The IRS’s computer systems and data analytics have not kept up with technological advances despite decades of modernization initiatives. The Inflation Reduction Act provides the IRS with a new source of funding dedicated to business systems modernization.
In the early 1960s, the IRS operationalized its first computer—an IBM 7074—to centralize data collection. Although, like the rest of the world, the IRS has substantially expanded and modernized its technological infrastructure since then, some legacy systems remain.
For example, the Individual Master File (IMF) was established in 1970 to process individual taxpayer account data. The IMF is integral to processing tax returns during the filing season, including generating refunds. The system, however, still uses Assembly Language Code (ALC) and COBOL. Among the challenges of using those methods is finding computer programmers in the 21st century who are trained in ALC and COBOL. Legacy systems also make it more difficult to respond to changes in the tax code, to view taxpayers’ accounts in real time, and to ensure data security.
Since 2000, the IRS has attempted to replace the IMF with a more advanced system—first, the Customer Account Data Engine (CADE), and then, when that effort failed, CADE 2. But the development of CADE 2 has been slowed—in part, because of cuts in the IRS budget and the growing demands on the IRS to implement new tax provisions.
The 2022 Inflation Reduction Act provided nearly $5 billion to the IRS for business systems modernization. Under its 2023 strategic operating plan, the IRS will use a portion of those funds to retire the IMF completely by 2028. IRS will also replace the parallel Business Master File in 2027.
Former IRS Commissioner Charles Rossotti, whose career spans experiences in government and founding a major business services technology firm, recommends that the IRS not wait until all legacy systems are replaced before developing and implementing new ones, such as machine learning for the improved detection of noncompliant taxpayers. Rossotti observes legacy systems remain often remain in private firms even after more advanced applications have been successfully implemented.
The IRS has announced that a portion of the modernization funding will also be used to develop data analytics to improve both tax enforcement and taxpayer services. The plan is to start on those investments before the retirement of the IMF and Business Master File.
Updated January 2024
Forman, Fred, and Charles Rossotti. 2021. The Business Case for IRS Transformation. Washington, DC: Government Executive.
General Accounting Office. 2023. “Information Technology: IRS Needs to Complete Modernization Plans and Fully Address Cloud Computing Requirements.” GAO-23-104719. Washington DC: General Accounting Office.
Internal Revenue Service. 2023. IRS Inflation Reduction Act Strategic Operating Plan FY 2023-2031. Publication 3744 (Rev. 4-2023). Washington DC: Internal Revenue Service.
Sieger, Nancy. 2022. “Modernizing Tax Processing Systems.” Washington DC: Internal Revenue Service. July 28.