The Internal Revenue Service has made progress in deploying its Modernized e-File system, according to a pair of new government reports, but unresolved performance issues are hampering the retirement of its older legacy systems for processing tax returns.

The reports, from the Treasury Inspector General for Tax Administration, acknowledged that the IRS processed more tax returns through the new MeF system during the 2012 filing season, but performance problems and upgrades of hardware and software have kept the IRS from getting rid of its older electronic filing system.

The MeF system provides faster processing of tax returns and extensions that promises to improve error detection, standardize business rules and expedite acknowledgments. Once it is fully implemented, the MeF system will provide a single method of filing all business and individual tax returns, forms and schedules via the Internet.

TIGTA conducted its reviews because the IRS initially planned to replace the legacy e-File system with the MeF system after the 2012 filing season, but is now unable to do so. TIGTA reviewed whether individual income tax returns were being accurately and timely processed; whether sufficient progress is being made to retire the legacy e-File system; and the IRS’s progress in making transmitters full participants in the MeF system. Transmitters are firms, companies or individuals that transmit tax return information to the IRS on behalf of electronic return originations, reporting agents, or taxpayers.

In its first report, TIGTA found that the MeF system has not shown that it can consistently process large volumes of tax returns for an extended period of time. While the IRS significantly increased the volume of tax returns processed through the MeF system during the 2012 filing season, the volume was less than anticipated due to performance issues and programming errors.

In TIGTA’s second report, TIGTA found that the IRS increased the number of vendors’ software packages available to transmit electronic tax returns.

However, TIGTA warned that unresolved performance issues with MeF and planned hardware and software upgrades may affect the MeF system’s reliability. Further, the IRS has not developed a retirement plan for the legacy e-File system that includes the conditions that will need to be met before the system can be shutdown.

“The Modernized e-File system is part of an initiative by the IRS to meet the needs of taxpayers, reduce taxpayer burden, and broaden the use of electronic interactions,” said TIGTA Inspector General J. Russell George in a statement. “However, due to problems we identified, it will be necessary to demonstrate the system’s ability to process all returns filed electronically for an entire season before the Legacy e-File System can be completely retired.”

In the first report, TIGTA recommended that the IRS develop a comprehensive testing plan that ensures tax returns are accurately processed through the MeF system before it permanently retires the legacy e-File system. IRS management agreed to enhance their testing procedures based on lessons learned.

In the second report, TIGTA recommended that the IRS defer retirement of the legacy e-File system until the increased risk associated with retiring it can be addressed, and complete a retirement plan for the legacy e-File system.

The IRS agreed to develop a contingency plan to use the legacy e-File System should the MeF system experience production issues. However, IRS officials did not state that they would develop a legacy e-File system retirement plan, along with associated implementation dates and monitoring plans.

“it should be noted that, up until April 17, 2012, the IRS processed 72.4 million individual income tax returns through MeF, up from 8.7 million returns in the prior-year period,” wrote Peggy Bogadi, commissioner of the IRS’s Wage and Investment Division. “This is a significant achievement, and is the result of several years of focus and careful management of a large, complex multi-year technology deployment. Any deployment of technology at this scale will involve issues. When those issues have arisen, we have moved quickly to resolve them. Further, we have incorporated the lessons learned into our planning for the 2013 filing season. We are actively managing risks, while also recognizing that it would not be a prudent use of taxpayer dollars to maintain two systems indefinitely. We will maintain the legacy system for 2013, but on a limited, exception-only basis.”

She took issue with TIGTA’s conclusions that “the MeF system has not shown it can consistently process large volumes of tax returns for an extended period of time,” and “the IRS continues to have limited assurances that the MeF system is accurately and effectively processing individual tax returns.”

“While we did experience some delays in processing returns during the 2012 filing season, the overall time frame for refund delivery was consistent with prior years,” Bogadi contended.