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Jun 6, 2025  |  
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Deborah Collier


NextImg:The IRS has no business entering the tax preparation business

The Inflation Reduction Act famously included $80 billion for the Internal Revenue Service to hire 87,000 new auditors. What received less attention was an additional $15 million for the agency to conduct a feasibility study on how the IRS can develop its own tax preparation software.

This study is a complete waste of taxpayer resources and would be better spent by modernizing the agency’s woefully outdated information technology systems.

POLITICAL NEGATIVITY IS HARMING OUR YOUNG AMERICANS

In September 2020, the IRS Taxpayer Advocate cited the “desperate need for multi-year funding to modernize IRS computer systems and infrastructure. Tax administration is at risk, and the country and the IRS need a solution now more than ever.” Many of the IRS’s core functioning systems are at least 25 years old and use obsolete programming languages such as COBOL. Some of them cannot be maintained due to a lack of vendor support, training, or other resources.

In its Oct. 13, 2022, report on "Major Management and Performance Challenges Facing the IRS" for FY 2023, the Treasury Inspector General for Tax Administration noted “that the IRS’s mainframe computer platforms did not satisfy the minimum mainframe security requirements in several key areas.” TIGTA also noted that this issue “will likely remain a challenge for the foreseeable future.”

This problem has resulted in the continued reliance on paper-based processes, creating significant delays and backlogs. In addition, TIGTA noted that “The IRA also includes funding for the IRS to study the cost and feasibility of creating a free direct e-file program, which would expand the overall scope and control of the current IRS Free File Program. The implementation of such a system will create additional avenues for malicious actors looking to exploit the IRS network and its online portals.”

On Feb. 7, the Government Accountability Office report on IRS IT systems reiterated that the IRS is using legacy hardware and software ranging in age from 24 to 64 years old, including the Individual Master File, which is the “authoritative data source for individual tax account data.” The IRS has been attempting to replace the 60-year-old IMF for more than 10 years, but that work has been suspended so that the agency can reallocate the staff working on the effort to other projects.

With modernization efforts on the IMF halted for the unforeseeable future, the agency will continue to be challenged by not having the ability “to get a real-time view of the taxpayer account, quickly respond to tax code changes, provide enhanced analytical capabilities, and provide additional taxpayer account information to more effectively combat fraud and identity theft.”

On top of these issues with IRS IT systems is the agency’s past failure to create its own software preparation program in 2002 called Cyberfile. Members of Congress appear to have forgotten or are just ignoring how the agency wasted $17 million on this effort, which led to the creation of the IRS’s Free File program in 2003. The Free File program is a public-private partnership that allows tax preparation companies to offer eligible taxpayers to file their taxes using their services at no charge. While 70% of all taxpayers meet the eligibility requirements, only 2% of those taxpayers used the service during the 2022 tax season.

Some members of Congress view this as an excuse for supporting the creation of the IRS’s own system, which will be mandatory, not voluntary. On Jan. 26, the IRS announced that taxpayers who earn $73,000 or less in 2022 may be eligible for the Free File program.

During the Feb. 15 confirmation hearing for Daniel Werfel to become the next IRS Commissioner, several senators expressed their concerns about the sorry state of the IRS’s IT systems and the agency’s inability to protect taxpayer information and provide necessary services to their customers.

In his opening statement, Sen. Mike Crapo (R-ID) noted that “Congress has appropriated the IRS hundreds of billions of dollars in annual funding, and tens of billions of dollars more in supplemental funding, with little improvement to show for it. The IRS continues to utilize outdated methods and processes that even the Taxpayer Advocate called ‘crazy.’”

There can be no doubt that the $15 million study, which is intended to describe how the IRS should create its own software program rather than whether it should do so, will be a complete waste of time and money. Congress should instead insist that the IRS modernize its existing IT infrastructure to ensure safe, timely, customer-centric returns and audits that are cyber-hardened against identity theft and cyber-attacks.

CLICK HERE TO READ MORE FROM THE WASHINGTON EXAMINER

There is no need to reinvent the wheel in tax preparation services. Instead, the agency should get its IT systems out of the dark ages.

Deborah Collier is vice president of Policy and Government Affairs at Citizens Against Government Waste.