
that it was unclear when these projects might resume.
complicated and risky IT modernization projects without
cost overruns, schedule delays, and project failures.
In a 2022 report, the Treasury Inspector General for Tax
Administration (TIGTA) clarified that these suspensions
Congress has several ways of overseeing BSM program
were needed to allow the IRS to reallocate $400 million of
spending. To obtain funding for a project, the IRS first must
the $1 billion in funds for technology modernization
submit a request to the House and Senate Appropriations
projects it received in the American Rescue Plan Act (P.L.
Committees for approval. Before the IRS submits a request,
117-2). The transferred funds were used to pay for an
it has to be reviewed by TIGTA, the Office of Management
urgent effort to eliminate the large backlog of paper tax
and Budget, and the GAO.
returns and taxpayer correspondence from FY2021 and
FY2022.
Congressional oversight of the BSM program also includes
mandatory quarterly reports by the IRS to the House and
In August 2022, Congress passed P.L. 117-115, known as
Senate Appropriations Committees on the cost, status, and
the Inflation Reduction Act (IRA). Among other things, the
projected delivery dates of current and near-future BSM
act provided the IRS with nearly $79 billion in 10-year
projects. These reports are supplemented by annual
mandatory funding. Of that amount, $4.8 billion was
evaluations of the program by the GAO and TIGTA.
designated for the BSM program. These funds were in
addition to any BSM funding included in annual
Performance Issues
appropriations laws. The IRS has until the end of FY2031
A recurring concern regarding the BSM program is the
to obligate the IRA money. Critics of this funding have
IRS’s periodic shortcomings in delivering technology
complained that too much of it is allocated to tax law
improvements on schedule and within budget and setting
enforcement ($46 billion) and not enough to taxpayer
reasonable goals and strategies for achieving them.
services and business systems modernization. TIGTA has
reported that the IRS had obligated $436 million of the IRA
An example of these difficulties, some argue, is the IRS’s
BSM funds by June 30, 2023.
ongoing effort to replace the Individual Master File with
CADE 2, a project that began in FY2012. In a 2016 report,
In June 2023, Congress passed the Fiscal Responsibility
the GAO recommended that the IRS develop a plan to
Act of 2023 (P.L. 118-5). Among other things, the act
finish the project with a timeline and key steps to be
immediately rescinded $1.4 billion of the IRA funding. It
performed. No such plan was issued. According to a 2023
also included an unwritten agreement between the Biden
GAO report, in July 2022, the IRS 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 without indicating when work on these critical
these reductions might affect IRA’s BSM funding
projects would resume.
In April 2023, the IRS issued a “strategic operating plan”
Gary Guenther, Analyst in Public Finance
for spending the $79 billion in IRA funding. The plan
offered some details on how the agency intends to invest
IF12525
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The IRS Business Systems Modernization Program: An Overview


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https://crsreports.congress.gov | IF12525 · VERSION 2 · UPDATED

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