IRS Limited Resources are a Challenge during the Pandemic

Key Takeaways:

• IRS struggles to adapt quickly to changing circumstances due to diminishing budgets, manual processes, workforce limitations, and aging IT infrastructure.
• IRS has been allotted $760M in stimulus funding for taxpayer services, operations support, and enforcement, and has spent $45M of that to date.
• IRS is in the midst of a six-year IT modernization initiative aimed at improving the taxpayer experience; reducing call wait and case resolution times; simplifying identity verification; increasing systems availability; and simplifying the implementation of new tax provisions.

Although the CARES Act and the Families First Act provide over $760M dollars to the IRS for taxpayer services, operations support, and enforcement, dwindling budgets, workforce reductions, and aging IT infrastructure hamper the IRS’ ability to adapt quickly in changing environments such as the pandemic.

Over the last decade, the IRS’ annual budget has decreased by nearly 20% and the agency has approximately 20% fewer employees.  However, at the same time, the number of tax returns processed by the agency has increased by 9%. The IRS is requesting $12B for its FY2021 budget, up $500M from the previous year, but that is still much lower than its $14B budget in FY 2010. 

IRS statistics show that for every dollar invested in the agency it collects approximately $5. The additional funding IRS received from the stimulus acts may help stimulate operational improvements, but to date the IRS has only spent $45M of those funds.

The IRS is also hampered by manual processes and legacy IT. Thousands of IRS employees have been home on administrative leave due to evacuation orders and a lack of telework capacity. The IRS began recalling mission-critical employees at the end of April to perform functions such as opening mail, answering phones and other activities that take place onsite during the tax filing season.

The IRS managed to release stimulus payments to Americans, even though it had to do so using its aging tax system infrastructure, but the effort was not without challenges and problems. The 1962 Masterfile system required multiple coding changes to administer stimulus checks. Due to the required speed to distribute stimulus funds and the difficulty of updating IRS systems, there were a few problems with the process. For example, some stimulus payments were sent to deceased taxpayers or to the wrong bank accounts.

The IRS is in the midst of a six-year, $2B IT modernization plan.  Treasury’s IT budget request for FY 2021 includes $3.1B for IRS investments, which is a 3.7% increase over FY 2020 levels. The requested funding would provide $300M for IRS’ business systems modernization efforts to improve the taxpayer experience; advance core taxpayer services and enforcement; modernized IRS operations; advance cybersecurity and data protection; and integrate architecture and infrastructure.

IRS has also been dinged by the Treasury Inspector General for Tax Administration (TIGTA) for not capitalizing on cloud computing. In a March 2020 report, TIGTA said that the lack of a cloud strategy and subsequent execution is costing taxpayers billions of dollars.

TIGTA also stated that challenges presented by the pandemic along with the increased workload of distributing stimulus payments will likely lead to increased tax season backlogs for the agency. As of the end of February, IRS backlogs had already spiked to 1.3 million, which equates to a 36% increase over the previous year.

Opportunities for contractors to assist IRS in its modernization efforts are likely, especially in the areas of web applications, case management, API management, cloud computing, digitization, RPA, VDI, IAM, and vulnerability and threat management. Contract vehicles that may be used to procure these products and services include TIPSS4, Schedule 70 and SEWP V.