Full text
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The Internal Revenue Service Has Experienced
Challenges in Transitioning to Electronic Records
September 6, 2023
Report Number: 2023-10-050
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TIGTACommunications@tigta.treas.gov | www.tigta.gov
TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION
HIGHLIGHTS: The Internal Revenue Service Has
Experienced Challenges in Transitioning to Electronic Records
Final Audit Report issued on September 6, 2023
Report Number 2023-10-050
Why TIGTA Did This Audit
This audit was initiated to assess
the IRS’s progress in transitioning
to electronic records in accordance
with Office of Management and
Budget/National Archives and
Records Administration
Memorandum M-19-21, Transition
to Electronic Records.
TIGTA has identified problems with
paper document processing and
emphasized the need for the IRS to
transition to electronic records in
previous audit reports.
Additionally, other stakeholders
have recommended process
improvements in attempts to move
the agency forward in its
digitalization efforts.
Impact on Tax Administration
The IRS annually processes more
than 240 million tax returns and
other forms and currently stores
over 5.7 million cubic feet of paper
records (the bulk of which are tax
returns) at Federal Records Centers
distributed across 17 locations
throughout the United States.
On average, the IRS sends
526,000 cubic feet of records to
the Federal Records Centers each
year. In Fiscal Year 2022, the IRS
spent approximately $35 million in
storage-related costs. Paper files
are often difficult to access, and
the Federal Government’s interest
is harmed when the IRS is unable
to produce documents needed to
support the IRS’s position as part
of an examination, appeal, tax
court case, etc. Taxpayers are also
burdened when IRS employees are
unable to readily access paper files
in response to requests for
assistance.
What TIGTA Found
All Federal agencies are required to adopt electronic recordkeeping
requirements by June 30, 2024. Due to delayed efforts to digitalize
records, the IRS was not on track to meet the deadline, so it
requested and was granted an extension until December 31, 2030.
The IRS scans millions of pages of documents every filing season,
including tax returns, checks, correspondence, and other original
documents. However, scanning systems and capabilities vary widely
across the organization. Current technology, such as optical
character recognition and two-dimensional document bar coding,
would enable the IRS to machine read paper tax returns, yet the IRS
does not currently possess the capability to perform these functions
on a large scale.
Digitalization is key to addressing challenges associated with large
volumes of paper and achieving compliance with electronic
recordkeeping mandates. While the IRS has developed high-level
strategies to help guide the transition to digitalized processes and
electronic recordkeeping, these strategies have not been updated to
reflect current priorities and the actions required to move forward.
IRS efforts to digitalize records could be significantly enhanced by
increasing the rate of electronically filed returns; however, the IRS has
not developed a single Service-wide strategy to incorporate all forms
for electronic filing. Paper-filed tax returns are more costly to
process and are also more likely to contain errors and be subject to
delays in processing, as seen during the Coronavirus Disease 2019
pandemic. As a result, the IRS must pay interest on any delayed
refunds. In Fiscal Year 2022, the IRS paid $3.5 billion in total refund
interest. This is a 70 percent increase from the $2.06 billion paid in
refund interest before the pandemic in Fiscal Year 2019.
Delayed efforts to digitalize records have resulted in continued
reliance on outside storage facilities. Access to IRS records stored in
the Federal Records Centers has been problematic in the past and
was significantly hampered by the Coronavirus Disease 2019
pandemic-related closures.
What TIGTA Recommended
TIGTA recommended that the IRS 1) create a single Service-wide
comprehensive digitalization strategy that identifies priorities,
objectives, interim target dates, milestones, etc., and identifies the
IRS business units responsible for the applicable actions; and
2) develop processes to require management to track digitalization
efforts and compare results against the plans, goals, objectives,
milestone dates, etc., and analyze any significant deviations to
identify needed strategic changes. The IRS agreed with both
recommendations. It plans to create a single Service-wide strategy
that will identify the IRS business units responsible for the applicable
actions and a process to track digitalization efforts against stated
goals.
U.S. DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20024
TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION
September 6, 2023
MEMORANDUM FOR: COMMISSIONER OF INTERNAL REVENUE
FROM:
Heather M. Hill
Deputy Inspector General for Audit
SUBJECT:
Final Audit Report – The Internal Revenue Service Has Experienced
Challenges in Transitioning to Electronic Records (Audit # 202210013)
This report presents the results of our review of the Internal Revenue Service’s (IRS) progress in
transitioning to electronic records in accordance with Office of Management and
Budget/National Archives and Records Administration Memorandum M-19-21, Transition to
Electronic Records. This review is part of our Fiscal Year 2023 Annual Audit Plan and addresses
the major management and performance challenge of Modernizing IRS Operations.
Management’s complete response to the draft report is included as Appendix IV. If you have
any questions, please contact me or Bryce Kisler, Assistant Inspector General for Audit
(Management Services and Exempt Organizations).
The Internal Revenue Service Has Experienced Challenges in Transitioning to Electronic Records
Table of Contents
Background .....................................................................................................................................Page 1
Results of Review .......................................................................................................................Page 3
The IRS Has Transitioned Its Permanent Records to an
Electronic Format, but Has Struggled Transitioning Its
Remaining Temporary Records ......................................................................................Page 3
Recommendations 1 and 2: .....................................................Page 15
Appendices
Appendix I – Detailed Objective, Scope, and Methodology ................................Page 16
Appendix II – Ongoing Pilot Digitalization Projects ................................................Page 18
Appendix III – Contracts Awarded in Efforts to Align With the
National Archives and Records Administration Mandates ...................................Page 19
Appendix IV – Management’s Response to the Draft Report .............................Page 22
Appendix V – Abbreviations.............................................................................................Page. 26
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The Internal Revenue Service Has Experienced Challenges in Transitioning to Electronic Records
Background
Every year, the Internal Revenue Service (IRS) receives millions of paper-based documents,
including tax returns, taxpayer correspondence (e.g., audit responses), and internal records,
which translate to tens of millions of sheets of paper. This large volume of paper presents an
enormous cost and time burden to the IRS in both the resources required to process and
transcribe these documents as well as the cost of physically transporting and storing them.
The IRS sends large volumes of paper to the Federal Records Centers (FRC), which are operated
by the National Archives and Records Administration (NARA), for storage and future access. The
IRS annually processes more than 240 million tax returns and other forms and currently stores
over 5.7 million cubic feet of paper records (the bulk of which are tax returns) at FRCs
distributed across 17 locations throughout the United States. On average, the IRS sends
526,000 cubic feet of records to the FRCs each year. Services provided by the FRCs include
custodial management, security, retrieval, and disposal of records.
The IRS pays the NARA to store and access these records. Per IRS management, the cost to
maintain records at the FRCs was approximately $35 million in Fiscal Year (FY) 2022.
Maintaining large volumes of paper documents requires dedicated resources, management
attention, and security investments, which could be applied to more effectively manage
electronic records.1
As part of their continued efforts to compel Federal agencies to transform business processes
and recordkeeping to a fully electronic environment, the
Office of Management and Budget (OMB) and the NARA
jointly issued OMB/NARA Memorandum M-19-21,
Transition to Electronic Records.2 The memorandum
identified key targets and deadlines for Federal agencies
to manage electronic records and for sending paper
records to the FRCs.
Specifically, the memorandum stipulated that by December 31, 2022, Federal agencies should
be:
•
Managing all permanent records in an electronic format with the appropriate metadata.3
1 An electronic record contains information recorded in a form that is machine-readable (e.g., information that only a
computer or similar system can process, and which, without a computer, would not be understandable to people).
Recorded electronic information becomes a Federal record when it satisfies the statutory definition of a “record” and
is the same definition applied to information recorded on paper.
2 Memorandum for Heads of Executive Departments and Agencies - Transition to Electronic Records (June 28, 2019).
3 Permanent records are those that are appraised by the NARA as having sufficient historical or other value to warrant
continued preservation by the Federal Government beyond the time it is needed for administrative, legal, or fiscal
purposes. For example, organizational studies or realignments which document changes in the way the IRS does
business or is structured (e.g., organizational charts) have been identified and appraised by the NARA as permanent
records. Metadata describes stored data and includes the structure, data elements, interrelationships, and other
characteristics of electronic records.
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The Internal Revenue Service Has Experienced Challenges in Transitioning to Electronic Records
•
Managing all temporary records in an electronic format to the fullest extent possible.4
•
Using commercial storage facilities to store analog (paper) records produced after
December 31, 2022.
Subsequently, the NARA extended the target implementation date due to delays encountered
by agencies during the Coronavirus Disease 2019 (COVID-19) pandemic. In December 2022, the
OMB and the NARA issued Memorandum M-23-07, Update to Transition to Electronic Records,
which reinforces the requirements established in OMB/NARA Memorandum M-19-21, with an
updated target implementation date.5 Under the updated guidance, all Federal agencies are
required to complete the following actions by June 30, 2024:
•
Manage all permanent records in an electronic format.
•
Manage all temporary records in an electronic format or store them in commercial
records storage facilities.
After June 30, 2024:
•
Federal agencies must transfer all permanent records in an electronic format with
appropriate metadata.
•
The NARA will no longer accept transfers of permanent or temporary records in analog
formats and will accept records only in an electronic format with appropriate metadata.
Within the IRS, the Commissioner has delegated overall records program management
responsibility to the IRS Records Officer, who is organizationally located within the Privacy,
Governmental Liaison, and Disclosure (PGLD) function. Within the PGLD function, the Identity
and Records Protection function leads Service-wide efforts to implement NARA Federal
electronic records management requirements within the IRS. The Identity and Records
Protection function collaborates with the Enterprise Digitalization and Case Management Office
(ED&CMO) to embed record requirements into its digitalization strategy.6 The IRS established
the ED&CMO to improve the taxpayer experience by modernizing legacy systems through both
Case Management and Digitalization Initiatives.
4 Temporary records are records approved by the NARA for disposal after a specified retention period. For example,
Forms 1040, U.S. Individual Income Tax Return, are considered temporary records. These forms have been appraised
and scheduled with a specific retention period of six years. At the end of that retention period, all routine Forms 1040
are eligible for destruction.
5 Memorandum for Heads of Executive Departments and Agencies - Update to Transition to Electronic Records
(December 23, 2022).
6 “Digitalization” is the process of converting text, pictures, or sound into a digital form that can be processed by a
computer, easily shared, and accessed, whereas “digitization” is the process of converting analog information
(i.e., physical documentation that requires physical storage) into a digital format that can be stored digitally through
traditional scanning processes, transcription, or other technology.
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The Internal Revenue Service Has Experienced Challenges in Transitioning to Electronic Records
Results of Review
The IRS Has Transitioned Its Permanent Records to an Electronic Format, but
Has Struggled Transitioning Its Remaining Temporary Records
OMB/NARA Memorandum M-19-21 established the deadline for all agencies to adopt electronic
recordkeeping requirements, to the fullest extent possible, by December 31, 2022. The OMB
and the NARA subsequently extended the deadline for all agencies to June 30, 2024.
Agencies may request a limited exception to the requirements in circumstances where replacing
specific analog records with electronic systems would be burdensome to the public, if the cost
would exceed the benefit, or for other reasons including instances where statutory or regulatory
barriers impede implementation or if there is exceptional intrinsic value in the original format.
In September 2020, the IRS asked the NARA for an exception that would enable it to continue to
produce paper records and store them at the FRCs until January 2028 (five years beyond the
original Calendar Year (CY) 2022 deadline). The IRS request did not cite any specific
NARA-identified criteria, but instead cited other reasons. These included:
•
Complexity and continuity of IRS operations.
•
Continuing assessment of an enterprise-wide strategy and long-term solution for
electronic processing of paper records.
•
Legislative/policy requirements to maintain specific record information in a paper format.
•
Paper volumes – large paper volume (mostly tax records) will continue to be created and
will need to be managed via a third-party service provider beyond December 31, 2022.
•
Technological interdependencies – the IRS’s ability to successfully modernize includes
necessary efforts to determine proper scanning operations and test upgraded
environments to ensure the preservation of authoritative digital records prior to the
destruction of source paper.
The IRS did not receive an official written response to its initial request and on
November 30, 2022, submitted another request to the NARA asking for an exception to
continue to produce paper records until December 31, 2030 (an additional three calendar years
beyond its original request), stating that it was to “better align with technology modernization
efforts and associated implementation requirements” as prescribed in the Taxpayer First Act and
the Inflation Reduction Act of 2022.7
The IRS did not cite any specific provisions of these Acts to support why the additional time was
warranted. IRS management had previously stated that they were on track to meet the terms of
Memorandums M-19-21 and M-23-07 (hereafter referred to as the NARA mandates) by
January 2028.
On February 2, 2023, the NARA granted an exception to the IRS allowing it to continue to store
records at the FRCs and additional time to transition to electronic records until
December 31, 2030. This approval is contingent upon the IRS providing the OMB and the NARA
7 Pub. L. No. 116-25, 133 Stat. 981 (codified in scattered sections of 26 U.S.C.) and Pub. L. No. 117-169, 136 Stat. 1818.
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The Internal Revenue Service Has Experienced Challenges in Transitioning to Electronic Records
with annual progress reports on specific benchmarks. Figure 1 shows the status of the IRS’s
progress towards meeting the key provisions of the electronic recordkeeping requirements.
Figure 1: IRS Progress in Meeting the NARA Provisions
Source: OMB/NARA Memorandum M-19-21, OMB/NARA Memorandum M-23-07, IRS Request for
Exception to NARA Mandates (November 30, 2022), and information provided by IRS management.
Fragmented scanning processes create prioritization and scanning challenges
The IRS scans millions of pages of taxpayer documents every filing season, including tax returns,
checks, correspondence, and other original documents. However, scanning systems and
capabilities vary widely across the organization. Fragmented scanning processes create
prioritization and scanning challenges. Paper documents are received in a variety of formats
and sizes with varying levels of complexity (e.g., handwritten/typed, quality of paper, length of
document), resulting in large-scale electronic data capture challenges.
Current technology, such as optical character recognition (OCR) and document bar coding,
would enable the IRS to machine read paper tax returns. However, the IRS does not possess the
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The Internal Revenue Service Has Experienced Challenges in Transitioning to Electronic Records
capability to perform these functions on a large scale. Further, not all paper-based and
electronic data received by the IRS are readily converted to digital data or are accessible
electronically across the IRS.8
Delayed efforts to digitalize records result in continued reliance on outside storage facilities to
manage IRS records and documents. Unlike electronic records, the process to retrieve paper
documents is labor-intensive and time consuming. It often takes weeks or months to receive
documents if they are received at all. IRS compliance functions are impacted when a previously
submitted document cannot be secured. This can potentially result in lost revenue when a
document is needed to determine or support a legal course of tax enforcement action.
Taxpayers are burdened when IRS employees are unable to readily access paper files in response
to requests for assistance. Further, only one examiner can have the document at a time. This
presents a unique challenge, as multiple examiners often need these original documents in
cases that require various, simultaneous actions such as those resolving identity theft issues.
In addition, this limits a taxpayer’s ability to efficiently interact with the IRS and hinders the IRS’s
ability to continue functioning during significant disruptions to operations, e.g., Government
shutdowns, the COVID-19 pandemic. For example, in response to the COVID-19 pandemic, the
IRS took unprecedented and drastic actions to protect the health and safety of its employees
and the taxpaying public by closing its tax processing centers nationwide.9 During this time, the
IRS held large amounts of unopened mail, including paper tax returns and correspondence, in
trailers until employees were able to return in person to work.
Digitalization is key to addressing challenges associated with large volumes of paper and
achieving compliance with the NARA’s electronic recordkeeping mandates. The IRS has long
recognized the need to modernize methods for processing paper tax returns but has had limited
success in effecting change. Efforts in this regard have primarily focused on improving the
electronic filing rate, which has increased over time, although a significant volume of paper tax
returns are still received.
Paper-filed tax returns are not only more costly to process than electronically filed (e-filed) tax
returns, but they are also more likely to contain errors and be subject to delays in processing, as
seen during the COVID-19 pandemic. As a result, interest may be due on refunds from returns
that are subject to delays in processing. The IRS paid $3.5 billion in total refund interest during
FY 2022.10 This is a 70 percent increase from the $2.06 billion paid in refund interest before the
pandemic in FY 2019. While the IRS has developed high-level strategies to help guide its
transition to digitalized processes and electronic recordkeeping, these strategies have not been
updated to reflect current priorities and the actions required to move forward.
The IRS has struggled to meet electronic recordkeeping requirements
On November 28, 2011, a Presidential Memorandum – Managing Government Records – was
issued that emphasized the need in Federal agencies for a records management framework that
8 Digital is defined as being of or relating to computers.
9 The location where the IRS processes paper and electronic submissions, corrects errors, and forwards data to its
Computing Centers for analysis and posting to taxpayer accounts.
10 Total refund interest is related to delays in IRS processing of tax returns as well as amended returns, tax law
changes, disaster declarations, and disputes.
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The Internal Revenue Service Has Experienced Challenges in Transitioning to Electronic Records
would assist them to transition from a paper-based records management system to electronic
records management where feasible.
E-mail records
Citing the 2011 Presidential Memorandum, the OMB and the NARA jointly issued Memorandum
M-12-18, Managing Government Records Directive, on August 24, 2012. Under this directive,
Federal agencies were instructed to eliminate paper and use electronic recordkeeping to the
fullest extent possible, and to manage both permanent and temporary e-mail records in an
electronically accessible format by December 31, 2016.
Further, on September 15, 2014, the OMB and the NARA jointly issued Memorandum M-14-16,
Guidance on Managing Email, which reiterated that by December 31, 2016, Federal agencies will
manage both permanent and temporary e-mail records in an electronically accessible format.
Although the IRS had more than four years’ notice to meet the electronic e-mail requirements,
the IRS did not achieve this objective until October 2017. This delay was partially due to an
acquisition protest filed with the Government Accountability Office (GAO).
Permanent records
OMB/NARA Memorandum M-12-18 also stipulated that all permanent electronic records in
Federal agencies must be managed electronically, to the fullest extent possible, for eventual
transfer of legal custody to the NARA in an electronic format by December 31, 2019. This
requirement was reiterated in OMB/NARA Memorandums M-14-16 and M-19-21. However, the
IRS did not achieve full compliance with this requirement until December 2020.
OMB/NARA Memorandum M-19-21 also stipulates that after December 31, 2022, all agencies
will transfer their permanent records to the NARA in electronic formats with the appropriate
metadata. The IRS timely achieved this objective in December 2020.
Temporary records
IRS management will not meet the original deadline to comply with the other provisions of the
NARA mandates. Specifically, the IRS was not on track to manage all temporary records in an
electronic format or store them in commercial records storage facilities by June 30, 2024.
Management cites the large volumes of paper documents received, the paper-intensive nature
of business operations and activities, along with the unanticipated demands on resources and
attention the COVID-19 pandemic placed on the agency for its inability to meet the terms of the
NARA mandates. The vast majority of documents the IRS is responsible for maintaining are
temporary records, such as tax returns and supplemental documents. According to the IRS Data
Book, the IRS processed more than 262.8 million Federal tax returns and supplemental
documents in FY 2022.11 Approximately 49.4 million of these tax returns and supplemental
documents were filed on paper.12
11 Internal Revenue Service Data Book, 2022.
12 This number excludes information returns, tax-exempt bond returns, and employee retirement benefit plan returns
because they do not have the requirement or option to be filed electronically. As a result, this number may be
understated. For example, the IRS estimates that 27.2 million information returns were filed in FY 2022 on paper.
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The Internal Revenue Service Has Experienced Challenges in Transitioning to Electronic Records
Limited actions were taken in response to prior recommendations
The Treasury Inspector General for Tax Administration (TIGTA) has previously identified
problems with paper document processing and emphasized the need for the IRS to transition to
electronic records in prior audit reports. Additionally, other stakeholders have recommended
process improvements in attempts to move the agency forward in its digitalization efforts.
In FY 2009, we reported that the IRS uses a labor-intensive, costly, and error-prone system
because it has been unable to implement a modernized submission processing system to
convert paper tax returns into an electronic format. The IRS agreed to pursue implementing
successful processes followed by States that use scanning technology, e.g., OCR,
two-dimensional (2-D) bar codes, to convert paper-filed tax returns prepared by individuals
(using a tax preparation software package) into an electronic format.13
However, in CY 2015, the IRS determined that there was no longer a sound business case for it
to convert paper returns to an electronic format using 2-D bar code scanning because paper
return filing had decreased from 34 percent to 17 percent and the rate of e-filed tax returns had
increased from 67 percent to 87 percent, significantly reducing the need for this technology.
Subsequently, in an FY 2018 report, the GAO reported that the IRS evaluated digitizing some
paper returns using 2-D barcoding technology, but it had not updated that analysis or expanded
it to consider other digitizing technologies.14 In December 2019, IRS officials reported that the
agency planned to begin scanning and digitizing individual tax returns filed on paper in
October 2021. However, in August 2021, the IRS requested an additional year to complete the
recommended action.
In a December 2021 recommendation to Congress, the National Taxpayer Advocate requested
dedicated multiyear funding for the IRS to purchase and implement scanning technology to
improve the speed and accuracy of paper return and correspondence processing.15 Noting
the COVID-19 pandemic and the significant backlog of unprocessed paper tax returns, the
National Taxpayer Advocate subsequently issued a Taxpayer Advocate Directive to the IRS on
March 29, 2022, directing it to:16
•
Work with tax return software companies to develop a plan for the companies to
voluntarily place 2-D barcodes on returns prepared with their software products during
the 2023 Filing Season and beyond.
13 TIGTA, Report No. 2009-40-130, Repeated Efforts to Modernize Paper Tax Return Processing Have Been
Unsuccessful; However, Actions Can Be Taken to Increase Electronic Filing and Reduce Processing Costs (Sept. 2009).
14 GAO, GAO-18-544, Tax Fraud and Noncompliance: IRS Could Further Leverage the Return Review Program to
Strengthen Tax Enforcement (July 2018).
15 The National Taxpayer Advocate operates independently of any other IRS business unit and reports directly to
Congress. National Taxpayer Advocate, 2022 Purple Book Legislative Recommendation #5, December 31, 2021:
Require the IRS to Work With Tax Software Companies to Incorporate Scanning Technology for Individual Income Tax
Returns Filed on Paper. The National Taxpayer Advocate Purple Book is a compilation of legislative recommendations
made by the National Taxpayer Advocate.
16 The National Taxpayer Advocate has the delegated authority to issue a Taxpayer Advocate Directive to direct
improvements to IRS operations or to grant relief to groups of taxpayers (or all taxpayers).
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•
Develop a plan to implement OCR or similar technology to automate the processing of
handwritten returns and returns without readable barcodes by the start of the
2023 Filing Season or, if not feasible, by the start of the 2024 Filing Season.
In an October 2022 response to Congress, the IRS Commissioner stated that with the additional
funding provided by the Inflation Reduction Act, the IRS would be “scanning some paper
individual income tax returns as well as some employment tax returns early in 2023. If the
scanning is successful, additional individual income tax returns and employment tax returns will
be scanned later in 2023.” The response lacked specific details as to the methodologies that
would enable these efforts and did not indicate the anticipated volume of documents to be
scanned. Earlier in the same month, the IRS reported that OCR and adaptive scanning
technologies had been enabled but only for returns received at IRS lockbox locations and only
for processing Forms 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.
Currently, the IRS receives over 100 million pieces of mail annually, which are delivered to over
100 unique addresses at tax processing centers. These unique addresses are mainly at
campuses to assist in identifying the functional area that generated the correspondence. The
sorting of this incoming mail relies on manual processes that do not involve digitalization. IRS
processing centers use the Service Center Automated Mail Processing System (SCAMPS) to
process incoming mail. These systems automatically open, count, sort, and attempt to detect
remittances. SCAMPS machines are over 20 years old and have not had any significant technical
upgrades in more than 15 years. However, the IRS has recently initiated a pilot of a program to
replace SCAMPS.17
As we noted in our February 2022 report, the IRS had not taken any significant actions to review
and assess needed equipment upgrades, replacement options, etc., even though SCAMPS has
limited technological capabilities and there were frequent requests for maintenance.18 We had
previously notified management of our concerns about their inaction to develop a strategy to
update or replace SCAMPS equipment. We also noted that since the start of the 2021 Filing
Season, SCAMPS machines have been serviced almost 300 times.
In their response, IRS management stated that they would take the actions necessary for the
evaluation and purchase of a replacement for the equipment used for opening and sorting mail
and ensure that those necessary actions are carried out timely. Because this procurement action
is dependent on funding and is subject to competing priorities, IRS management will reevaluate
continuing actions if implementation is not successful within three years.
High–level strategies were developed but have not been updated
The Digital Recordkeeping Modernization Strategy is an initiative commissioned by the PGLD
function’s Chief Privacy Officer and the Director, Identity and Records Protection, to address and
meet the targets outlined by the OMB, the NARA, and key legislation. The intent is to enable
the IRS to transition recordkeeping to a fully electronic environment that complies with Records
and Information Management laws and regulations. The strategy document was last revised in
17 TIGTA is reviewing SCAMPS replacement in TIGTA, Audit No. 202340610, Continued Assessment of the IRS’s Efforts
to Address the Backlogs During the 2023 Filing Season.
18 TIGTA, Report No. 2022-40-015, Plans to Close the Austin Tax Processing Center Should Be Halted Until Hiring
Challenges and Substantial Backlogs at Remaining Centers Are Addressed (Feb. 2022).
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March 2022 and includes a roadmap that identifies target dates and objectives supporting four
broad goals.
•
Comply with the FRC mandate.
•
Comply with the electronic records mandate.
•
Support the modernization of paper intake.
•
Support the reduction of paper created post-intake.
Additionally, the PGLD function drafted a digitalization status report that was submitted as
support for the IRS’s November 30, 2022, request for exception to the NARA mandates.
However, seven of the current 13 objectives listed identify December 31, 2030, as the projected
completion date and four do not have projected completion dates. Only two of the current
objectives have near term completion dates of September 2023 and December 2025. Further,
there are no interim target dates that could be used to measure whether progress is on track to
meet the completion dates identified.
Per PGLD management, the ED&CMO is responsible for the overall IRS digitalization strategy
efforts. The IRS Digitalization Strategy was developed in 2020 to address the challenges
associated with ingesting large volumes of paper documents and unstructured data to better
align the IRS with key Federal guidance, e.g., the NARA mandates. The IRS Digitalization
Strategy consists of three goals:
The stated vision of the strategy is to “enable a digitally driven IRS by 2025.” Subsequently,
ED&CMO management acknowledged that the strategy needs to be “refreshed” and that the
initial target date for a refresh of the existing strategy was June 30, 2022. However, per
discussions with ED&CMO management in February and April 2023, the strategy had yet to be
updated pending ongoing work with IRS executives and discussions relative to the
implementation of the Inflation Reduction Act.
Although the IRS has been granted additional time to comply with the NARA mandates, an
updated digitalization strategy is needed to help guide the transition to digitalized processes
and electronic recordkeeping. The updated strategy should reflect current priorities and the
actions required (with interim target dates) to ensure that the processes stay on track moving
forward.
Per the GAO’s Standards for Internal Control in the Federal Government, management should
design control activities to achieve objectives and respond to risks.19 Control activities help
management fulfill responsibilities and address identified risk responses in the internal control
system. Key management functions include tracking major entity achievements and comparing
these to the plans, goals, and objectives set by the entity and analyzing significant differences.
19 GAO, GAO-14-704G, Standards for Internal Control in the Federal Government (Sept. 2014).
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Pilot digitalization projects are in progress but are limited in scope and several years out
from full implementation
As part of its efforts to address the digitalization of millions of paper documents received
annually, the IRS is using pilot projects as a method for testing and evaluating technologies and
approaches that can be scaled across the agency. Pilot projects are intended to help the IRS
quickly test concepts that could inform future large-scale digitalization solutions. Per IRS
management, projects are recommended by employees in IRS business units and are selected
based on their potential to help the IRS assess key digitalization capabilities, functions, and
technologies.
In December 2021, the IRS established the Digital Integration Board, which is comprised of
high-level management officials from various IRS functions and is intended to serve as a catalyst
for the IRS Digitalization Strategy. Per IRS management, the Digital Integration Board will
observe the progress of pilot digitalization projects to assess their potential for scalability across
the IRS. However, the pilot projects are limited in scope, and it will be several more years before
testing is complete. As such, it is not yet evident if any of the projects will provide the solutions
needed for the IRS to meet current electronic recordkeeping requirements. In addition,
successful pilots will have to be scaled up to extensive projects, which will take several more
years to complete before significant benefits are realized.
Most of the projects are worked collaboratively with the ED&CMO and one or more of the other
IRS business units. The list of currently ongoing pilot digitalization projects is provided in
Appendix II.
The ED&CMO is using outside vendors on some of the projects. Contracts were awarded under
four Requests for Proposal using the Pilot IRS Procurement process. Under this process, projects
are awarded with built-in phases that allow officials to determine whether to continue funding
or terminate the pilot at the end of each phase. As such, the IRS can select the most qualified
vendor for subsequent phases of a project based upon their performance in a prior phase.
Cumulatively, the IRS has spent more than
$24 million on contracts for these four pilot
projects (Submission Processing Modernization,
Augmented Reality (AR), OCR, and Scanning as a
Service (SCaaS)) that are intended to further IRS
efforts in achieving compliance with the NARA
mandates. A more detailed description of the
contract terms and the associated costs are
provided in Appendix III.
TIGTA has initiated an audit to evaluate the IRS's efforts to scan paper-filed individual tax returns
into an electronic format for the 2023 Filing Season.20 This will include the three pilot projects
that ED&MCO management considers to be the most critical to the success of the digitalization
process:
SCaaS – This project involves converting paper records into digital files that will be
stored in an IRS repository and serve as the official record and converting incoming
paper returns into digital files and filing them electronically. The initial phase of the
20 TIGTA, Audit No. 202340829, IRS Efforts to Scan Paper-Filed Individual Tax Returns for the 2023 Filing Season.
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The Internal Revenue Service Has Experienced Challenges in Transitioning to Electronic Records
project focused on scanning Forms 709, United States Gift (and Generation-Skipping
Transfer) Tax Return, while the second phase is focused on expanding the scope to
include other forms and a more significant volume of paper documents.
Although they comprise far less than 1 percent of all forms received annually, Forms 709
were selected for the SCaaS pilot because of their long retention period. They are held
in storage (sometimes for decades) until they can be associated with the applicable
Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, which is
filed after the death of the gift giver.
Contracts were awarded to vendors in August 2021 and the project is currently in the
second of two phases that is expected to take up to four and a half years. In addition to
Forms 709, contractors have begun scanning Forms 941, Employer’s Quarterly Federal
Tax Return, for Tax Year 2022.
Lockbox – This project relies on an existing relationship with the Department of the
Treasury’s Bureau of the Fiscal Service to scan Forms 940 and submit them electronically.
Per IRS management, 3,705 Forms 940 were accepted into the electronic filing system
through the lockbox project in CY 2022 and this continued into CY 2023. As of March 6,
2023, over 120,000 scanned paper Forms 940 were accepted through the lockbox
project. IRS management anticipates that the volume of Forms 940 will reach
approximately 400,000 through this project in CY 2023 and intends to expand the
process with additional industry partners and forms. The stated intent is to expand the
process to include Forms 941 and Forms 1040, U.S. Individual Income Tax Return, later in
CY 2023.
Submission Processing Modernization – This project seeks to identify solutions to
improve the IRS's ability to receive, count, sort, mark, and process high volumes of mail
of varying shapes, sizes, and dimensions with additional capability to identify, extract,
and digitize/digitalize data from envelopes and their contents. Contracts were awarded
to vendors in August 2022, and the project is currently in the second of three phases
with completion of Phase 2 expected in FY 2023. During Phase 2, the contractors
transitioned to scanning and e-filing Forms 1040 and 10 attachments. Phase 3 of the
project will expand to scanning and e-filing Forms 1040 and 25 attachments. Phase 3 of
the project is expected to take up to four years to complete.
Other efforts have been completed with limited results:
OCR – This project involved extracting machine-readable data from low-resolution and
poor-quality images (both digital and paper) with the capability to integrate them with
the IRS’s information technology systems and intake different types of forms and data.
The pilot project was discontinued in October 2022 after failing to identify acceptable
solutions using the vendor and resources provided. The ED&CMO has no plans to
resume this effort at this time.
2-D Barcoding – This project requires tax return preparation software to generate and
imprint a barcode that captures the information from the return. Upon receipt of the
paper return, the IRS then scans the barcode to capture the data and process the return
as if it had been transmitted electronically. The technology has been employed for data
intake for Forms 8918, Material Advisor Disclosure Statement, and 8886, Reportable
Transaction Disclosure Statement. However, the IRS cannot expand 2-D barcoding to
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The Internal Revenue Service Has Experienced Challenges in Transitioning to Electronic Records
Forms 1040 without engaging the software industry to revise industry standards for data
intake and processing. The National Taxpayer Advocate has submitted a legislative
request asking Congress to require the IRS to work with tax software companies to
incorporate scanning technology for individual income tax returns filed on paper. Per
IRS management, there are currently no additional efforts to expand 2-D barcoding to
other forms.
V-Code Initiative – The ED&CMO was not directly involved in this initiative to address
the backlog of Tax Years 2020 and 2021 paper returns. It was an effort led by the Wage
and Investment (W&I) Division using scanning technology to convert paper-filed tax
returns (that were prepared using tax preparation software) into an electronic format.
Once converted, the tax return was processed as an e-filed tax return. However, the
results were inconsistent, and per IRS management, the project has since been
discontinued.
Continued expansion of e-filing is critical to the IRS Digitalization Strategy
IRS efforts to digitalize records could be significantly
enhanced by increasing the rate of e-filed tax returns. As
noted in a May 2022 TIGTA report, e-filing provides
significant benefits to taxpayers and the IRS.21 One of the
primary benefits to the IRS is the substantially reduced
processing costs. On average, compared to paper-filed tax
returns, the IRS saves $4.29 per return in processing costs
for e-filed business tax returns and $7.06 per return for
e-filed individual tax returns.22 Further, e-filed tax returns
allow for immediate retrieval and reduce the need for
storage.
Paper-filed tax returns are not only more costly to process than e-filed tax returns, but they are
also more likely to contain errors and be subject to delays in processing. For example, as we
previously reported, the IRS closed its tax processing centers in March and April 2020 in
response to the COVID-19 pandemic. Although the IRS re-opened its tax processing centers in
June 2020, delays in processing backlogged paper tax returns continue to burden taxpayers and
the IRS continued to have a backlog into the 2023 Filing Season.23
Additionally, return processing backlogs and delays in issuing refunds were contributing factors
in the IRS paying significantly more refund interest to taxpayers. This is because the IRS is
generally required to pay interest on refunds issued more than 45 days after the filing
deadline.24 The IRS paid $3.5 billion in total refund interest during FY 2022, an increase from the
$3.03 billion and $3.27 billion paid in both FYs 2020 and 2021, respectively, and the $2.06 billion
paid in FY 2019.
21 TIGTA, Report No. 2022-40-036, A Service-Wide Strategy Is Needed to Address Challenges Limiting Growth in
Business Tax Return Electronic Filing (May 2022).
22 Document 6746, Cost Estimate Reference (Rev. 5-2022).
23 TIGTA, Report No. 2023-46-007, Backlogs of Tax Returns and Other Account Work Will Continue Into the
2023 Filing Season (Dec. 2022).
24 26 U.S.C. § 6611.
Paper-filed tax returns are not
only more costly to process
than e-filed tax returns, they
are also more likely to contain
errors and be subject to delays
in processing.
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The Internal Revenue Service Has Experienced Challenges in Transitioning to Electronic Records
For FY 2022, nearly 213.4 million returns and other forms were filed electronically. These
represented approximately 81 percent of all filings. For individual tax returns, 93.8 percent were
filed electronically. However, the number of paper-filed tax returns is still significant with over
13 million individual tax returns (Forms 1040 and 1040-SR, U.S. Tax Return for Seniors) and over
20 million business tax returns filed on paper in CY 2022.
Although the use of e-file has increased, business tax returns are less likely to be e-filed.
Responding to a FY 2014 TIGTA report, the IRS agreed to:25
•
Develop a Service-wide strategy that outlines specific efforts the IRS will initiate to
advance the e-filing rate of business tax returns.
•
Continue to expand the type of business tax returns that can be e-filed through the
Modernized Electronic Filing system.
The IRS’s stakeholders continue to share concerns about its e-filing rate for business income and
employment tax returns. For example, in a March 2021 report, the GAO noted that although the
IRS established several projects to modernize some of its paper-based processes, none of the
ongoing projects involve making additional business-related tax forms available for e-filing.26
Additionally, in Publication 3415, IRS Electronic Tax Administration Advisory Committee Annual
Report to Congress (June 2021), the Electronic Tax Administration Advisory Committee
recommended that the IRS prioritize work that will make e-filing available or easier for forms
with significant filing volumes.27 Emphasis was placed on employment tax returns given that the
e-file rate was approximately 53 percent. The Electronic Tax Administration Advisory Committee
asserts that more progress must be made in removing the barriers to e-filing and that the IRS
needs to place greater emphasis on e-filed employment tax returns.
However, as we reported in May 2022, IRS management did not take sufficient actions to
address the recommendations included in our prior review and more effort was needed to
increase growth in e-filing of employment tax returns. Further, we reported that the
Modernized Electronic Filing Sequencing Plan to prioritize the continued expansion of forms
available for e-filing was replaced by an ineffective decentralized process. The IRS Digitalization
Strategy does not include continued expansion of forms for e-filing.
In response, IRS management stated they plan to “reevaluate e-filing options and coordinate
across the organization to understand stakeholders’ digital needs and the challenges in meeting
these needs and to develop a clearer and more comprehensive view of ongoing digitalization
efforts.” IRS management also stated that they planned to develop a strategy to incorporate
individual and business tax forms that may be filed through the existing e-filing platform. The
IRS agreed to implement these actions by March 15, 2023; however, IRS management has since
25 TIGTA, Report No. 2014-40-084, A Service-Wide Strategy Is Needed to Increase Business Tax Return Electronic
Filing (Sept. 2014).
26 GAO, GAO-21-251, Tax Filing: Actions Needed to Address Processing Delays and Risks to the 2021 Filing Season
(Mar. 2021).
27 Section 2001(b)(2) of the IRS Restructuring and Reform Act of 1998 (Pub. L. No. 105-206, 112 Stat. 685 (codified as
amended in scattered sections of 2 U.S.C., 5 U.S.C. app., 16 U.S.C., 19 U.S.C., 22 U.S.C., 23 U.S.C., 26 U.S.C., 31 U.S.C.,
38 U.S.C., and 49 U.S.C.)) authorized the creation of the Electronic Tax Administration Advisory Committee to ensure
input from the private sector in the development and implementation of a plan to eliminate barriers, provide
incentives, and use competitive market forces to increase e-filing.
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The Internal Revenue Service Has Experienced Challenges in Transitioning to Electronic Records
stated that they require additional time to perform these actions and requested an extension to
March 15, 2024.
The IRS cannot mandate that returns be submitted electronically although certain types of
entities and filers are statutorily required to e-file, including certain large corporations and tax
return preparers. Additionally, with the passage of the Taxpayer First Act, tax return preparers
who file 10 or more returns in CY 2022 are now required to file returns electronically.
Congress intended for the IRS to actively pursue e-filing per the IRS Restructuring and Reform
Act of 1998. The IRS was directed to “establish a plan to eliminate barriers, provide incentives,
and use competitive market forces to increase electronic filing….” Further, the IRS was advised
that the plan should, “to the extent practicable, provide that all returns prepared electronically
for taxable years beginning after 2001 shall be filed electronically.” Given that the IRS has not
developed a Service-wide strategy to incorporate all forms for e-filing, additional legislation may
be necessary to spur expansion of e-file to certain types of forms or filers.
Delayed efforts to digitalize records have resulted in continued reliance on outside
storage facilities
The volume of paper documents created as well as delayed digitalization necessitates the use of
outside storage facilities to maintain IRS records until they are scheduled for destruction. The
IRS does not maintain any agency-operated storage facilities for paper records and currently
uses the FRCs to store them. As part of its interagency agreement with the IRS, the NARA is
responsible for the storage, management, and retrieval of IRS records and documents at its
FRCs. However, the FRCs were closed or operating at limited capacity due to COVID-19
pandemic restrictions starting in March 2020, which affected the servicing of IRS document
requests.
As stated in our May 2022 report, the IRS reported having more than 8.9 million tax returns
waiting to be shipped to an FRC and more than 2,000 outstanding requests for paper-filed
tax return-related documents (needed by IRS business units to address taxpayer compliance and
customer service cases) as of December 31, 2021. The Chief Operating Officer of the NARA
estimated that it would take several years to fulfill the IRS’s outstanding document requests.
Problems securing records from the FRCs are not entirely attributable to COVID-19
pandemic-related access issues. As we reported in 2020, the IRS could not always locate or
timely retrieve paper tax records.28 Specifically, the IRS could not locate 12 (6 percent) of
185 examination case files and five (3 percent) of 185 related individual tax returns that we
requested. An additional 43 (23 percent) of the 185 examination case files and 19 (10 percent)
of the 185 individual tax returns were eventually located but were not provided timely.
Further, previous interviews with IRS management confirmed that there is no tracking method in
place to determine when document requests are received and completed. As a result, some
requestors may never receive the documents requested. Without a tracking method, a
reconciliation of document requests cannot be performed, and the IRS could be paying for
services that may not be provided.
28 TIGTA, Report No. 2020-10-050, Sensitive Tax Records Could Not Always Be Located or Timely Provided
(Aug. 2020).
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The Internal Revenue Service Has Experienced Challenges in Transitioning to Electronic Records
The Federal Government’s interest is harmed when the IRS is unable to produce the documents
needed to support the IRS’s position as part of an examination, appeal, tax court case, etc. This
issue is being addressed in a separate TIGTA audit that is included in our FY 2023 Annual Audit
Plan.29
The IRS does not anticipate completing digitalization efforts until December 31, 2030; however,
it is not currently seeking commercial storage space for paper records created after
June 30, 2024, as stipulated in the 2022 NARA mandate. Because the IRS is not seeking
commercial storage space, it will continue to incur costs to store its records at the FRCs until
more documents are digitalized. Fees paid include not only the cost to store documents, but
also costs to transfer records, service reference requests, and refile documents. PGLD
management indicated that they anticipate these costs will increase to over $38 million in
FY 2023 and will be approximately $36 million in both FYs 2024 and 2025.
The Chief Information Officer should:
Recommendation 1: Create a single Service-wide comprehensive digitalization strategy that
identifies priorities, objectives, interim target dates, milestones, etc. The strategy should identify
the IRS business units responsible for the applicable actions and should be updated annually.
Management’s Response: The IRS agreed with this recommendation and will create a
single Service-wide comprehensive digitalization strategy. The Chief Information Officer
will collaborate with the Transformation and Strategy Office on corrective actions for this
recommendation. The Transformation and Strategy Office will create a single
Service-wide comprehensive digitalization strategy that identifies priorities, objectives,
interim target dates, milestones, etc. The strategy will identify the IRS business units
responsible for the applicable actions and will be updated annually.
Recommendation 2: Develop processes to require management to track digitalization efforts
and compare results against the plans, goals, objectives, milestone dates, etc., and analyze any
significant deviations to identify needed strategic changes.
Management’s Response: The IRS agreed with this recommendation and will develop a
process requiring management to track digitalization efforts against stated goals.
29 TIGTA, Audit No. 202330016, IRS Management of Taxpayer Paper Files.
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The Internal Revenue Service Has Experienced Challenges in Transitioning to Electronic Records
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this audit was to assess the IRS’s progress in transitioning to electronic
records in accordance with OMB/NARA Memorandum M-19-21, Transition to Electronic
Records. To accomplish our objective, we:
•
Identified the key provisions of the NARA mandates and other relevant guidance to
determine the actions necessary for the IRS to achieve compliance with the mandates.
•
Identified the roles and responsibilities of the PGLD function, the ED&CMO, and other
IRS business units responsible for implementing provisions of the NARA mandates.
•
Determined the actions taken by the IRS in response to the NARA mandates by:
o Interviewing IRS management officials in the PGLD function and the ED&CMO.
o Obtaining and reviewing supporting documentation from the IRS including the IRS
Digitalization Strategy, the Digital Record Keeping Modernization Strategy, etc.
•
Identified and reviewed TIGTA and GAO audit reports that address the IRS’s efforts to
digitalize records to identify potential causes and effects of the IRS’s failure to timely
digitalize records.
Performance of This Review
This review was performed with information obtained from the PGLD function and the ED&CMO
in Washington, D.C., during the period November 2021 through June 2023. We conducted this
performance audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.
Major contributors to the report were Bryce Kisler, Assistant Inspector General for Audit
(Management Services and Exempt Organizations), Glen Rhoades, Director; Lindsay Steward,
Audit Manager; Meaghan Tocco, Acting Audit Manager; and Mary Herberger, Lead Auditor.
Internal Controls Methodology
Internal controls relate to management’s plans, methods, and procedures used to meet their
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance. We determined that the
following internal controls were relevant to our audit objective: the NARA mandates
(OMB/NARA Memorandums M-19-21 and M-23-07); the IRS Digitalization Strategy (July 2020);
the Digital Recordkeeping Modernization Strategy (multiple revisions) as well as the results of
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The Internal Revenue Service Has Experienced Challenges in Transitioning to Electronic Records
other related TIGTA and GAO audits and the Joint Audit Management Enterprise System.1 We
evaluated these controls by requesting and reviewing IRS guidance and documentation on
transitioning to electronic records as well as interviewing IRS personnel responsible for
implementing provisions of the NARA mandates.
1 The Department of the Treasury system for use by all bureaus to track, monitor, and report the status of internal
control audit results. The system tracks specific information on issues, findings, recommendations, and planned
corrective actions from audit reports issued by oversight agencies, such as the GAO and TIGTA.
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The Internal Revenue Service Has Experienced Challenges in Transitioning to Electronic Records
Appendix II
Ongoing Pilot Digitalization Projects
Pilot
Description
Primary Business/
Organizational Unit
AR
Collaborate with the Information Technology
organization to generate information when any mobile
device is directed at IRS images, forms, etc., based on the
IRS’s publicly available information. The application
explains the benefits of e-filing and encourages taxpayers
to file in this way.
The ED&CMO is operating as
the primary, with project
support from the Online
Services function and the
W&I Division.
Digital and Mobile
Adaptive Forms
With the Services and Enforcement Program
Management Office and the W&I Division, the IRS
is working to support business unit migration of
paper-based forms to mobile-responsive and
508 compliant adaptive forms.
W&I Division
Lockbox
In collaboration with the W&I Division, the ED&CMO is
working on a document intake solution that will increase
data collection up front, optimize electronic file storage,
and achieve full data capture for paper submissions
received at IRS lockbox processing sites.
W&I Division
Scaled Digital
Initiative Model
Develop a standardized project life cycle to support the
evolution and maturity of project management efforts.
ED&CMO
SCaaS
Collaborate with the Small Business/Self-Employed
Division to manage services to convert paper files to
digital records and data. SCaaS contractors will scan
paper files and transfer the digital files and related
metadata to the IRS. The IRS will then store these digital
files in a NARA-compliant storage repository and destroy
the paper records.
Small Business/
Self-Employed and
W&I Divisions
Submission
Processing
Modernization
Seek information on technologies capable of
high-capacity (100 million+ pieces of mail) digital intake.
W&I Division
Taxpayer Digital
Communications
Form 8288
Installation
Allow the taxpayer or taxpayer’s Power of Attorney to
communicate with the IRS via secure two-way messaging,
electronically file Form 8288, U.S. Withholding Tax Return
for Certain Dispositions by Foreign Persons, and obtain an
opportunity zone eligibility certificate, eliminating a new
requirement for a paper form.
Large Business and
International Division
Source: Enterprise Digitalization and Program Management Office (February 10, 2023).
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The Internal Revenue Service Has Experienced Challenges in Transitioning to Electronic Records
Appendix III
Contracts Awarded in Efforts to Align With the
National Archives and Records Administration Mandates
OCR
Phase 1
Phase 2
Phase 3
Description
of Phase
Proof of Concept and
Prototype: Extracting
machine-readable data
from publicly available
Form 990, Return of
Organization Exempt
from Income Tax (not to
exceed
$50,000/60 days).
Additional Testing and
Pilot/Initial Deployment -
will expand the scope of the
results of Phase1 by
increasing the number and
type of Forms 990 and
possibly additional forms
(not to exceed
$150,000/120 days).
Deployment - additional
deployment efforts within
IRS systems, additional IRS
forms/images, or shifting to
poor-quality documents (not
to exceed
$7.3 million/4.5 years).
Number of
Vendors
Awarded
Contracts
Five
Three
One
Current Phase
Discontinued as of October 18, 2022
Cumulative Cost Total (no FY 2023
contractual expenditures).
$1,400,000
Source: IRS Request for Proposal dated June 23, 2021; Notice of Award on July 26, 2021; and IRS
management cost totals as of March 14, 2023.
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The Internal Revenue Service Has Experienced Challenges in Transitioning to Electronic Records
SCaaS
Phase 1
Phase 2
Description
of Phase
Testing and Pilot/Initial Deployment -
will consist of a demonstration of the ability
of the solution to provide high-resolution
scans and to transfer them to the IRS
through secure digital channels. The
project will focus on scanning Form 709
(not to exceed $200,000/180 days).
Deployment - will focus on scaling the
scanning solution and transmission of
documents to encompass a significant
volume of paper documents. A key
component of Phase 2 will be
leveraging efficiencies to timely handle
the significant scanning workload (not
to exceed $7.3 million/4.5 years).
Number of
Vendors
Awarded
Contracts
Five
Three
Current Phase
Ongoing – Phase 2
Cumulative Cost Total (including FY 2023 commitments)
$15,550,000
Source: IRS Request for Proposal dated July 19, 2021; Notice of Award on August 18, 2021; and IRS
management cost totals as of March 14, 2023.
AR
Phase 1
Phase 2
Phase 3
Description
of Phase
Proof of Concept and
Prototype: Provide
operational prototypes
which utilize the IRS’s
publicly available sets of
information to improve
the taxpayer experience
(not to exceed
$50,000/60 days).
Additional Testing and
Pilot/Initial
Deployment - will
consist of efforts to gain
additional empirical
information on how the
solutions generate
improvements to the
taxpayer experience (not
to exceed $150,000/120
days).
Deployment - will focus on
additional deployment of
solutions involving other IRS
publicly available sets of
information and
improvements to the
taxpayer experience
(not to exceed
$7.3 million/4.5 years).
Number of
Vendors
Awarded
Contracts
Four
Three
One
Status
Ongoing – Phase 3
Cumulative Cost Total (no FY 2023 contractual expenditures).
$3,000,000
Source: IRS Request for Proposal dated August 31, 2021; Notice of Award on September 22, 2021; and
IRS management cost totals as of March 14, 2023.
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The Internal Revenue Service Has Experienced Challenges in Transitioning to Electronic Records
Submission Processing Modernization
Phase 1
Phase 2
Phase 3
Description
of Phase
Proof of Concept and
Prototype: Demonstrate
sorting, opening, processing,
and reporting on various
types of mail. Primarily a
demonstration of the
solution to perform intake of
mail of various shapes and
dimensions in large
quantities (not to exceed
$75,000/180 days).
Additional Testing and
Pilot/Initial Deployment -
will demonstrate the ability
to further process mail
beyond intake, to include
sorting accuracy, reporting
functions, remittance
identification and
management, opening and
extracting contents, etc.
(not to exceed
$150,000/180 days).
Deployment: - will
demonstrate the ability
to digitalize data
extracted from the
mailings, to include
how data recording
and downstream
access will occur;
remittance processing;
ease of IRS access to
extracted data and the
ability to interface and
be compliant with IRS
systems, cybersecurity
requirements,
hardware, and
software, etc.
(not to exceed
$7.275 million/4 years).
Number of
Vendors
Awarded
Contracts
Five
Four
To Be Determined
Status
Modified, ongoing – Phase 21
Cumulative Cost Total (including FY 2023
commitments)
$4,375,000
Source: IRS Request for Proposal dated July 12, 2022; Notice of Award on August 8, 2022; and IRS
management cost totals as of March 14, 2023.
1 Contracts with Phase 2 vendors were subsequently modified to include: compression of Phase 2 and the first half of
Phase 3 to combine the proof of concept, solution deployment, and production. Funding was reallocated and
$1,000,000 was distributed to each Phase 2 vendor. The Phase 2 time frame was revised to 90 days with expected
completion in May 2023.
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The Internal Revenue Service Has Experienced Challenges in Transitioning to Electronic Records
Appendix IV
Management’s Response to the Draft Report
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The Internal Revenue Service Has Experienced Challenges in Transitioning to Electronic Records
Appendix V
Abbreviations
2-D
Two-Dimensional
AR
Augmented Reality
COVID-19
Coronavirus Disease 2019
CY
Calendar Year
ED&CMO
Enterprise Digitalization and Case Management Office
E-file(d); E-filing
Electronically File(d); Electronic Filing
FRC
Federal Records Center
FY
Fiscal Year
GAO
Government Accountability Office
IRS
Internal Revenue Service
NARA
National Archives and Records Administration
OCR
Optical Character Recognition
OMB
Office of Management and Budget
PGLD
Privacy, Governmental Liaison and Disclosure
SCaaS
Scanning as a Service
SCAMPS
Service Center Automated Mail Processing System
TIGTA
Treasury Inspector General for Tax Administration
W&I
Wage and Investment
To report fraud, waste, or abuse,
contact our hotline on the web at www.tigta.gov or via e-mail at
oi.govreports@tigta.treas.gov.
To make suggestions to improve IRS policies, processes, or systems
affecting taxpayers, contact us at www.tigta.gov/form/suggestions.
Information you provide is confidential, and you may remain anonymous.