David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: update pending.

IRS modernization has long been a buzzword for the agency as it works to catch up with the fast pace of changing technology. But what happens when the necessary updates to the legacy systems get delayed or potentially even shut down?

Tax Notes reporters Tyrah Burris and Emily Hollingsworth recently investigated how the IRS modernization efforts are going, and they join me now to talk more about what they discovered. Tyrah, Emily, welcome to the podcast.

Tyrah Burris: Hi, happy to be here.

Emily Hollingsworth: Thanks for having us, Dave.

David D. Stewart: It seems like we've been talking about IRS modernization for a while. Tyrah, could you give us a brief background?

Tyrah Burris: Yeah, so the IRS has been modernizing its systems for a while, and one system that they've been focusing on is the individual master file, and that's a database that's about more than 60 years old, and it's written in assembly language code and common business-oriented language. And so the IMF stores and processes the individual taxpayer account information and tax returns. So like I said, that system is roughly 60 years old, and they've specifically been working with modernizing with the CADE (customer account data engine) projects. And the goal of that is to transform the older language into a more updated language called Java. And more specifically, the CADE project, or the customer account data engine, was intended to develop a centralized database for taxpayer records to be more accessible at one reference point. So the first iteration of CADE began in 1999, but that version was scrapped in 2009 after cost overruns and delivery delays.

And then in 2010, the IRS started the second version, CADE 2, and then it hit a few milestones in 2014 and 2012. However, in 2025 the Treasury announced a strategic pause to the IRS modernization efforts so that they could adjust their strategy and reassess. But some of our sources have mentioned that this progress on modernization has been extremely slow.

Emily Hollingsworth: Another source told us that uncertainty about funding was a challenge, which made planning for the process difficult. And we were told that the codes associated with CADE 2 were somewhat of a mess and hard to navigate and that any coding or software changes that could help the IT department had to be vetted by the IRS, which took time.

David D. Stewart: So what drew you to look into this topic?

Tyrah Burris: Yeah, so at the end of last year, Emily and I came across a 2022 article on the IRS's website, which said that the IRS is in the home stretch of modernizing its systems and completing CADE 2. So that caught our attention and made us want to dig in a little bit deeper to find out exactly what that meant and to figure out the status of the project in 2026. Shortly after we read that article, we submitted some FOIA (Freedom of Information Act) requests in November of 2025 and in December of 2025 for the IRS documents on modernization in CADE 2. And we were also interested in understanding how the recent staff cuts and contract cancellations by DOGE (the Department of Government Efficiency) impacted the IRS's ability to continue modernizing its systems.

So back in March 2025, DOGE announced that the IRS froze roughly $1.5 billion in modernization contracts. And out of those contracts, there was a company called MITRE, and they had a contract for $6.1 million for technical analysis and recommendations for the individual master file.

So that led us to investigate what other modernization contracts the IRS canceled that contributed to modernizing the systems.

David D. Stewart: Now you mentioned that you pursued some FOIA requests. What other things did you do to dig down into this topic?

Tyrah Burris: Yeah, so in May we received the FOIA documents from the IRS, and after we looked through some of those documents, we came up with some general questions to present to sources, like could they tell us about CADE and CADE 2? And what is it? How does it work? So before we started some source outreach, we did another round of FOIA requests. We started doing some source outreach, and we reached out to former and current IRS employees through LinkedIn and Reddit. We also contacted former IRS commissioners like Danny Werfel, as well as reach out to the GAO (Government Accountability Office) and TIGTA (Treasury Inspector General for Tax Administration) for answers to more technical questions. And we also reached out to experts at organizations like the National Taxpayers Union and the National Association of Tax Professionals.

And in the beginning it was a little tough getting responses back from people, especially IRS employees, but eventually we started getting responses, and each person we talked to, they gave us another name or another organization who we could try. And slowly we started building our source list, which helped us to move forward with our investigation.

David D. Stewart: So let's turn to what you found in this investigation. First off, let's talk about what sort of things did DOGE try to do in the modernization effort?

Tyrah Burris: So when DOGE came into the picture, one thing that they did was a 30-day hackathon at the IRS, and that's when IRS employees and DOGE engineers, they sought to quickly convert the older language mentioned earlier to Java. And one of our sources told us that he thinks DOGE wasn't happy with how the money was being spent on modernization at the IRS. So DOGE also canceled a lot of contracts. And one of the contracts mentioned earlier, with MITRE, was for $6.1 million, but that contract was ordered in January 2025, and it was supposed to last through January 2026, but instead it was canceled in April 2025 and the award amount was reduced to $1 million. However, the IRS did tell us that the contract cancellations and changes didn't stop the agency's efforts to modernize the processing systems.

David D. Stewart: What sort of things did you see also from the significant workforce reductions that DOGE brought in?

Tyrah Burris: Yeah, so TIGTA reported that roughly 29 percent of the IRS's staff, IT staff actually, were either separated from their jobs or they took the deferred resignation program. And that also included veteran employees who understood the IRS's older systems and even new IT employees who were hired with the funding from the Inflation Reduction Act. So our sources told us that the IRS currently trains current employees on the older IT language, but one issue that they faced is that it's hard to find new employees who understand that old language because it's not taught in universities or colleges anymore.

David D. Stewart: What other things are you hearing from the sources you talked to on this?

Emily Hollingsworth: We've gotten a lot of varied responses. People were extremely generous with their time and sharing the information and experiences that they've had. What we've been hearing is that a lot of the sources have told us that there's been less transparency about where the IRS stands on its modernization projects now than it had been in the past. And there's also less transparency on how they're planning to achieve the goals that the IRS is setting out. From the FOIA documents we obtained, we found that the IRS has been setting out priorities to modernize its operations. One in particular is developing a unified application programming layer, or API, which could allow IRS employees to access multiple databases and allow those systems to communicate with one another. We've also heard from members of the Senate Finance Committee who've also told us that there's been less transparency, which has made it difficult for Congress to provide oversight to the IRS. And sources also emphasized to us that failing to update the IRS's legacy systems would make processing tax returns more difficult and more expensive in the future.

David D. Stewart: So what seems to be the end result of all of these DOGE actions?

Emily Hollingsworth: Well, I think that's a good question. And I think when we also kind of look at the consequences of DOGE's actions on the CADE 2 program, it's not quite clear cut. According to some of the former IRS officials we spoke with, IRS modernization projects came to a stop when DOGE first established because a lot of aggressive cuts were taking place and people were reluctant to rock the boat, so to speak. Sources told us that modernization work is being done, though like Tyrah said, it's happening kind of at a slower pace than it had been, but there's also plenty of evidence to show that there were already issues with CADE 2's deployment before DOGE came onto the scene. Some people pointed out that the fact that the project had been taking place since 2009 and hadn't been deployed, even following an independent evaluation in 2020, had people questioning whether this project was the right way to go about updating the IRS's systems or if the agency should consider other options. A similar argument was made about the first CADE, which was scrapped in 2009.

David D. Stewart: Now, what were you hearing about the cuts to funding to the IRS over this period?

Emily Hollingsworth: What we heard from a lot of the former IRS leaders we spoke with is that the nature of congressional appropriations can vary, sometimes wildly, from year to year and that it can make funding large endeavors like CADE 2 challenging. And particularly finding how much the IRS spent on CADE 2 specifically was definitely a challenge. There's no one place where CADE 2 funding was recorded. Tyrah and I searched decades' worth of reports from the GAO and TIGTA, ultimately finding that the IRS spent $2 billion on CADE 2 through 2024.

And then when we talk about IRS funding in general, it becomes even more of a roller coaster. Bit of a tangent, but at its lowest, the IRS was allocated only $110 million in fiscal 2018 for its IT and business modernization fund. And this is a notable contrast to the $200 million to $300 million the IRS received from Congress on average in years past. Then of course in 2022, the IRS saw a boom in funding about $80 billion in total through the Inflation Reduction Act and $4.8 billion was set aside for modernization. But as you know, a large sum of that $80 billion had been clawed back by Congress since 2022. So in summary, the feast and famine of funding the IRS has experienced is one reason we learned why CADE 2 faced challenges and setbacks.

David D. Stewart: What are we hearing from current IRS leadership on the modernization project?

Emily Hollingsworth: Our colleague Ben Valdez attended and reported on the IRS's nationwide tax forum held in August in New York City. While there, IRS CEO Frank Bisignano said that he prefers the term "transformation" when it comes to IRS systems rather than "modernization." He makes the point that not all of the IRS's systems need to be overhauled or rebuilt from the ground up. He said that they can be adjusted or transformed and still improve taxpayer and employee experience. We think this idea seems to line up with the IRS's change to the term "legacy systems" back in 2025, which no longer includes older systems like the individual master file and could also support DOGE's efforts at the time to cut spending.

David D. Stewart: So where do things stand on modernization now?

Emily Hollingsworth: The IRS told us that it's working to incrementally reduce its reliance on older systems, and the agency referred us to its fiscal 2027 capital investment plan. The plan has a section on its future objectives, which include plans to modernize or transform the individual master file in coordination with CADE 2 and the individual tax processing engine. But a lot of questions remain unanswered, such as whether the individual master file, or IMF, will ever be retired or when CADE 2 would be fully deployed, if ever. Former IRS Commissioner Danny Werfel told us that the IRS's lack of details surrounding its future plans are a problem because without clear objectives or a timeline to complete these projects, it's difficult to hold the agency accountable or get a clear understanding of where things stand.

David D. Stewart: Well, it seems like this is going to be a long-term issue to keep track of, and I'm sure you'll come and update us next time there's a development. Emily, Tyrah, thank you for being here.

Tyrah Burris: Thank you.

Emily Hollingsworth: Thank you.

David D. Stewart: That's it for this week. You can follow me online at @TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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