A Modern IRS? Careful What You Wish For

Electronic tax-return filing has made things more complex, not less. And better computers could mean worse abuses.

by Jay Starkman, CPA

[A version of this article (without footnotes) appeared in The Wall Street Journal on March 8, 2023, p. A17, with the title, “A Modern IRS? Careful What You Wish For”]

President Biden has promised not to use 87,000 new IRS agents to audit taxpayers with incomes under $400,000. About 90 percent of individual audits last year were conducted exclusively by mail. A defective algorithm resulted in the audit rate for certain low income taxpayers being exceeded only by those making more than $5 million.¹ IRS computers are already artificial intelligence (AI) capable and may soon select and manage audits, with less agency manpower.

IRS convinced Congress that it is running 1960's systems with blinking lights and spinning reels like an old James Bond movie scene. “You all have made a very convincing case that the information technology at the IRS is from the dark ages,” Senate Finance Committee Chairman Ron Wyden told Commissioner Charles Rettig in March 2021.²

The President's 2023 budget notes that only 9.3 percent of hardware is "aged."³ IRS installed the latest IBM z15 mainframe⁴ in 2021 and says it has "updated all IRS employee workstations to Windows 10."⁵

Every taxpayer is listed in the IRS Master File, a database structure based on COBOL, a 1960s programming language, still widely used and promoted by IBM. As tax laws became more complex, over decades, IRS created more than 500 systems, including 60 separate major databases containing different pieces of taxpayer information.⁶

As a result, IRS employees lack easy access to a taxpayer’s complete record. Over three decades, IRS has wasted billions⁷ while failing to replace this Master File and citing a need for more money while the cause was weak management. GAO says this project may take another decade.⁸ [New applications are programmed in C/C++, Java and Python modern computer languages.⁹]

IRS claims that upgrading its computer systems, an extremely expensive and daunting task, would improve customer service and compliance. GAO writes AI will “create predictive models and algorithms to analyze data more efficiently,”¹⁰ meaning better compliance. When IRS first switched on computers in 1967, The New York Times ran a headline, “Taxpayer’s Big Brother”¹¹ because of the 150 different computer notices spit out by the millions.¹² AI computers will be far more intrusive than Big Brother.

IRS technology accounts for over 20% of the agency's budget and almost 9% of its employees¹³ which includes about 7,000 staff plus 6,500 contractors,¹⁴ and uses 3,505 software products,¹⁵ managed by a chief information officer paid $197,300 in 2021.¹⁶ At Fortune 500 companies, CIOs are paid seven-figures.¹⁷ The IRS organization chart lists CIO near the bottom, far below Diversity Chief and Data Analytics Chief.¹⁸ Any wonder government watchdogs for decades have complained that IRS lacks “intellectual capital” for developing modern computer systems?¹⁹ When Congress passes a new tax law, IRS hires contractors to implement the system.

Following Watergate revelations of IRS abuse, Congress became fearful of a tax agency with advanced computers that could easily be turned into an instrument of oppression. So, the Carter administration killed a major IRS computer upgrade in 1978, approving only a scaled-back program.²⁰

Congress has forgotten the post-Watergate fear of a too highly computerized tax agency. Mandated efiling, ever more complex tax laws, budgeting new revenue from funding vastly increased audits, unwieldy complex new tax forms²¹ and extended or suspended statutes of limitations are enabling IRS to become the tyrant Congress in the 1970s feared.

Recently, with almost no public discussion, IRS formally amended its mission statement by adding:

In the United States, the Congress passes tax laws and requires taxpayers to comply. The taxpayer’s role is to understand and meet their tax obligations. The IRS's role is to help compliant taxpayers understand the tax law, while ensuring that the minority who are unwilling to comply pay their fair share of taxes.²²

This seemingly minor revision, stressing compliance, does not contemplate a service organization first and foremost. When the top one percent pays 38 percent of federal income taxes while the bottom 50 percent pays three percent,²³ the term, “fair share,” is political dogma that deserves no place in tax policy.²⁴ The 1987 IRS mission statement said it better, that taxpayers should pay “the proper amount.”²⁵

IRS National Taxpayer Advocate Erin Collins complains, “Paper is IRS’s kryptonite, and the agency is buried in it.”²⁶ It’s a bad analogy. Kryptonite came from outer space. Paper forms originate with IRS and IRS is burying taxpayers in it, not the other way around, demanding ever-more information that only an AI computer might use.

Over 95 percent of taxpayers now efile, so IRS no longer handles as much paper.²⁷ In the past, IRS smoothly processed 100 million paper 1040s annually. Today, it chokes on under 9 million paper returns. The IRS website lists over 2,700 different forms. Only efiling makes it possible for IRS to process the mountains of complex forms it foists on taxpayers who risk hacking of their most sensitive data, as occurred at TaxSlayer,²⁸ or online services like H&R Block, TaxAct, and TaxSlayer sharing data with Facebook.²⁹

Efiling allowed IRS to turn the two-page Form 1040 into 8 pages, including two lines for reporting Olympic medal winnings.³⁰ Many partnerships and S corporations are required to attach new 15-20 page schedules to each K-1 detailing foreign taxes, under threat of an unlimited statute of limitations for failure to include when required.³¹ IRS receives approximately 30 million partnership K-1s but makes no systematic use of this data absent an audit.³² Only 140 partnerships were audited in 2018.³³

Demanding so much useless detail makes tax preparation more expensive. After a public outcry, IRS recently shelved a controversial proposal that would require banks to efile a Form 1099 for transactions exceeding $600.³⁴

Today’s computers identify and issue a notice for every perceived discrepancy and adds penalties. IRS computers spit out over 175 million notices in 2018.³⁵ Last year’s correspondence included 17 million “math error” notices³⁶ – mostly for efiled returns. Exasperated, most taxpayers pay the notices, without protest, even when wrong. Otherwise, IRS couldn’t handle the avalanche of challenges. I reply to every wrong notice; two-thirds are wrong in my experience, including a $10 notice a client recently received.

In 1954, the Internal Revenue Code had only 12 civil penalties.³⁷ This grew to 25 in 1967 and 150 in 1987.³⁸ Today, Code penalties are as uncountable as the stars in the sky. Only IRS computers seem to know them all. Congress is responsible for enacting these penalties, often invented or increased as a revenue offset for some powerful politician’s pet project.

[ AUTHOR’S NOTE: I’ve spent a long career promoting tax simplification. Simplification won’t happen because campaign contributions encourage complicating taxes and there is no constituency promoting simplification.]

The only possible cure for this stampede of forms is for many more taxpayers to file on paper. They will earn 7 percent interest on late refunds. Only then might IRS realize that it is not possible to administer a two thousand form portfolio of ever-increasing complexity.

Until then, IRS and Congress are likely to issue more complicated forms and mandate more efiling, with an omnipotent and fearsome computer system backed by harsher penalties.

Tyranny by IRS machines is upon us.

1National Taxpayer Advocate, “2022 Annual Report to Congress,” pp 19, 244; 91.3% correspondence audits for incomes under $50K, especially low-income EITC issues. https://www.taxpayeradvocate.irs.gov/wp-content/uploads/2023/01/ARC22_FullReport.pdf; The average assessment was $5,169 for under $25K income and $6,565 for $25K - $200K, “IRS Audit Trends for Individual Taxpayers Vary by Income,” Statement of James R. McTigue, Jr., Director, Strategic Issues, General Accountability Office, GAO-22-106032, 18 May 2022, p 5. “Measuring and Mitigating Racial Disparities in Tax Audits,” Stanford Institute for Economic Policy Research, 30 Jan 2023, https://siepr.stanford.edu/publications/measuring-and-mitigating-racial-disparities-tax-audits

2“Hearing with the IRS Commissioner on the 2021 Filing Season,” House Oversight Subcommittee, 18 Mar 2021, https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/OV-2%20%20Hearing%20Transcript_1.pdf

3“The Budget for Fiscal Year 2023,” Budget Appendix: Department of the Treasury: Internal Revenue Service, p. 1016: "[I]n 2021, the IRS reduced the percentage of aged hardware within the IT environment from 16 percent at the end of 2020 to 9.3 percent through refreshing employee workstations, upgrading aged server operating systems and related aged hardware, and phasing out old equipment." www.whitehouse.gov/wp-content/uploads/2022/03/tre_fy2023.pdf. GAO reports only 7.1% aged, “IRS’s FY 2022 and FY 2021 Financial Statements,” GAO-23-105564, 10 Nov 2022 Table 5, pg 18.

4“Demystifying Data with AI on IBM Z,” IBM, 2021, www.redbooks.ibm.com/redpapers/pdfs/redp5633.pdf. IBM just announced its new z16 in April 2022.

5"Annual Key Insights Report: Fiscal Year 2020 Successes and Accomplishments," IRS Pub 5453 (3-2021) 24 Feb 2021 ("Updated all IRS employee workstations to Windows 10") pp. 6,20; However, the Washington Post reported IRS still has some Windows XP. "Why does the IRS need $80 billion?" Washington Post, 9 Aug 2022, www.washingtonpost.com/opinions/interactive/2022/irs-pipeline-tax-return-delays (Windows XP still in use); The Internal Revenue Manual and GAO seem to indicate that IRS is still running Win7 while upgrading to Windows 10. "Cost and Schedule Performance of Selected IRS Investments," GAO-22-104387, October 2021. There is little public information since the 2015 scandal that IRS had spent $140M over four years upgrading only half the units to Win7. Treasury Inspector General For Tax Administration reports generally redact any mention of which Windows O/S's IRS is using. There is one mention of Windows 10 in a recent TIGTA report, "The End-User Incident Management Process Can Be Improved," Report Number: 2022-20-053, 26 Sept 2022, pg 1. The Internal Revenue Manual was recently uptdated to refer to "Windows 7/Windows 10," Internal Revenue Manual 4.19.7.3 (09-28-2022), 1.4.23.1.4.5, 3.8.47.26(6), 4.7.10.5.2(3).

6500 systems. “Former IRS CIO Shares Concerns About Data Blindness and Impact on Managing Risk,” Government Technology Insider, 31 Jan 2019, https://governmenttechnologyinsider.com/former-irs-cio-shares-concerns-about-data-blindness-and-impact-on-managing-risk/; 60 separate. Statement of Nina E. Olson Executive Director, Center for Taxpayer Rights before Subcommittee on Select Revenue Measures and Oversight, 10 Jun 2021, p 5, https://docs.house.gov/meetings/WM/WM05/20210610/112792/HMTG-117-WM05-Wstate-OlsonN-20210610.pdf

7“Creaky I.R.S. Is at a Crossroads,” NY Times, 7 Apr 1990, p 33; “Big U.S. Contract To A.T.&T,” NY Times, 16 July 1991, p D1 [“worth at least $1.4billion over seven years”], https://timesmachine.nytimes.com/timesmachine/1991/07/16/408991.html?pageNumber=57 ; David Cay Johnston, “End of the I.R.S. Pipeline; Tax Returns of 90's Meet I.R.S. Technology of 60's,” NY Times, 15 Apr 1995, p 31; “A Technological Overhaul Of I.R.S. Is Called a Fiasco,” 15 Apr1996, p B8 [“To date this has been a $4 billion fiasco.”]; “Unbelieveable! The mess at the IRS is worse than you think,” Fortune, 14 Apr 1998, p 98-110; “IRS Delays Launch of Key Technology Program Until 2004 Filing Season, Agency Selects Outside Firm to Review Program,” IR-2003-94, 25 Jul 2003, www.irs.gov/pub/irs-news/ir-03-94.pdf; “The IRS's CADE 2 Database Deployment is Experiencing Delays and Increased Costs,” TIGTA Press Release TIGTA 2013-49, 26 Nov 2013, https://www.tigta.gov/articles/press-releases/irss-cade-2-database-deployment-experiencing-delays-and-increased-costs; “The IRS’ Individual Master File may be the oldest IT system in government and its failure could disrupt tax processing nationwide.,” Nextgov, 19 March 2018, www.nextgov.com/it-modernization/2018/03/irs-system-processing-your-taxes-almost-60-years-old/146770/; “40 Years of Failure: IRS Unable to Fix Computer System,” Americans for Tax Reform, 5 Mar 2022, www.atr.org/40-years-of-failure-irs-unable-to-fix-computer-system/; “IRS Needs to Complete Modernization Plans and Fully Address Cloud Computing Requirements,” Table 5, GAO-23-104719, Jan 2023 (released 7 Feb 2023), www.gao.gov/products/gao-23-104719 [$1.671 billion Dec 2010 thru Sept 2022]

8“IRS’s Efforts to Modernize 60-year-old Tax Processing System Is Almost a Decade Away,” 4 Nov 2021, https://www.gao.gov/blog/irss-efforts-modernize-60-year-old-tax-processing-system-almost-decade-away

9IRM §2.5.3.1.7, IRM §2.5.3.3(4) General Programming (12-17-2021), IRM 2.5.3.12 (07-20-2022)

10“IRS Needs to Complete Modernization Plans and Fully Address Cloud Computing Requirements,” Table 4, GAO-23-104719, Jan 2023 (released 7 Feb 2023), www.gao.gov/products/gao-23-104719

11NY Times, 12 April 1967, https://timesmachine.nytimes.com/timesmachine/1967/04/12/90322356.html?pageNumber=66

12150 different computer notices. John S. Bubula, "Tax Administration by computer: how it works now, what is coming next," 25 J Taxation 205-209 (October 1966) at 208.

13"Congressional Budget Justification & Annual Performance Report and Plan," IRS Pub. 4450 (Rev. 3-2022), Fiscal Year 2023, pg IRS-4. Information services $2.146B + modernization $0.300B out of $12.039B Total. Pg. IRS-66 shows $2.168B ($2,303,311,000+$24,791,000+$261,833,000+$310,027,000=$2,899,962,000; $310M is an additional line item on pg IRS-1 for modernization. So, IT could be 24% of the IRS budget.)

147,011 employees plus 6,549 contractors, "Annual Assessment of the IRS’s Information Technology Program for Fiscal Year 2021," Treasury Inspector General for Tax Administration, Rpt No 2022-20-005, 14 Dec 2021, pp. 1, 4-5. At 29 Jan 2023, TIGTA has not yet released a 2022 report.

15“IRS Needs to Complete Modernization Plans and Fully Address Cloud Computing Requirements,” GAO-23-104719, Jan 2023 (Full Report version, released 7 Feb 2023), p. 37, www.gao.gov/products/gao-23-104719

16Nancy Sieger CIO, $197,300 in 2021 at IRS salaries, www.openthebooks.com/executive-agencies-of-the-united-states/?Year_S=0&Emp_S=Internal%20Revenue%20Service. Associate CIO, Jeff D. Gill was paid $255,800 in 2021.

17"How much do CIOs really make? Pay packages of 25 Fortune 500 execs revealed," CIO.com, 19 Sep 2018, https://www.cio.com/article/220288/how-much-do-cios-really-make-pay-packages-of-25-fortune-500-execs-revealed.html

18IRS Organization Chart, https://www.irs.gov/pub/newsroom/marketing/internet/irs-organization-chart.pdf (November 2022, last visited Jan 24, 2023)

19A 2018 General Accountability Office report noted the agency suffers from "a decrease in staff available with the proper skill sets." "IRS Needs to Take Additional Actions to Address Significant Risks to Tax Processing," Government Accountability Office, GAO-18-298, June 2018; "A Vision for a New IRS," Report of the National Commission on Restructuring the Internal Revenue Service, 25 Jun 1997, pg F-4 (Though not specified, hearing was before the National Commission on Restructuring the Internal Revenue Service, per commission's report, pg C-4 which listed then IRS CIO Arthur Gross as a witness.) https://cybercemetery.unt.edu/archive/natcommirs/20160104232246/http:/www.house.gov/natcommirs/report1.pdf; David Cay Johnston, "Computers Clogged, I.R.S. Seeks to Hire Outside Processors," NY Times, 31 Jan 1997, A1.

20John Broder, "Are I.R.S. Computers Deductible? How an Agency Was Left Behind on the Road Ahead," NY Times, 10 Feb 1997, pg D1, https://archive.nytimes.com/www.nytimes.com/library/cyber/week/021097irs.html

21“The IRS estimates the [2022 Inflation Reduction Act] provisions impacting the 2023 Filing Season will require creating or revising 24 tax forms, 29 tax form instructions, and three publications before the start of the filing season. In addition, the IRS will have to modify 20 information technology systems to accommodate the new and revised tax forms. “Inflation Reduction Act: Assessment of the Internal Revenue Service Implementation Efforts,” Treasury Inspector General for Tax Administration, Rpt No 2023-IE-R003, 12 Jan 2023, https://www.tigta.gov/sites/default/files/reports/2023-01/2023ier003fr.pdf

22IRM Sec. 1.1.1.2(2). www.irs.gov/about-irs/the-agency-its-mission-and-statutory-authority (29 Jul 2019, last visited 29 Jan 2023)

23“Summary of the Latest Federal Income Tax Data, 2022 Update,” Tax Foundation, 20 Jan 2022 (last visited 30 Nov 2022), https://taxfoundation.org/publications/latest-federal-income-tax-data/

24Jay Starkman, “Debunking ‘Fair Share,” Financial Times, 23 Feb 2013 at www.starkman.com/articles/FairShare.shtml; Jay Starkman, “Why Not a 100% Tax Rate — It’s Not Unprecedented,” Wall St. Journal, 24 June 2021 at www.starkman.com/articles/Confiscate.shtml

25IRS 1987 mission statement: “The purpose of the Internal Revenue Service is to collect the proper amount of tax revenue at the least cost; serve the public by continually improving the quality of our products and services; and perform in a manner warranting the highest degree of public confidence in our integrity, efficiency and fairness.” Inexplicably, Congress legislated that the mission statement be revised when it passed the IRS Tax Restructuring and Reform Act of 1998. So, IRS re-wrote it: “Provide America's taxpayers top-quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.” IRM Sec. 1.1.1.2(1). https://www.irs.gov/irm/part1/irm_01-001-001#idm139964655718464

26“The IRS Pleads Poverty,” Wall St Journal, 13 Jan 2022, www.wsj.com/articles/the-irs-pleads-poverty-treasury-funding-delays-charles-rettig-taxpayer-advocate-erin-collins-11642096755

27Commissioner Rettig, “The Fiscal Year 2023 Budget Request from the U. S. Internal Revenue Service,” Senate Financial Services and General Government Subcommittee Hearing, 3 May 2022, https://www.appropriations.senate.gov/hearings/the-fiscal-year-2023-budget-request-from-the-u-s-internal-revenue-service at 51:20.

28“FTC Gives Final Approval to Settlement with Online Tax Preparation Service,” 8 Nov 2017, www.ftc.gov/news-events/news/press-releases/2017/11/ftc-gives-final-approval-settlement-online-tax-preparation-service

29“Tax Filing Websites Have Been Sending Users’ Financial Information to Facebook,” The Markup, 22 Nov 2022, https://themarkup.org/pixel-hunt/2022/11/22/tax-filing-websites-have-been-sending-users-financial-information-to-facebook; “Reps. Schiff, Chu, And Krishnamoorthi Urge Investigation Into Disclosure Of Taxpayers’ Personal, Financial Information To Facebook, Press Release, 2 Feb 2023, https://schiff.house.gov/news/press-releases/schiff-urges-investigation-into-disclosure-of-taxpayers-personal-financial-information-to-facebook

30Form 1040, Schedules 1, 2, and 3, each two pages. Olympics at Schedule 1 lines 8m and 24c.

31IRS Notice 2021-39.

32Charles O. Rossotti, “Success or Failure at the IRS: What Will Make the Difference?” Tax Notes Federal, 19 Dec 2022, p. 1666.

33Wyden, June 8, 2021 opening statement, Senate Finance Committee Hearing on the IRS’s Fiscal Year 2022 Budget, 8 Jun 2021. Wyden wrote, "It’s an audit rate of 0.00004 percent." www.finance.senate.gov/download/042221-wyden-statement. His math is wrong. 140/4010200 = 0.000034911 = 0.0035% (rounded). 4,010,200 partnership returns were filed in 2018 per IRS statistics, www.irs.gov/pub/irs-soi/18pa03.xlsx

34The measure failed to even make it into a 2021 draft version of the reconciliation bill that later morphed into the Inflation Reduction Act of 2022. However, the American Rescue Plan Act of 2021 (P. L. 117-2) modified IRC §6050W(e) reducing the threshold for third party payors (eg, Amazon, eBay, PayPal, Airbnb, Uber, Lyft) filing Form 1099-K to $600 (from $20,000) and is expected to result in tens of millions of 1099-Ks and mismatch anguish to taxpayer recipients. Amid much criticism, at the last minute, 23 Dec 2022, IRS announced it would delay the $600 reporting requirement from calendar 2022 to 2023. IRS Notice 2023-10, IR-2022-226.

35National Taxpayer Advocate, “Annual Report to Congress 2018,” Vol 1 at 170 (Feb. 2019), www.TaxpayerAdvocate.irs.gov/2018AnnualReport

36National Taxpayer Advocate, “2022 Annual Report to Congress,” p. 2, https://www.taxpayeradvocate.irs.gov/wp-content/uploads/2023/01/ARC22_FullReport.pdf; Laura Saunders, “The Latest IRS Headache for Taxpayers: 11 Million ‘Math Error’ Notices,” Wall St Journal, Updated 3 Sep 2021, https://www.wsj.com/articles/the-latest-irs-headache-for-taxpayers-11-million-math-error-notices-11630661402

37§6651 failure to file, §6652 failure to file information return ($1 each statement; $250 today), §6653 failure to pay, §6654 & §6655 estimated tax, §6656 failure to deposit tax, §6657 bad checks ($5, 2% today, EFTPS added in 2010), §6658 interference with jeopardy/termination assessment, §6672 tax evasion, §6673 Tax Court filing merely for delay ($500, $25,000 today), §6673 failure/fraudulent W-2 (still $50), §6675 gasoline (obsolete),

38Commissioner’s Executive Task Force on Civil Penalties, Internal Revenue Service, Report on Civil Tax Penalties, Chapter 5 (February 21, 1989)

END OF FOOTNOTES

A version of this article (without footnotes) appeared March 8, 2023, on page A17 in The Wall Street Journal with the title, “A Modern IRS? Careful What You Wish For ”