IRS chief may be overselling tax IT modernization

IRS has a long way to go in its efforts to modernize legacy IT systems. (Photo credit: Mark Van Scyoc / Shutterstock.com)

Acting IRS Commissioner David Kautter told lawmakers during an April 11 House Appropriations committee hearing that the agency has made significant improvements around a key IT modernization initiative.

"The core processing system for filing and processing tax returns has been modernized and updated, and that is where a substantial amount of the money the committee has appropriated to the IRS has gone," Kautter said.

Kautter did not specify which system he was referencing, but government watchdogs have extensively documented how two of the agency's most important tax processing systems -- the Individual Master File and its successor, CADE2 -- have major unresolved funding and modernization issues.

In September 2017, IRS CIO Gina Garza told appropriators that replacing the Individual Master File and finishing CADE2 would take another five years, 50 to 60 additional employees and $85 million a year.

In an emailed response to questions, IRS spokesperson Bruce Friedland indicated that Kautter was referencing CADE2 but characterized the current status of the system in far less definitive terms.

"We have taken steps in recent years to update those systems, but we also continue to work on them as well‎," said Friedland. "So as an example, our core systems like CADE2 have been working well this filing season, but we have more work to do on those systems down the road."

According to the federal IT Dashboard, the IRS is poised to spend $110.9 million on CADE2 in fiscal year 2018. The effort, comprising 26 projects, earned a medium risk rating from the tax agency's tech office.

It's not clear what improvements the IRS has made since Garza's comments or who performed the work. In an interview with FCW April 5, IRS procurement officials declined to provide updates on activity related to the agency's IT modernization initiatives, instead referring questions on the topic to the CIO.

President Donald Trump's recommended budget proposes $11.49 billion in combined funding for the IRS in 2019, including an increase for enforcement, but also a staff reduction of approximately 4,000 employees. The omnibus spending bill passed in March allocates an additional $320 million to implement the Tax Cuts and Jobs Act.

Kautter did request new IT-related funding, but believes additional resources are needed not for the agency's IT systems, but to improve the agency's customer service and replace the hardware his employees rely on, such as laptops, fax machines, printers and other devices.

"Where a lot of the inefficiency, where a lot of the obsolete equipment and software rests is in the day-to-day equipment used by IRS employees," he said.

According to the Government Accountability Office, approximately two-thirds of the IT hardware and infrastructure used by the agency is obsolete, a problem that has gotten progressively worse over the past five years. In 2016, the IRS warned that it had maxed out its Sustaining Infrastructure Program, which funds hardware replacement, and would need an additional $459 million to adequately fund IT lifecycle replacement in line with agency goals.

The IRS is also taking a more active look at the impact of cryptocurrencies and revisiting guidance around how to handle virtual currencies that was last updated in 2014. Currently, the agency treats bitcoin and similar products as capital assets or property, not currency. That may change, but Kautter indicated that IRS officials were more concerned about its use by criminal elements and tax avoidance.

"The biggest concern we've got frankly is not just the tax treatment, it is the fact that cryptocurrency seems to be a way to evade federal income tax, and so the Criminal Investigation Division is very much focused on this, and they've got some investigations underway," he said.