Modernized e-File Is Improving, but IRS Can’t Retire Legacy System Yet

The Treasury Inspector General for Tax Administration (TIGTA) on Wednesday reported on the IRS’s progress in retiring its Legacy e-File system and moving to the Modernized e-File (MeF) system (TIGTA Rep’t No. 2012-20-121). The IRS started to phase out the legacy system in 2004 with the introduction of an internet-based e-file system, the MeF system. The IRS continues to maintain the Legacy e-File system as it has rolled out subsequent MeF system releases accommodating more returns.

In 2004, the IRS first deployed MeF to process Form 1120, U.S. Corporation Income Tax Return, and related forms, electronically. In February 2010, the IRS began processing Form 1040, U.S. Individual Income Tax Return, with 22 other forms and schedules, using MeF.

According to TIGTA, the number of returns the MeF system processed in its first two filing seasons was significantly lower than had been projected, and the IRS had to rely on the legacy system for the balance of the returns. In response to these problems, the IRS has developed a new version of MeF, Release 8.0, but has not fully implemented it and will not be able to use it for e-filing of employment tax returns, which will prevent the IRS from detecting errors on the employment tax returns on a real-time basis.

TIGTA reported that the IRS has improved the performance of MeF during the 2012 filing season. For the 2011 filing season, the IRS received only 8.7 million individual income tax returns through MeF, while in 2012, MeF received 72.4 million individual returns (versus 49.8 million filed on the legacy system). The IRS increased the number of approved software packages for the new system and increased MeF filings by notifying transmitters that had submitted 1 million or more individual returns electronically in the 2011 filing season that they were required to submit their 2012 filing season returns using MeF.

TIGTA made three recommendations to ease the process of retiring the legacy system completely. First, TIGTA recommended that the IRS defer the retirement of the Legacy e-File system until the increased risk associated with retiring the system can be addressed. The IRS agreed with this recommendation and said it was prepared to accept a limited number of individual returns on the legacy system if the MeF system experiences problems during the 2013 filing season.

The second recommendation was that the IRS update the Internal Revenue Manual (IRM) to include procedures that require performance test teams to obtain waivers or deferrals from the testing requirement if performance tests are not executed and to prepare and submit end-of-test status reports to senior management for performance tests that are completed. The IRS agreed to update the IRM to include this procedure.

The third recommendation was for the IRS to develop a retirement plan to completely shut down the legacy system. The IRS responded that discussions regarding the future of the legacy system had taken place but a final decision to retire the system has not been made. TIGTA was not satisfied with this response and added an auditor’s comment that the IRS needs to develop a timeline for retiring the legacy system.