IRS Edges Closer to 21st-Century Computing

Thanks to the Inflation Reduction Act, the agency now has funding for significant IT upgrades—but the devil is in the details.

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One day in 2018, IRS computers went down—and not just on any old day. The agency’s Individual Master File crashed on Tax Day in April. That file, known as the IMF, stores every detail about tax filings, penalties, and other details for every taxpayer in the country. The agency cannot function without it. Taxpayers could not file electronic returns through the IRS portal, creating a mammoth headache for agency employees and an extra day for taxpayers who could now file after the deadline without fear of penalties.

For those in the know, the crash was not a surprise. In his final press conference as IRS commissioner in 2017, John Koskinen had warned that a “catastrophic system failure” due to the antiquated Individual Master File and related programs was likely imminent if the agency failed to act. But Congress did not move on the problem until the passage of the Inflation Reduction Act this August, which allocated $80 billion to the IRS over the next ten years.

To reduce the tax gap—the difference between taxes owed and collected that amounts to hundreds of billions that the federal government never sees, in part due to tax dodges by the uber-wealthy—beefing up the people power to dig into tax filings, conduct audits, and pursue investigations has been a top Biden administration priority.

Deploying additional agents dials up the Republican outrage machine, but bringing on new investigators only skims the surface of resources the IRS needs to become an efficient tax collector.

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The agency desperately needs to get acquainted with 21st-century information technology. The IRA’s nearly $5 billion for modernization is “transformational,” IRS Commissioner Chuck Rettig said in a statement. Rettig added that the new funds will “not just close the tax gap but meaningfully improve taxpayer service and technology.” But he will have to get moving: Treasury Secretary Janet Yellen has called for a strategic IT plan to be on her desk in six months.

The agency has phenomenal technology problems. Right now, IRS employees must manually enter data from taxes filed by mail in IRS systems. The adoption of optical character recognition (OCR) technology would enable IRS employees to point a camera or reader at a sheet of paper and enter the text into the IMF. Joe Hughes, an Institute on Taxation and Economic Policy federal policy analyst, says the manual data entry system is a reason why some taxpayers do not receive their previous year’s tax refunds before they start preparing their taxes for the following year. “If you have a smartphone, then odds are that you have an OCR,” Hughes said. “But the IRS doesn’t have that technology right now.”

The IRA also does not mandate an electronic tax filing system, a move backed by Sens. Elizabeth Warren (D-MA) and Ron Wyden (D-OR), longtime advocates for this overdue upgrade. There is funding available for an e-file study, which would help the IRS decide how to best implement a direct e-file system free of charge to taxpayers. Once in place, such a system would allow most middle-class taxpayers to easily submit their taxes through an IRS portal, instead of paying a tax preparation service to electronically file the documents. (ProPublica has investigated how Intuit, the maker of TurboTax, one of the country’s largest tax preparers, has been lobbying for years to keep the IRS from creating its own tax filing system.)

Bringing on new investigators only skims the surface of resources the IRS needs to become an efficient tax collector.

The IRA also specifically directs the IRS to upgrade its phone technology to provide speedier responses to taxpayers who want to talk to an agency representative. The new funding will also enable the agency to use chatbots that provide computer users with answers by phone or computer.

Adopting OCR, a direct e-file system, and chat (and voice) bots would go a long way to professionalize and streamline IRS operations and equip its agents with the task-appropriate IT tools. And these upgrades may not necessarily leave workers unemployed as automation and other programmatic efficiencies often do. Since a bipartisan defunding campaign has left the agency with too few employees, workers who are no longer burdened with data entry tasks could ideally be reassigned to more important jobs within the agency.

Yet leveraging emerging technologies comes with a big asterisk. The agency’s decision to stick with COBOL as its programming language means that a 2018-like meltdown (or perhaps something worse) remains a constant threat. The IRS will not be able to move forward if it keeps COBOL, which originally debuted in 1959, running. Eric Egan, a policy fellow with the Information Technology and Innovation Foundation, a research and educational think tank, says that what Latin is to English, COBOL is to most modern programming languages. Yet since the IRA mandates the “operation and maintenance of legacy systems,” the agency currently has little choice.

Charles Ofria, a Michigan State University computer science professor, says that COBOL was “on its way out” when he was in college 40 years ago and there are plenty of other modern programming languages, including JavaScript, C++, or Python, that are widely taught and better suited to the upgrades that the agency needs to make. In the meantime, it will be difficult to integrate new software programs with COBOL. Ofria points out that most programming languages are designed to interact with one another, so deciding which language to use depends to a greater extent on the task to be performed.

Replacing a legacy system is astronomically expensive, which may be why the IRA allowed COBOL to live on. Ofria estimates that replacing the legacy system would be a decade-long project costing at least $1 billion. But forging ahead with COBOL could prove costly as well: The programming language is not commonly taught at universities and colleges today—which means that the IRS must train new hires on COBOL. Moving to newer programming languages would likely help the agency attract a wider group of highly qualified prospective employees.

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