What Businesses Tackling Technical Debt Can Learn From the IRS

IRS paperwork

Where a business spends its money typically defines its strategy.

And with the news last Thursday (May 2) that the Internal Revenue Service (IRS) is seeking more funding to continue scaling its digital transformation efforts as part of its Strategic Operating Plan, process modernizations designed to leapfrog technical debt are more top of mind than ever for firms looking to capture sustainable growth.

“The changes outlined in this report are a stark contrast to the years of under-funding that deteriorated taxpayer service and tax enforcement, frustrating taxpayers, the tax community and IRS employees alike,” IRS Commissioner Danny Werfel said in a statement, describing the modernization changes outlined in the agency’s Strategic Operating Plan as a “generational imperative” needed to serve the nation and taxpayers.

“We have an opportunity to build a 21st century tax agency to serve the American people in the manner they expect — and the level they deserve,” he added.

After all, continuing to rely on antiquated operations frequently means that there’s still a significant amount of time and resources spent on manual processes like entering and reconciling data, and generally entails a huge amount of paper in the mix — a situation that is true not just for the IRS, but for private-sector businesses of all shapes and sizes.

The consequences of failing to adequately address technical debt — meaning legacy systems and architecture, hardware and software — include low levels of service and technology that does not fully reflect the digital world we live in.

For incumbent players across financial services and payments faced with competition from agile, digital upstarts, it can be crippling.

Read more: 2024 Is the Year Businesses Put Technical Debt to Bed

Years of Under-Funding Left Digital Transformation Challenges

Digital transformation refers to the integration of digital technology into all areas of a business, fundamentally changing how it operates and delivers value to customers. It is not just about adopting new technologies, but also about leveraging them to create new business processes, culture and customer experiences.

Digital transformation is crucial for businesses to stay competitive in today’s rapidly evolving landscape, particularly across key functions like accounts receivable (AR) and accounts payable (AP). However, it also comes with challenges, one of which is technical debt.

Technical debt refers to the accumulated cost of shortcuts taken in the place of investing in holistic modernization initiatives. These shortcuts, which include using outdated technologies, neglecting proper documentation or bypassing code refactoring, may appear at first to expedite initial digitization processes, but can lead to long-term issues and increased maintenance costs, as well as result in a degradation of customer relationships.

It’s hard to innovate and gain the full benefits of modernization initiatives when new digital experiences “crash into 30-year-old technology stacks,” Form3 CEO Mike Walters told PYMNTS in November.

Having a modern operational foundation capable of leveraging the latest technology makes a business nimble and properly equipped to respond appropriately to macro and micro changes while consistently delivering value for their business partners and customers.

At the end of 2023, PYMNTS Intelligence in “Digital Payments Technology: Investing in Payments Systems for the Digital Economy” revealed that the 250 CFOs surveyed were prioritizing their system investments based on long-term considerations like growth and profit.

Read also: Many Smaller SMBs Opt to Process Ad Hoc Payments Manually — and It’s Costing Them

Moving Process Modernization From Assessment to Action

Technical debt arises when organizations prioritize short-term gains (e.g., meeting deadlines, cutting costs) over long-term considerations (e.g., scalability, maintainability). While it may accelerate initial development, it can impede future progress and innovation and can limit an organization’s agility and responsiveness to changing market demands. Legacy systems burdened with technical debt are less adaptable to new technologies and business requirements, hindering innovation and growth.

And as it relates to the ongoing digitization of the IRS, as Wendy Walker, solution principal at Sovos, told PYMNTS, the government’s efforts pose challenges — and benefits — for enterprises switching from paper-based filing and processes.

“You have to think from an organizational perspective about how you’re going to change over those systems and processes and procedures, and what those impacts are to everybody in between,” Walker said.

Frequently, firms can also run up against the limitations of their right-now balance sheet when identifying investment areas for long-term growth.

To address these funding cliffs, firms are turning to innovative working capital solutions to help them manage both daily cash flow needs as well as to capture the flexibility that investments in digital transformation offers.