This report was conceived, back in February 2018, as a baseline representation of the IRS at that point in time. We thought it would be a helpful document for both Congress and the new Commissioner—to know where things stood, from the perspective of the taxpayers’ advocate, on the eve of the first filing season under a new tax law. We wanted to reflect the taxpayer’s journey as he or she navigates the tax system, from obtaining answers to tax law questions before filing to litigating tax issues in court. Hence the title of the Most Serious Problems section—“The Taxpayer’s Journey”—and the organization of that section reflecting phases of the taxpayer’s experience with the IRS, along with a section of “roadmaps” depicting that journey. One of our goals in creating these roadmaps was to help readers understand the complexity of the taxpayer journey. It was challenging for us to create these roadmaps and will probably be difficult for readers to follow them, which hints at the extreme frustration many taxpayers experience when they must interact with the IRS. IRS employees also experience that frustration as they try to navigate the system. For every step shown on the roadmaps, I note there are multiple sub-steps and detours that we did not represent, for fear of getting ourselves and everyone else completely lost.
Then came the longest government shutdown in the history of the United States. The Annual Report staff was furloughed, along with most of TAS. On January 28, when my office reopened, it was clear that the IRS baseline had changed. The five weeks could not have come at a worse time for the IRS—facing its first filing season implementing a massive new tax law, with a completely restructured tax form. As I outline below, the IRS is entering the filing season inundated with correspondence, phone calls, and inventories of unresolved prior year audits and identity theft cases.
Lurking under all of these are profound Information Technology (IT) systems issues. The IRS systems that constitute the official record of taxpayer accounts—the Individual Master File and the Business Master File—are the oldest in the federal government and for the last 25 years the IRS has tried—and been unable—to replace them. Taxpayer information is stored in over 60 separate case management systems, so the IRS has no 360-degree view of taxpayer data. The IRS has no enterprise case selection system, so it can’t be sure it is focusing on the right taxpayers or the right issues in its outreach, audit, and collection activities.
The IRS desperately needs to replace its antiquated technology systems. Indeed, this is the agency’s #1 need. Last year, the IRS experienced a systems crash on the final day of the tax-filing season, forcing the IRS to extend the filing season by a day. The crash prompted talk of the risk of a catastrophic systems collapse, and that risk does, indeed, exist. But there is a greater risk: IRS performance already is significantly limited by its aging systems, and if those systems aren’t replaced, the gap between what the IRS should be able to do and what the IRS is actually able to do will continue to increase in ways that don’t garner headlines but increasingly harm taxpayers and impair revenue collection.
And that matters a great deal because the IRS is effectively the accounts receivable department of the federal government. In fiscal year (FY) 2018, it collected nearly $3.5 trillion on a budget of $11.43 billion—a return on investment of about 300:1. Yet funding for IRS technology upgrades—provided through the Business Systems Modernization (BSM) account—has been very limited in both absolute and relative terms. As the following chart shows, BSM funding was reduced by 62 percent from FY 2017 ($290 million) to FY 2018 ($110 million) and constituted just one percent of the agency’s overall appropriation in FY 2018.
Congressional funding for the BSM account has been limited in part because the IRS has not done a good job of planning and executing technology upgrades in the past. More funding should be made available subject to accountability measures. But given the additional revenue and improved taxpayer service state-of-the-art technology is likely to bring in, I believe spending for new systems going forward should be measured in billions—not millions. In this report, our #1 legislative recommendation is that Congress provide the IRS with additional dedicated, multi-year funding to replace its core IT systems—pursuant to a plan that sets forth specific goals and metrics and is evaluated annually by an independent third party so that Congress is not merely writing the agency a blank check.
But that is forward-looking. In recent years, modernization efforts have started and stopped, in part because of funding fluctuations and in part because constant legislative changes have absorbed almost half of the IRS’s IT bandwidth during the last six years, according to IRS officials. In short, the IRS is stretched to its breaking point.
This is the IRS’s baseline. Because our Report was written before the shutdown, in this preface I shall attempt to describe some of the initial effects of the shutdown on the IRS, including TAS, and on U.S. taxpayers. (The full effect will become clearer months, and even years, down the road.) I will also point out where the shutdown exacerbated trends we already identified in the Most Serious Problems section of this report. I will discuss the impact of these interruptions on IRS IT modernization efforts and advocate for multi-year funding for those efforts. And I will recommend that Congress at the very least exempt the IRS from the operation of the Anti-Deficiency Act.
Before I discuss these issues, I want to express my deep appreciation to, and admiration for, the IRS workforce, including but not limited to employees in the Taxpayer Advocate Service. Most IRS employees experienced financial challenges as a result of missing two pay checks. Some employees could not pay their bills and others were deeply worried they would miss payments if the shutdown continued for much longer. Yet when the shutdown ended, IRS employees returned to work with energy and generally hit the ground running, eager to make sure the agency could deliver the filing season as well as achieve its broader mission. The IRS faces many challenges as an agency—and this report documents many of them—but the dedication of the IRS workforce is a notable bright spot.