IRS delay on key system could cost up to $70 million

The decision to wait until after the 2025 filing season to switch to a new processing engine for individual tax account administration will cost the IRS up to $70 million, according to a September watchdog report. 

The current system, called the Individual Master File, dates to the 1960s. The IRS has long been trying to modernize it, and that effort is “one of the most complex modernization programs in the federal government,” the Treasury Inspector General for Tax Administration writes in the report. 

The agency has been testing a new processing engine since April to potentially cut over to before the coming filing season, but IRS Commissioner Danny Werfel told Nextgov/FCW last month that the agency was holding off “out of an abundance of caution.” The new goal is to switch to the new processing engine as the system of record next summer.

The report states that a six-month delay from a January go-live for the new system, referenced throughout the report, could cost up to $70 million.

“It’s important to take the time to get this transition right... particularly during filing season,” the IRS told Nextgov/FCW in a statement, calling the IMF “a critical system vital to the health of the nation’s tax administration work as well as serving individual taxpayers.” 

The new TIGTA report gives some insight into the leadup to that choice, detailing the type of testing and defect remediation processes used by the IRS, as well as the risks introduced by moving to parallel processing — or running both the old and new system simultaneously — when the IRS did. 

To meet the previously planned January go-live, the IRS had planned to run parallel operations with the old and new systems between April and December of 2024. 

But in order to do so, the team first had to run a certain number of cycles on the new system without defects, and the IRS realized in August 2023 that they were at risk of not being able to finish the work and meet that requirement to start parallel operations in April because of problems addressing code and data format defects.

The agency attempted to remediate as many defects as possible to be able to still meet the January 2025 go-live date and did start parallel operations in April 2024.

TIGTA says that this “introduced additional complexity and risk, e.g., challenges in proving operational readiness in parallel operations while defects are still being mitigated.”

Another risk: the fact that the planned timeline for parallel operations wouldn’t cover the peak of a tax filing season. 

That’s one issue the IRS itself has also pointed to in its decision to push the switchover to after the coming filing season.

Also, multiple modernization efforts at the agency are happening at the same time, as the IRS looks to spend the tens of billions it got via the Inflation Reduction Act, Werfel told Nextgov/FCW previously.

“What I didn't want to have happen is if we have some kind of launch failure with IMF — what would happen is you surge all the resources there and then you lose momentum,” Werfel said. “Because we have multiple modernizations going all at once, we have to make some of these trade-offs.”

At the time, Werfel also pointed out that the agency can still tap into the better data generated by the new processing engine, even without formally switching to it as the system of record. 

As for the cost, the decision to switch to the new system after the 2025 tax season “helps the agency meet a robust set of production, functional and operational readiness criteria before the agency transitions over to the modernized system,” the IRS told Nextgov/FCW. 

“This will ensure a smooth path forward — for the good of taxpayers and the tax system,” they said. “The IRS is being very careful to ensure this happens in a way that’s seamless to taxpayers and the tax professional system.”

The report also includes recommendations for the tax agency. One asks for more details like outcomes and key results in the IRS plans for Inflation Reduction Act resources. TIGTA and other watchdogs have issued similar recommendations in the past. The IRS agreed with both recommendations.