The issue is clearly not about the price of the licenses. The IRS is paying 200$ per machine to extend XP support (which is more in a single year than what they would have paid for new Win7 licenses).

The expensive part is upgrading the hardware to support Win7, rewriting all the software that aren't compatible with Win7, training the personnel to use Win7 (and all the newly re-written software). Now, imagine if they were actually trying to upgrade to Linux. They'd pay much more to train the personnel, they'd have to re-write almost every single software they have been using. On top of that, they'd still pay for custom support (and Linux support is considerably more expensive than Windows support).