Potential $70M Cost from IRS Key System Delay
TL/DR –
The IRS plans to shift to a new tax account administration processing engine after the 2025 filing season, a delay that could prove costly. The present system, the Individual Master File, is from the 1960s and its modernization is seen as extremely complex. The IRS has been testing a new system, but is waiting to switch over to it fully out of caution, a delay that may cost up to $70 million.
Costs of Postponing New IRS Processing Engine
The IRS’ decision to postpone the switch to a new individual tax account processing engine until after the 2025 tax season could cost up to $70 million, as indicated in a recent watchdog report. The current system, the Individual Master File (IMF), has been operating since the 1960s and the IRS is putting significant effort into its modernization.
Testing of New IRS Processing Engine
The IRS has been testing a new processing engine since April, with a view to implementing it before the upcoming tax season. However, IRS Commissioner Danny Werfel stated that the switchover has been delayed “out of an abundance of caution.” The goal now is to change to the new engine next summer.
Delay Implications
The report estimates that a six-month delay could inflate costs by up to $70 million. Despite the cost, the IRS maintains that a careful approach to transition is necessary, especially during the tax filing season. The IMF is critical for efficient tax administration and serving individual taxpayers.
Insights into IRS Testing Process
The watchdog report provides insights into the IRS’ testing and defect remediation processes. It also touches on the challenges of running both the outdated and new systems simultaneously. The IRS had planned to run parallel operations between April and December 2024. However, issues with code and data format defects derailed these plans.
Modernization Efforts and Risks
Multiple modernization efforts are underway at the IRS. Werfel suggests that a potential failure with the IMF could drain resources and halt progress in other areas. The agency is determined to prevent this scenario and ensure a smooth transition for taxpayers and the tax system.
Recommendations
The report also calls for greater clarity in the IRS’s plans for resources provided by the Inflation Reduction Act. The IRS has agreed with these recommendations, similar to those made in the past.
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