The IRS Technology Modernization Program: An Overview
Updated May 20, 2024
The IRS Technology Modernization Program: An Overview
The Internal Revenue Service (IRS) collects 95% of the
January 2014. The GAO reported that only the first phase
funds needed to operate federal government programs and
was completed by January 2014. According to the IRS’s
agencies. In FY2023, the agency collected $4.7 trillion in
latest projection, CADE 2 should be fully deployed by
gross revenues, processed 272 million tax returns and other
FY2028.
forms, and issued $659 billion in refunds. The IRS’s
information technology (IT) systems are critical to this
The IRS made significant changes in the BSM program
output.
when it launched a six-year plan (called the IRS Integrated
Modernization Business Plan or IMBP) in April 2019 to
The capabilities of those systems have long been a concern
make major improvements in taxpayers’ interactions with
to taxpayers, tax professionals, and lawmakers, among
the IRS. The plan revolved around projects intended to (1)
others. Critics regard key elements of the IRS’s information
expand online access to taxpayer information and other IRS
systems as outdated, inefficient, and ill-suited to achieving
services, (2) reduce call-wait and case-resolution times, (3)
the service’s current strategic goals. These systems rely on
accelerate the processing of tax returns and refunds, (4)
core legacy computer systems installed in the 1960s that
simplify the verification of taxpayer identities, and (5) retire
operate on computer programming languages such as
millions of lines of legacy IT code. The IRS initially
Common Business Oriented Language (COBOL) and
projected that these projects would be completed by
Assembly Language Code. The Government Accountability
FY2024 at a cost between $2.3 billion and $2.7 billion.
Office (GAO) maintains that legacy systems like the IRS’s
“contribute to security risks, unmet mission needs, staffing
An infusion of multiyear funding for the IRS under the
concerns, and increased costs.”
Inflation Reduction Act (P.L. 117-115, IRA, see below for
more details) seemingly has imparted new momentum to
The IRS has pursued several major technology
the IRS’s long-standing technology modernization efforts.
modernization initiatives since the 1970s. It has spent
In April 2023, the IRS issued a “Strategic Operating Plan”
billions of dollars on its current effort, the Business
(SOP) for using the $79 billion in mandatory IRA funding
Systems Modernization (BSM) program, which started in
the agency was to receive between FY2022 and FY2031,
the late 1990s. In recent years, the program has emphasized
including $4.8 billion in BSM funds. This funding is in
projects intended to expand and digitize taxpayer services
addition to IRS discretionary funding in that period. One of
(e.g., creating online taxpayer accounts for expedited case
the SOP’s five objectives was to “deliver cutting-edge
management). Central to such projects is the replacement of
technology, data, and analytics to operate more effectively.”
the IRS’s COBOL-based Individual and Business Master
Files, which are still used in the processing of individual
In a 2024 update of the SOP, the IRS stated that it is
and business returns.
planning to undertake 18 technology modernization projects
between FY2023 and FY2025, at a total cost in IRA funds
This In Focus briefly reviews the evolution of the BSM
of $3.3 billion. Three projects are expected to account for a
program and discusses some of the policy issues it raises.
significant portion of that expenditure: Enterprise Case
Evolution of the BSM Program
Management, Individual Master File Modernization, and
Identity and Access Management.
The BSM program focused on several technology
development initiatives in its early years. Foremost among
Funding
them was the Customer Account Data Engine (CADE 1),
Congress set up a special appropriations account in FY1997
which was intended to replace the Individual Master File
(the Information Technology Investment Account) for the
with a faster, more efficient, and more secure taxpayer data
BSM program. Since FY1998, BSM funds have been
management system. In 2004 congressional testimony,
available only for the acquisition, development, and
GAO’s Robert F. Dacey referred to CADE as the “linchpin
implementation of products and services related to
modernization project” because most IRS information
modernization projects; they may not be used for the
systems depended directly and indirectly on the file’s data.
maintenance and operation of the IRS’s existing IT
systems, the cost of which is covered by a different
IRS officials initially estimated that CADE 1 would cost
appropriations account.
$66 million and would be ready for deployment by late
2001. In 2009, after a string of delivery delays and cost
Initial BSM funding was $295 million in FY1998. This
overruns, the IRS stopped working on the project.
amount has fluctuated ever since. Funding peaked in
FY2002 (in current dollars) at $406 million and remained
In 2010, the IRS began to develop a successor to CADE 1
above $300 million until FY2005, when it fell to $203
known as CADE 2. The project was slated to be finished in
million. BSM appropriations remained below $300 million
three phases, the first two of which were to be completed by
until FY2012, when they rose to $330 million. Funding
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The IRS Technology Modernization Program: An Overview
then stayed near that amount until Congress lowered it to
In April 2023, the IRS issued a “strategic operating plan”
$110 million in FY2018. It steadily rose from FY2019 to
for use of the $79 billion in IRA funding. The plan offered
FY2022, but Congress approved no BSM funding in
some details on how the agency intends to invest the $4.8
FY2023 and FY2024. Enacted BSM funding totaled nearly
billion for BSM projects, without providing specific cost
$6 billion from FY1998 to FY2024.
estimates. One of the plan’s priorities is the retirement of
the Business Master File by FY2027 and the Individual
The National Taxpayer Advocate proposed that BSM be
Master File by FY2028. Another priority is to invest IRA
funded on a multiyear basis in her FY2018 Report to
funds in consolidating the IRS’s multiple case management
Congress. In her view, a longer funding horizon would
systems on a single digital platform.
greatly lower the project interruptions, cancellations, and
cost overruns associated with single-year funding. Congress
In a March 2024 report, the GAO asserted that the IRS’s
may have taken a step in that direction when it allowed the
technology modernization efforts were at “the risk of cost
IRS two years (from FY2022 to FY2024) to spend the $275
overruns, schedule delays, and overall project failure”
million in enacted BSM appropriations for FY2022.
unless the agency clarifies how it plans to use IRA funding
to achieve its IT modernization goals.
According to the GAO, the IRS invested $3.3 billion in IT
in FY2022, of which $0.9 billion went to development and
In a May 2024 update to the SOP, the IRS asserted that if
modernization and $2.4 billion to operations and
Congress were to continue providing no BSM discretionary
maintenance. The IRS’s IT spending rose to $4.4 billion in
funds, the $4.8 billion in the IRA’s BSM funds may be
FY2023, nearly half of which ($2.0 billion) came from
exhausted by FY2026.
mandatory IRS funding provided by the Inflation Reduction
Congressional Oversight
Act (see below for more details).
Fluctuations in BSM funding since the late 1990s partly
Congress provided no appropriations for BSM in FY2023
reflect congressional concerns about the IRS’s ability to
and FY2024, and the Biden Administration is requesting no
manage and complete complicated and risky IT
discretionary funds for BSM in FY2025.
modernization projects without costly delays.
Recent Developments
Congress has established several ways of overseeing BSM
According to the GAO, the IRS was working on 21 IMBP
program management. To obtain funding for a project, the
projects in August 2022. Of these, 9 were intended to retire
IRS first must submit a request to the House and Senate
core legacy computer systems, and the other 12 sought to
Appropriations Committees for approval. Before a request
develop new digital options for assisting taxpayers. By the
is submitted, it has to be reviewed by TIGTA, the Office of
end of September 2022, the IRS had suspended work on 6
Management and Budget, and the GAO. The IRS is also
of the 21 projects; among the suspended projects were
required to submit quarterly reports to the House and
CADE 2 Target State (TS) and Individual Master File
Senate Appropriations Committees on the cost, status, and
Retirement Acceleration (IMFRA). These projects were
projected delivery dates for BSM projects.
still suspended as of May 2024.
Policy Issues
The Treasury Inspector General for Tax Administration
A recurring, preeminent concern about the BSM program is
(TIGTA) noted in a 2022 report that the project suspensions
the IRS’s ability to deliver significant technology
allowed the IRS to transfer $400 million of the $1 billion it
improvements on schedule and within budget, and to set
received for technology modernization projects in the
feasible strategies for achieving program goals.
American Rescue Plan Act (P.L. 117-2) to the taxpayer
services account. The additional funds were used to defray
A notable driver of this concern is the IRS’s ongoing effort
the cost of shrinking large backlogs of paper tax returns and
to replace the Individual Master File. Two projects critical
taxpayer correspondence from FY2021 and FY2022.
to the success of that effort (i.e., CADE 2 TS and IMFRA)
are currently suspended, and according to a 2024 TIGTA
In August 2022, Congress passed the Inflation Reduction
report, it is unclear when work on them will resume. In
Act (P.L. 117-115, IRA). Among other things, the act
early 2023, the GAO reported that as of June 30, 2022, 33%
provided the IRS with nearly $79 billion in mandatory
of IRS IT applications, 22% of software, and 8% of
funding, to be used for a variety of purposes from FY2022
hardware were considered legacy.
to FY2031. Of that amount, $4.8 billion was designated for
BSM projects. These funds were in addition to any
The GAO noted in the same report that the absence of a
discretionary BSM funding in that period. TIGTA has
feasible timeline for replacing the Individual Master File
reported that the IRS had used nearly $1 billion of the IRA
raises the concern that the IRS is likely to face growing
BSM funds by the end of 2023.
challenges as it continues to rely on software “written in an
archaic language requiring specialized skills that are
The Fiscal Responsibility Act of 2023 (P.L. 118-5)
increasingly difficult to find.”
rescinded $1.4 billion of the IRA funding. The Further
Consolidated Appropriations Act, 2024 (P.L. 118-47)
Gary Guenther, Analyst in Public Finance
rescinded another $20.2 billion in IRA funds. It is unclear
how these reductions might affect the IRA’s BSM funding
IF12525
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The IRS Technology Modernization Program: An Overview
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