Budget cuts could slow IRS modernization

The IRS may take longer and have to pay more over the long term to modernize its business systems, according to agency officials, because the administration dramatically reduced funding for the program in its proposed fiscal 2007 budget.Both the Government Accountability Office and the IRS Oversight Board told lawmakers recently that IRS Business Systems Modernization should receive more funding to accelerate its progress. The IRS has put its modernization program on track after years of schedule delays, cost overruns and management problems.BSM is still a high-risk and highly complex effort, but it is critical to supporting the IRS’ taxpayer service and enforcement goals, said David Powner, director of GAO’s IT management issues.Reduced funding would “likely affect the agency’s ability to deliver the functionality planned for the fiscal year and could result in project delays and/or scope reductions,” Powner told the Senate Appropriations Subcommittee on Transportation, Treasury, the Judiciary, HUD and related agencies.The administration proposed $167.3 million for BSM, which is $29.3 million (or 15 percent) less than this year’s $197 million.The performance of the IRS’ modernization program has improved steadily, Powner said.“It is one of the better programs over the last couple of years. It would be prudent to increase its budget slightly,” he said, though did not say by how much.The IRS Oversight Board recommended $188.6 million more than last year’s $197 million—for a total of $385.6 million—in part because the IRS suffered severely reduced funding levels in the last three fiscal years, said Raymond Wagner Jr., chairman of the advisory group.The board also wants the IRS to speed up the pace of the BSM program. The IRS is hampered in its efforts to modernize because of its reliance on its 40-year-old Master File system for central record keeping.“No modern financial institution in the private sector could survive under these conditions, and eliminating these limitations is key to making the IRS an efficient and effective modern financial institution,” Wagner said.The age of IRS’ Master File will eventually make it impossible to maintain. As time passes, a catastrophic disruption in the nation’s tax system becomes more likely, he said.IRS’ BSM budget aims to continue support for the Customer Account Data Engine (CADE), the Filing and Payment Compliance, and Modernized e-File projects, said IRS commissioner Mark Everson.During this year and fiscal 2007, the IRS will emphasize the release of major projects that deliver value sooner at lower risk in tax administration, infrastructure initiatives that support all modernization projects and continued improvement to program management.The agency has used CADE, its modernized taxpayer database, to process more than 6.4 million returns and disburse 5.3 million refunds worth $3 billion as of April 14. Refunds are issued within six business days after returns are posted to CADE. Not only does it speed up refunds, but it also updates taxpayer account information more quickly than the legacy Master File system, Everson said.The IRS said it plans to expand CADE processing to 33 million returns in the 2007 filing season and 70 million by 2009.But those plans could be pushed out. IRS was to spend $85 million in 2007 to develop and deploy additional CADE releases that would let the system process up to 50 million tax returns by the 2008 filing season and issue associated refunds faster, Powner said. With the reduced budget, the agency likely will have to scale back some of its near-term work on this project.Following GAO recommendations, the IRS also is finalizing a new modernization strategy and five-year road map in light of changes to the program. The new strategy focuses on promoting investments that provide value in smaller, incremental releases delivered more frequently, he said.“This strategy is important because it will describe how and when IRS will receive the full benefits from its modernization efforts, such as when CADE will be able to replace the Master File,” Powner said.Lawmakers at the hearing said shrinking the modernization budget not only slows the momentum but sends the wrong message after putting the program on track, said Sen. Christopher Bond (R-Mo.), chairman of the Senate Appropriations subcommittee.“Cutting BSM is equivalent to punishing good behavior,” Bond said.Business Systems Modernization should be the IRS’ top priority because of its impact on customer service and tax enforcement, and ultimately, lowering the $345 billion tax gap, which is the difference between what taxpayers pay and what they actually owe, Bond said.