IRS dips into enforcement funds, user fees for IT

In a little noticed letter to three left-leaning senators in late August, IRS Commissioner Charles Rettig spelled out the dire status of the tax agency's IT modernization efforts.

"Each year, the IRS must take extraordinary measures to fund IT," Rettig wrote in response to questions from Sens. Elizabeth Warren (D-Mass.), Bernie Sanders (I-Vt.) and Sheldon Whitehouse (D-R.I.).

In fiscal year 2021, $600 million of the agency's $2.6 billion technology budget was funded through transfers from non-IT accounts, including $200 million from enforcement and $400 million in user fees, Rettig explained.

In addition to the reliance on aging infrastructure and legacy systems, the IRS is onboarding technology obligations that are attached to new legislation, such as the Foreign Account Tax Compliance Act. The growing threat of cyberattacks and demand for new electronic services are also stretching budgets to the breaking point. Additionally, the IRS is poised to take on new cryptocurrency reporting responsibilities included in a Senate version of the bipartisan infrastructure legislation that is currently being negotiated between Congress and the White House.

"Technology has helped increase IRS productivity; however, we are now at the point where inadequate investments in systems, facilities and people outstrip those productivity gains," Rettig wrote.

Rettig wants to incorporate new technology and modernize existing services as a path to increasing efficiency, speeding processing, improving collection, identifying tax fraud and reducing errors. But getting over that hump is a major challenge.

The tax agency is in the midst of a business systems modernization plan that it estimates will cost $2.3 billion to $2.7 billion to put in place. So far, that effort has been funded at 55% of agency requests going  back to fiscal year 2019.

"Even with our use of supplementary funding sources, such as inter-appropriation transfers, this funding shortfall required us to significantly rescope and reschedule the Modernization Plan, which proceeded at a slower pace than initially planned," Rettig wrote.

Rettig noted that increases in funding and staffing levels proposed in the Biden administration's American Families Plan would allow the IRS to get back to 2010 staffing levels by around fiscal year 2023. The resources would also allow the tax agency "to invest in critical technology to improve the taxpayer experience and use additional information reporting to increase compliance in areas where we currently lack information."