National Taxpayer Advocate pins some IRS modernization blame on procurement hurdles

Slow-moving modernization and digitization efforts at the IRS continue to plague filers, the National Taxpayer Advocate said Wednesday in its annual report to Congress, pointing specifically to federal procurement roadblocks that are hindering the agency’s attempted shift away from paper-based returns.

The IRS’s IT issues — named one of the tax agency’s 10 most serious problems facing taxpayers — have endured despite “meaningful investments and a vision for digital transformation,” stated the report by Erin M. Collins, the voice of the taxpayer, leaving the public “trapped in outdated workflows that delay refunds, prolong disputes, and create unnecessary hardship.”

“At its core, this problem is not about paper, scanners, or procurement rules. It is about service. It is about taxpayers waiting too long for answers, refunds, and resolution,” the report said. “The IRS’s continued reliance on paper-based processing and its slow, rigid procurement environment presents a serious and ongoing threat to taxpayer rights, financial stability, and trust in the tax system.”

The IRS over the past year has suffered significant cuts to its workforce, a fact noted throughout the NTA’s report. But there are myriad other issues that go beyond staffing shortfalls, namely problems with the federal procurement system that have impeded the agency’s ability to acquire critical technology upgrades.

The report zeroes in on a handful of tech procurement challenges, starting with the Federal Acquisition Regulation — a “laudable” program in theory, the NTA said, but one that weighs the IRS down with “dense regulations and highly technical procedures.”

The agency has specifically had problems in standing up Supply Chain as a Service (SCaaS), a cloud-based model that outsources parts of its digital operations to vendors. Those challenges, the NTA wrote, “are symptomatic of an outdated and cumbersome procurement process.”

“IRS officials cannot simply partner with an appropriate technology firm and deploy a new solution overnight,” the report said. “Instead, they must comply with the FAR, which is a sprawling set of procurement rules that has grown increasingly complex since its rollout in 1984.”

The report was sympathetic to the IRS’s plight in acquiring “even relatively simple” IT, a seemingly straightforward endeavor that “can become protracted exercises in regulatory compliance.” Major federal IT acquisitions can take months or even years, the report noted, compared to a process of mere weeks for comparable private-sector projects. 

“By the time a federal contract is in place, the technology specified may be an entire generation out of date,” the report said.

One example of that dynamic is the IRS’s efforts to purchase scanning services, part of an overarching agency — and Trump administration — priority to ditch paper-based products for an entirely digitized tax process. The IRS started planning for digital scanning pilots in 2021, the report noted, but “full-scale implementation contracts” were not in place by the 2025 filing season, per the report. 

The missed timeline led to “interim measures” to get the IRS through the season, followed by the agency awarding a “bridge task order for scanning services without full competition.” 

“This sole-source award was justified under urgent and compelling need, since any lapse in scanning would jeopardize” the agency’s Zero Paper Initiative timeline, the report said, resulting in a court challenge by competing vendors. 

“Following the lengthy standard procurement route would have caused a ‘critical break in service’ at a cost the IRS estimated to be ‘at least $173,000 per day, or $63.2 million per year, to the American taxpayers’ if scanning were delayed,” the report continued. “In other words, every day of procurement delay carries a real price tag due to more paper piling up and more interest accruing on late refunds.”

That contract was allowed to proceed, though the judge ruled that the IRS must “better document its justification.” Still, the NTA believes the entire ordeal was emblematic of procurement problems outside the IRS’s control, especially when trying to “meet a presidential mandate for digital processing.” It’s reasonable to conclude, the NTA added, that “such workarounds should not be necessary.”

Beyond red tape of that nature, the NTA called out the “rigidity and risk aversion” inherent in federal procurement processes that put limits on the IRS’s “access to innovation.” Contracting officers face burdensome compliance checklists that often favor larger, more established contractors, crowding out “newer, innovative firms that lack armies of procurement lawyers and contract specialists,” the report said. 

“In a more agile procurement environment, the IRS might have engaged in iterative, performance-based contracts or technology demonstrations with startups and industry leaders to quickly find the best solution,” the NTA continued. “Instead, the IRS is juggling multiple approaches, all while complying with onerous regulations that slow progress.” 

The NTA acknowledged some “promising” FAR reforms that are in the works, but wondered if changes to make the process less onerous would go far enough — and come soon enough — to actually address the IRS’s “mounting modernization needs from a taxpayer’s perspective.”

With its Zero Paper Initiative facing significant delays due to “overwhelmed” vendors and other factors, the tax agency’s goal of mostly paperless processing has been rendered “unattainable” for 2026. The agency has been forced to do in-house manual processing “for the majority of those returns” — an outcome that speaks to broader modernization struggles still facing the IRS.

Still, in the preface of the report, Collins wrote that she’s been “encouraged by the IRS’s renewed focus on modernizing its technology.” But there needs to be follow-through on automation, digitization and the connection of online tools to real-time account information. 

“True modernization is not achieved by digitizing paper alone, but by reengineering end-to-end processes, embracing automation, and adopting a customer-centric, iterative approach modeled on private-sector best practices,” the report said. “Until the IRS aligns its staffing, procurement, technology deployment, and performance management with these principles, taxpayers will continue to bear the cost of institutional inertia.”