Internal Revenue Service: Business Operations Need Continued Improvement
(Letter Report, 09/09/96, GAO/AIMD/GGD-96-152).

The Internal Revenue Service (IRS) has experienced major problems in (1)
fulfilling its business vision--reducing the volume of paper returns,
better serving customers, and improving compliance; (2) overcoming
management and technical weaknesses in its tax systems modernization
effort; and (3) strengthening the reliability of its financial
management and systems used to account for hundreds of billions of
dollars and to measure IRS' performance. This report discusses pivotal
actions that IRS should take to fully implement earlier GAO
recommendations and improve its management practices. GAO summarized
this report in testimony before Congress; see: IRS Operations: Critical
Need to Continue Improving Core Business Practices, by Gene L. Dodaro,
Assistant Comptroller General for Accounting and Information Management
Issues, before the Senate Committee on Governmental Affairs.
GAO/T-AIMD/GGD-96-188, Sept. 10 (13 pages).

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD/GGD-96-152
     TITLE:  Internal Revenue Service: Business Operations Need 
             Continued Improvement
      DATE:  09/09/96
   SUBJECT:  Tax administration systems
             Systems conversions
             Financial management systems
             Data integrity
             Electronic forms
             Customer service
             Strategic information systems planning
             Reengineering (management)
IDENTIFIER:  IRS Tax System Modernization Program
             TSM
             IRS TeleFile Program
             IRS Electronic Filing Strategies Portfolio
             IRS Document Processing System
             IRS Integrated Data Retrieval System
             
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Cover
================================================================ COVER


Report to Congressional Requesters

September 1996

INTERNAL REVENUE SERVICE -
BUSINESS OPERATIONS NEED CONTINUED
IMPROVEMENT

GAO/AIMD/GGD-96-152

IRS Operations

(511521)


Abbreviations
=============================================================== ABBREV

  CFO - Chief Financial Officers
  CMM - Capability Maturity Model
  DPS - Document Processing System
  GPMO - Government Program Management Office
  GPRA - Government Performance and Results Act
  IDRS - Integrated Data Retrieval System
  IRS - Internal Revenue Service
  OMB - Office of Management and Budget
  SCRIPS - Service Center Recognition Image Processing System
  TSM - tax systems modernization

Letter
=============================================================== LETTER


B-272945

September 9, 1996

The Honorable Ted Stevens
Chairman
The Honorable John Glenn
Ranking Minority Member
Committee on Governmental Affairs
United States Senate

As you requested, this report offers an overall perspective on
opportunities to improve the Internal Revenue Service's (IRS)
business operations and is based on our recent reports and related
testimonies on this topic.\1 These testimonies and related reports
extensively describe the substantial problems IRS has experienced in
fulfilling its business vision, overcoming management and technical
weaknesses in its tax systems modernization (TSM) efforts, and
improving the reliability of its financial management systems used to
account for hundreds of billions of dollars in taxpayer monies and to
measure IRS' performance. 

We are not making any new recommendations in this report.  As
detailed in our recent studies, IRS has initiated actions that begin
to implement the dozens of recommendations we have previously made in
these areas.  But to date, IRS has not fully implemented our
recommendations, which offer a framework for correcting its
management and technical problems. 


--------------------
\1 Tax Systems Modernization:  Management and Technical Weaknesses
Must Be Overcome To Achieve Success (GAO/T-AIMD-96-75, March 26,
1996); Tax Systems Modernization:  Progress in Achieving IRS'
Business Vision (GAO/T-GGD-96-123, May 9, 1996); Financial Audit: 
Actions Needed to Improve IRS Financial Management (GAO/T-AIMD-96-96,
June 6, 1996); and Tax Systems Modernization:  Actions Underway But
IRS Has Not Yet Corrected Management and Technical Weaknesses
(GAO/AIMD-96-106, June 7, 1996). 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

This report identifies pivotal actions that IRS should take to fully
implement our recommendations and improve its business practices. 
These steps include: 

  -- limiting funding for TSM to critical priorities;

  -- developing an effective implementation strategy for achieving
     IRS' business vision that includes an agreed upon set of
     performance measures, which is imperative to changing the way
     IRS operates and serves customers;

  -- developing the capacity to make sound investments in information
     technology, which will be heavily relied upon to achieve IRS'
     business strategy and measure performance;

  -- building the necessary technical foundation for TSM information
     systems projects, which will provide the overall blueprints for
     developing systems, and the disciplined processes needed for
     completing information systems projects timely and economically,
     and ensuring that information systems concepts are transformed
     into practical tools that perform as intended; and

  -- addressing serious and persistent financial management problems,
     which affect the credibility of financial information, such as
     over $1 trillion in monies collected from American taxpayers and
     billions of dollars in delinquent taxes owed to the government. 

The success of these critical efforts hinges on IRS, the Department
of the Treasury, the Office of Management and Budget (OMB), and
congressional initiatives to ensure that recommendations in these
areas are promptly and fully implemented.  Historically, IRS has not
been highly responsive in fixing business operation problems and
implementing our recommendations.  Treasury, in particular, has
become more active in oversight and, while that is a positive
development, the department's continued focus on monitoring IRS'
corrective actions will be a key factor in ensuring progress.  OMB
needs to emphasize its leadership and oversight roles in resolving
these matters as well. 

The Congress has legislatively established management tools it can
use to closely monitor IRS' progress and hold IRS accountable for
improving its business operations.  These laws include (1) the Chief
Financial Officers Act of 1990, (2) the Government Performance and
Results Act of 1993, (3) Title V of the Federal Acquisition
Streamlining Act of 1994, (4) the Paperwork Reduction Act of 1995, as
amended, and (5) the Information Technology Management Reform Act of
1996. 

Through this legislation, the Congress has provided an excellent
framework for (1) overseeing IRS' efforts to improve financial
management operations and modernize tax processing with more
effective technology and (2) measuring IRS' performance in meeting
its business vision.  In addition, the new National Commission on
Restructuring IRS, legislated by the Congress, will have a principal
role over the next year in conducting a broad-based evaluation of
IRS' operations and recommending changes to IRS' organizational
structure, management practices, and operating procedures. 


   OBJECTIVE, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :2

To provide the requested overview of what we see as opportunities to
improve IRS business operations, we synthesized several of our most
recently issued products.  These reports and testimony evaluate IRS'

  -- performance in achieving major mission objectives to process
     returns more efficiently, improve service to taxpayers, and
     increase taxpayer compliance;

  -- accountability for revenues designated for the general fund and
     a wide spectrum of trust funds as well as its appropriations for
     salaries and expenses; and

  -- initiatives to modernize by modifying business processes and
     incorporating information technology to enhance mission and
     financial accountability and productivity. 

Each of these products is grounded in large bodies of work performed
over several years in accordance with generally accepted government
auditing standards. 

We requested comments on a draft of this report from the Department
of the Treasury, the Internal Revenue Service, and the Office of
Management and Budget.  IRS provided us with written comments on
August 16, 1996.  Treasury officials concurred with IRS' comments.  A
representative from the Office of Management and Budget provided us
with oral comments on August 19, 1996.  Comments are discussed in the
Agency Comments and Our Evaluation section. 


   LIMITING FUNDING FOR TSM TO
   CRITICAL AREAS
------------------------------------------------------------ Letter :3

In its May 6, 1996, report on the status of TSM to the Senate and
House Appropriations Committees, the Department of the Treasury
candidly assessed TSM progress and future redirection.  It described
ongoing and planned actions intended to respond to our July 1995
recommendations to correct management and technical weaknesses.\2 It
concluded that despite some qualified success, IRS had not made
progress on TSM as planned because systems development efforts had
taken longer than expected, cost more than originally estimated, and
delivered less functionality than originally envisioned.  It further
stated that significant changes were needed in IRS' management
approach and that IRS did not currently have the capability to
develop and integrate TSM without expanded use of external expertise. 

Treasury's report delineates, and we verified, that IRS has initiated
a number of actions and is making some progress in addressing our
recommendations.  For example, IRS (1) is preparing a comprehensive
strategy to maximize electronic filing, (2) has created an investment
review board to select, control, and evaluate its information
technology investments, (3) has updated its systems engineering
process, is updating its systems life cycle methodology, and is
working across various IRS organizations to define disciplined
processes for software requirements management, quality assurance,
configuration management, and project planning and tracking, and (4)
has completed a descriptive overview of an integrated, three-tier,
distributed systems architecture. 

However, as we reported in June 1996, many of these actions are still
incomplete and do not respond fully to any of our recommendations.\3
Examples include the following: 

  -- The comprehensive business strategy for electronic filing is not
     scheduled for completion until early fall 1996.  Completing this
     strategy is central to maximizing electronic filings and
     achieving IRS' business vision of significantly reducing the
     volume of paper returns. 

  -- IRS does not yet have a complete and repeatable process for
     selecting, controlling, and evaluating its technology
     investments.  Implementing such a process is necessary to make
     sound investment decisions on planned and ongoing systems. 

  -- The procedures for requirements management, quality assurance,
     configuration management, and project planning and tracking are
     being developed, but are still incomplete.  Overcoming these
     weaknesses is critical to successful systems modernization. 

  -- IRS has not completed its integrated systems architecture or its
     security and data architectures, and has no schedule for doing
     so.  Completing these architectures is fundamental to designing
     and building TSM systems. 

As a result, IRS has not made adequate progress in correcting its
management and technical weaknesses, and none of our recommendations
have been fully implemented.  IRS expects to improve the
accountability for and probability of TSM success by increasing its
reliance on contractors.  However, IRS has not addressed the risk
inherent in shifting hundreds of millions of dollars to additional
contractual efforts before it has the disciplined processes in place
to manage all of its current contractual efforts effectively. 

As we reported, until IRS' weaknesses are corrected and our
recommendations are fully implemented, we believe the Congress should
consider limiting TSM spending to only cost-effective modernization
efforts that

  -- support ongoing operations and maintenance;

  -- correct IRS' pervasive management and technical weaknesses;

  -- are small, represent low technical risk, and can be delivered in
     a relatively short time frame; and

  -- involve deploying already developed systems that have been fully
     tested, are not premature given the lack of a completed
     architecture, and produce a proven, verifiable business value. 

As the Congress gains confidence in IRS' ability to successfully
develop these smaller, cheaper, quicker projects, it could consider
approving larger, more complex, more expensive projects in future
years. 


--------------------
\2 Tax Systems Modernization:  Management and Technical Weaknesses
Must Be Corrected If Modernization Is To Succeed (GAO/AIMD-95-156,
July 26, 1995). 

\3 GAO/AIMD-96-106, June 7, 1996. 


   IMPERATIVE NEED FOR AN
   EFFECTIVE BUSINESS VISION
   IMPLEMENTATION STRATEGY
------------------------------------------------------------ Letter :4

In 1986, IRS initiated TSM primarily to replace the computers that it
was using to process and store the information on tax returns.  IRS
planned to introduce the new technology without changing its existing
organizational and operating structure, which included 10 service
centers that processed tax returns, over 70 telephone call sites that
provided various types of service to taxpayers, and 63 district
offices that were responsible for many of IRS' compliance activities. 

In 1992, in response to recommendations by GAO and others, IRS began
to analyze how it might use new technology to change its business
operations.  As a result, IRS developed a vision for 2001 that called
for organizational, technological, and operational changes affecting
the way it processes tax returns, provides customer service, and
ensures compliance. 

Specifically, IRS' vision calls for

  -- moving from a paper-laden, labor-intensive tax return processing
     environment to a modern electronic environment;

  -- providing better service to taxpayers through wider use of the
     telephone, better access to data, and new information systems;
     and

  -- improving compliance through access to accurate, up-to-date
     data, earlier identification of noncompliant taxpayers, and
     increased efficiencies in its field enforcement functions. 

Since 1992, IRS has made some progress in modernizing its operations,
but the differences between IRS' current operations and those
proposed in its vision are great.  Part of the reason IRS has not
been more successful in significantly changing its business
operations is that it does not have a well-defined business strategy
for achieving its vision.  As discussed in the following sections,
IRS is, for example, revisiting its electronic filing strategy and
looking for alternative ways for improving customer service. 

The Government Performance and Results Act (GPRA) provides an
excellent vehicle for IRS to reach agreement with the Congress on a
business strategy and for the Congress to assess IRS' performance in
implementing an agreed upon strategy.  Under GPRA, each agency is to
develop strategic plans for its program activities, laying out the
organization's fundamental mission and long-term goals and objectives
for accomplishing that mission.  GPRA requires that these plans be
submitted to OMB and the Congress by September 30, 1997.  Recognizing
the value of such plans, OMB has accelerated the legislative schedule
and is currently working with agencies in developing key elements of
their strategic plans. 


      IRS DOES NOT YET HAVE A
      COMPREHENSIVE STRATEGY TO
      SIGNIFICANTLY REDUCE THE
      VOLUME OF PAPER RETURNS
---------------------------------------------------------- Letter :4.1

One of the biggest problems facing IRS is its inefficient system for
processing most tax returns.  IRS has made little progress either in
reducing the number of paper returns it processes or in delivering
the new systems needed to better process paper. 

IRS' strategy for receiving and capturing data from tax returns was
and still is a critical component of IRS' business vision. 
Initially, IRS' strategy focused on replacing computers in its 10
service centers with more efficient ones.  However, in 1992, IRS
began examining other processing options.  As a part of that
analysis, IRS concluded that it had to make various organizational
and business changes. 

One of the most important business changes was IRS' decision to
significantly increase, by the year 2001, the number of tax returns
received electronically.  Compared with IRS' current procedures for
processing paper returns, electronic filing has several benefits for
IRS.  These benefits include reduced processing, storage, and
retrieval costs; and faster, more accurate processing of returns and
refunds. 

Although IRS has implemented some initiatives that have increased the
number of electronic returns since 1993, IRS does not have a
comprehensive business strategy to reach or exceed its electronic
filing goal, which was 80 million electronic filings by 2001.  IRS'
estimates and projections for individual and business returns
suggested that, by 2001, as few as 39 million returns may be
submitted electronically, less than half of IRS' goal and only about
17 percent of all returns expected to be filed. 

We have reported that IRS' business strategy would not maximize
electronic filings because it primarily targeted taxpayers who use a
third party to prepare and/or transmit simple returns, are willing to
pay a fee to file their returns electronically, and are expecting
refunds.  Focusing on this limited taxpaying population overlooked
most taxpayers, including those who prepare their own tax returns
using personal computers, have more complicated returns, owe tax
balances, and/or are unwilling to pay a fee to a third party to file
a return electronically. 

To date, most of the returns filed electronically are ones that, if
filed on paper, could be filed on forms (like the 1040EZ) that are
among the least costly paper returns to process.  With that in mind,
we recommended, in October 1995, that IRS identify those groups of
taxpayers that offer the greatest opportunity to reduce IRS' paper
processing workload and operating costs if they filed electronically
and develop strategies that focus on eliminating or alleviating
impediments that inhibit those groups from participating in the
program.\4

Some of IRS' 21 electronic filing initiatives have realized some
positive results.  For example, certain taxpayers who are eligible to
file a Form 1040EZ are now allowed to file electronically using a
toll-free number on touch-tone phones.  This year, about 2.8 million
taxpayers used that filing method, known as TeleFile. 

Also, IRS has not yet successfully addressed one of the major
impediments to the expansion of electronic filing--its cost to
taxpayers.  We concluded that, without a strategy that also targets
these taxpayers, IRS would not meet its electronic filing goals.  In
addition, if, in the future, taxpayers file more paper returns than
IRS expects, added stress will be placed on IRS' paper-based systems. 
Accordingly, we recommended that IRS refocus its electronic filing
business strategy to target, through aggressive marketing and
education, those sectors of the taxpaying population that can file
electronically most cost-beneficially. 

To respond to our recommendation, to date, IRS has performed an
electronic filing marketing analysis at local levels; developed a
marketing plan to promote electronic filing; consolidated its 21
electronic filing initiatives into its Electronic Filing Strategies
portfolio; and initiated a reengineering project with a goal to
reduce paper tax return filings to 20 percent or less of the total
volume by the year 2000.  It plans to complete its electronic filing
strategy in early fall 1996.  These initiatives could result in
future progress toward increasing electronic filings. 

However, these initiatives are not far enough along to determine
whether they will culminate in a comprehensive strategy that
identifies how IRS plans to target those sectors of the taxpaying
population that can file electronically most cost-beneficially.  It
also is not clear how the reengineering project will affect the
strategy, or how these initiatives will affect TSM systems that are
being developed. 

IRS has also experienced problems in delivering the systems to
process paper returns in the future.  IRS' business vision for 2001
included consolidating the processing of all paper documents (tax
returns, correspondence, and information returns) into 5 of its 10
service centers.  IRS identified which five centers will specialize
in paper processing and consolidated the processing of paper
information returns and Federal Tax Deposit coupons in those centers
with the roll out of an interim scanning and imaging technology known
as the Service Center Recognition Image Processing System (SCRIPS). 
Besides information returns and tax deposit coupons, SCRIPS was
originally expected to process all forms 1040EZ, 1040PC, and 941
(employment tax returns).  Instead, for 1996, SCRIPS is processing
about 50 percent of the 1040EZs and none of the 1040PCs and 941s. 

Also, in 1988 IRS began designing a Document Processing System (DPS)
in an effort to use imaging and optical character recognition
technologies to process paper tax returns and capture 100 percent of
the data on those returns.  In April 1992, we said that IRS had not
adequately assessed the cost-benefit trade-offs associated with its
strategy for receiving and capturing tax return data using DPS.\5 We
recommended that IRS develop a comprehensive analysis to determine
the cost and benefits of alterative strategies for receiving and
capturing tax return information. 

IRS proceeded with the development of DPS without this analysis and
estimates that it spent about $270 million on DPS through fiscal year
1995.  According to IRS officials, IRS is now uncertain whether the
benefits of DPS outweigh the costs and IRS is currently reevaluating
its needs.  With the problems encountered with both the SCRIPS and
DPS systems, IRS is left without a proven system for more efficiently
processing paper returns in the future. 


--------------------
\4 Tax Administration:  Electronic Filing Falling Short of
Expectations (GAO/GGD-96-12, October 31, 1995). 

\5 Tax Systems Modernization:  Input Processing Strategy is Risky and
Lacks a Sound Analytical Basis (GAO/T-IMTEC-92-15, April 29, 1992). 


      IRS FACES SEVERAL CHALLENGES
      IN IMPLEMENTING ITS CUSTOMER
      SERVICE VISION
---------------------------------------------------------- Letter :4.2

The second part of IRS' business vision is to improve service to
taxpayers.  A key IRS goal is to resolve 95 percent of taxpayer
issues after one contact.  For service to improve, taxpayers must be
able to reach IRS by telephone when they have questions or problems,
and IRS employees must have easy access to the information needed to
help taxpayers. 

Taxpayers have long had a problem reaching IRS by telephone.  The
percentage of taxpayer calls that IRS assistors answered decreased
from 58 percent for the 1989 filing season to 8 percent for the 1995
filing season.  Although the accessibility rate improved during the
1996 filing season, assistors were still only able to answer 20
percent of taxpayers' telephone calls.\6

Also, even when a taxpayer reaches IRS, assistors do not always have
easy access to the information needed to resolve taxpayers' problems. 
As a result, the assistor may have to either (1) refer the taxpayer
to another office, (2) research the problem and call the taxpayer
back, or (3) tell the taxpayer to call back later. 

IRS' strategy for improving customer service includes consolidating
work units, changing work processes, and increasing the use of or
implementing new information systems.  For instance: 

  -- IRS' customer service vision calls for consolidating the work of
     different functional areas that do not have face-to-face
     interaction with taxpayers.  IRS is making some progress in
     consolidating the work of 70 such organizational units in 44
     locations that traditionally have non face-to-face interaction
     with taxpayers into 23 customer service centers.  This
     consolidation effort will continue through 2002.  The
     consolidated centers would, for example, absorb the functions of
     toll-free taxpayer assistance sites, which answer calls about
     tax law and procedures, taxpayer accounts, and notices that
     taxpayers receive from IRS. 

  -- IRS' customer service vision emphasizes use of the telephone to
     interact with taxpayers.  To fulfill this vision, IRS must
     complete actions directed at converting to telephone much of the
     work now being done by correspondence and at making it easier
     for taxpayers to reach IRS and resolve their problems by
     telephone.  IRS is making some progress in (1) extending its
     hours of operation, (2) improving its ability to route calls
     nationwide, (3) increasing the use of interactive systems, and
     (4) reducing demand for assistance. 

IRS' strategy offers promise as it is designed to improve taxpayers'
ability to get assistance from IRS and to provide IRS employees easy
access to information.  However, IRS must address several important
managerial, technical, and human resource challenges to fully achieve
that vision.  Specifically, IRS has to manage the transition to the
customer service vision while continuing to answer taxpayer
inquiries, manage taxpayer accounts, and collect unpaid taxes.  IRS
also has to determine the scope of responsibilities for those staff
employed at customer service centers and provide the requisite
training for that staff.  IRS also has to develop the information
systems necessary to support the accomplishment of its vision,
including an interactive telephone system that is easy for taxpayers
to use. 


--------------------
\6 As discussed in appendix I, IRS measures the level of access based
on the number of taxpayers assisted divided by the estimated number
of taxpayers that called.  Through June 1996, IRS statistics show it
provided a 46-percent level of access compared to 38 percent the
prior year. 


      ACHIEVING CUSTOMER SERVICE
      AND COMPLIANCE GOALS DEPENDS
      ON BETTER ACCESS TO CRITICAL
      DATA
---------------------------------------------------------- Letter :4.3

Achieving IRS' customer service and compliance goals depends in large
measure on increasing the use of and implementing new information
systems.  However, IRS has not fully defined its business
requirements for those systems and lacks a cost-effective strategy
for accessing taxpayer data that may be needed for customer service
and compliance. 

Also, IRS' primary taxpayer account database that is used for
assisting taxpayers--the Integrated Data Retrieval System (IDRS)--
was designed in the 1960s.  Until 1995, account information in IDRS
was spread among 10 service centers, and employees in each center had
access to information on only a small percentage of IDRS accounts. 
When an employee did not have access to the account information
needed to respond to a taxpayer's question, the employee typically
wrote down the question and mailed it to the location that had access
to the information.  Then, that office would respond to the
taxpayer's question. 

Early in 1995, IRS implemented a networking capability among the 10
service centers so that employees could have access to IDRS data
nationwide.  This networking capability is referred to as Universal
IDRS.  Although Universal IDRS gives IRS employees access to taxpayer
account information nationwide, IDRS does not always contain complete
information on a taxpayer's account.  Other information needed to
help the taxpayer may reside in different systems that are not linked
to IDRS. 

Making it easier for taxpayers to reach IRS by telephone is of
limited value if IRS employees on the other end of the line do not
have access to the data needed to help the taxpayers, which has been
a long-standing problem in IRS.  IRS eventually intends to provide
its employees with access to greater amounts of on-line taxpayer data
in shorter time frames than current systems can provide. 

Another major goal of IRS' vision is to increase compliance. 
Achieving this goal hinges on the ability of enforcement staff to
readily access good data.  For example, as we discussed in recent
testimony on IRS' debt collection practices, existing IRS computer
systems do not provide ready access to needed information and,
consequently, do not adequately support modern work processes.\7
Access to current and accurate information on tax debts is essential
if IRS is to enhance the effectiveness of its collection tools and
programs to prevent taxpayers from becoming delinquent in the first
place. 

Although technology plays a key role in helping an organization
collect good data and make it readily accessible to employees, it is
critical that the organization first determine what data it needs. 
IRS has not yet identified all of the data that enforcement staff
need to do their job. 

IRS currently captures about 40 percent of the data provided by
taxpayers on their individual income tax returns.  IRS' intent, as
part of modernization, was to capture either through electronic
submission or imaging, 100 percent of the data.  However, as part of
the TSM reassessment effort, IRS has decided that it will continue
capturing about 40 percent of the individual income tax return data
for at least the next 5 years, with the intent of moving to 100
percent later.  If IRS is going to continue capturing 40 percent of
the tax return data, it is critical that it capture the right 40
percent.  IRS does not now know if it is capturing the right data. 

It is also important that any data IRS captures, whether 40 percent
or 100 percent of the universe, be easily accessed by staff who need
it.  In that regard, IRS officials told us that enforcement staff are
not able to readily access the data that IRS is now capturing. 


--------------------
\7 Tax Administration:  IRS Tax Debt Collection Practices
(GAO/T-GGD-96-112, April 25, 1996). 


      TSM PROJECTS AND
      REENGINEERING EFFORTS MUST
      BE INTEGRATED
---------------------------------------------------------- Letter :4.4

One of the managerial weaknesses discussed in our July 1995 report on
TSM that has significant programmatic implications was a lack of
integration of IRS' reengineering efforts and TSM projects. 
Specifically, we said that IRS' business reengineering efforts were
not tied to its TSM projects and that IRS lacked a comprehensive plan
and schedule defining how and when to integrate these business
reengineering efforts with ongoing TSM projects. 

We continue to question IRS' ability to make sound investment
decisions on TSM until the reengineering of important processes is
sufficiently complete.  Reengineering could result in new business
requirements that are not addressed by planned TSM projects or that
make those projects obsolete. 

For example, IRS' strategy for returns processing needs to be based
on a clear definition of its downstream business requirements for
customer service and compliance, and on an analysis of the cost and
benefits of meeting those requirements.  These requirements may
evolve from the different scenarios that IRS is currently considering
as a part of its reengineering efforts.  Until such an alternatives
analysis of the business requirements is completed, IRS has no
assurance that its technology investments for submission processing
are sound. 


   DEVELOPING THE CAPACITY TO MAKE
   SOUND TECHNOLOGY INVESTMENTS
------------------------------------------------------------ Letter :5

Successfully achieving IRS' business goals--reducing the volume of
paper returns, better serving customers, and improving
compliance--will depend heavily on investing in information
technology.  Consequently, IRS needs to effectively manage
information technology investments by using the best practices of
leading organizations and the provisions of the Information
Technology Management Reform Act of 1996 and the Paperwork Reduction
Act of 1995, as amended. 

Despite the billions of dollars at stake, IRS information systems are
not yet managed as investments, and strategic information management
practices are not fully in place.  To overcome this, and provide the
Congress with insight needed to assess IRS' priorities and
rationalization for TSM projects, we recommended that the IRS
Commissioner take immediate action to implement a complete process
for selecting, prioritizing, controlling, and evaluating the progress
and performance of all major information systems investments, both
new and ongoing, including explicit decision criteria, and using
these criteria, to review all planned and ongoing systems investments
by June 30, 1995. 

IRS has taken positive steps that indicate a willingness to address
the strategic information management problems we have raised.  IRS
has, for example, created the executive-level Investment Review Board
for selecting, controlling, and evaluating all of IRS' information
technology investments; developed the Business Case Handbook that
includes decision criteria on costs, benefits, and risks; and
developed the Investment Evaluation Review Handbook designed to
assess projected costs and benefits against actual results. 

But, as noted in Treasury's report on TSM, the investment process is
not yet complete.  According to Treasury, it was missing (1) specific
operating procedures, (2) defined reporting relationships between
different management boards and committees, and (3) updated business
cases for major TSM technology investments.  Our own analysis shows
serious weaknesses, such as inadequate data, an incomplete portfolio,
and the lack of an effective investment evaluation review process. 

These concerns coincide with two central criticisms we have
repeatedly made about TSM.  Because of the sheer size, scope, and
complexity of TSM, it is imperative that IRS institutionalize a
repeatable process for selecting, controlling, and evaluating its
technology investments, and that it make informed investment
decisions based on reliable qualitative and quantitative assessments
of costs, benefits, and risks.  Although IRS is planning and is in
the initial stages of implementing parts of such a process, a
complete, fully-integrated process does not yet exist.  Specifically,
IRS has not provided us evidence to justify its claims that its
decisions were supported by acceptable data on project costs,
benefits, and risks. 

To help ensure that agencies such as IRS have the capacity to manage
information technology as an investment, the Information Technology
Management Reform Act of 1996 establishes a framework for improving
the capital planning and control of investments in information
technology.  Under the act, agencies are to design and implement a
process for maximizing the value and assessing and managing the risks
of information technology acquisitions and use the process to select,
control, and evaluate agency information technology investments. 
Much more effort will be required by IRS in order to fully meet this
standard. 


   BUILDING A TECHNICAL FOUNDATION
   FOR TSM
------------------------------------------------------------ Letter :6

Once investment decisions are made, the activities of transforming
these ideas into successfully developed and operated systems requires
following good business practices.  Our work has identified
weaknesses in these activities, and IRS' serious technical weaknesses
continue to impede successful systems modernization.  IRS has
initiated a number of actions to address these weaknesses but
additional measures are necessary to correct them and, in the
interim, to mitigate the risks associated with ongoing TSM spending. 


      SOFTWARE DEVELOPMENT
      ACTIVITIES ARE INCONSISTENT
      AND POORLY CONTROLLED
---------------------------------------------------------- Letter :6.1

Unless IRS improves its software development capability, it is
unlikely to build TSM timely or economically, and systems are
unlikely to perform as intended.  IRS said it is committed to
developing consistent procedures addressing requirements management,
software quality assurance, software configuration management, and
project planning and tracking.  It also said that it was developing a
comprehensive measurement plan to link process outputs to external
requirements, corporate goals, and recognized industry standards. 

IRS has begun to improve its software development capability, but
these actions are not yet complete or institutionalized, and, as a
result, systems are still being developed without the disciplined
practices and metrics needed to give management assurance that they
will perform as intended.  Providing this assurance will require IRS
to: 

  -- have disciplined processes in place to ensure that all
     contractors are performing at least at CMM Level 2;\8

  -- develop a schedule for conducting software capability
     evaluations;

  -- complete procedures for requirements management, software
     quality assurance, software configuration management, and
     project planning and tracking; and

  -- complete a set of metrics and a schedule for institutionalizing
     the process needed to ensure its use. 


--------------------
\8 The Software Engineering Institute at Carnegie Mellon University
has developed a model, the Software Capability Maturity Model (CMM),
to evaluate an organization's software development capability.  CMM
Level 2 denotes that basic project management processes are
established to track cost, schedule, and functionality and the
necessary process discipline is in place to repeat earlier successes
on similar projects. 


      SYSTEMS ARCHITECTURES,
      INTEGRATION, AND TESTING ARE
      INCOMPLETE
---------------------------------------------------------- Letter :6.2

IRS' systems architectures,\9 integration planning, and system
testing and test planning are incomplete.  IRS said that it was
identifying the necessary actions to define and enforce systems
development standards and architectures agencywide.  Although IRS has
taken actions to prepare a systems architecture and improve its
integration and system testing and test planning, these efforts are
not yet complete or institutionalized. 

As a result, TSM systems continue to be developed without the
detailed architectures and discipline needed to ensure success.  To
provide these architectures and discipline, IRS must, for example: 

  -- complete its integrated systems architecture (the "blueprints"
     of TSM);

  -- bring its development, acceptance, and production environments
     under configuration management control;

  -- include selected security methods and techniques in its security
     concept of operations document;

  -- develop a detailed disaster recovery and contingency plan needed
     to provide useful guidance in emergencies;

  -- include in its test and evaluation master plan descriptions of
     (1) the security testing that should be performed and how these
     tests should be conducted and (2) the responsibilities and
     processes for documenting, monitoring, and correcting testing
     and integration errors; and

  -- complete plans for its integration testing and control facility
     and ensure that the permanent facility simulates the complete
     production environment. 


--------------------
\9 A system architecture is an evolving description of an approach to
achieving a desired mission.  It describes (1) all functional
activities to be performed to achieve the desired mission, (2) the
system elements needed to perform the functions, (3) the designation
of performance levels of those system elements, and (4) the
technologies, interfaces, and location of functions. 


      NO SINGLE IRS ENTITY
      CONTROLS ALL INFORMATION
      SYSTEMS EFFORTS
---------------------------------------------------------- Letter :6.3

IRS has not yet established an effective organizational structure to
consistently manage and control systems modernization
organizationwide.  IRS has made improvements in consolidating
management control over systems development.  For example, in
September 1995, the Associate Commissioner for Modernization assumed
responsibility for the formulation, allocation, and management of all
information systems resources for both TSM and non-TSM expenditures. 

However, the Associate Commissioner still does not have control over
all IRS systems development activities.  Specifically, systems
development conducted by the research and development division has
now been redefined as technology research, keeping it from the
control of the Associate Commissioner.  We continue to believe that
it is critical for IRS to establish an organizationwide focus to
manage and control all new modernization systems and all upgrades and
replacements of operational systems throughout IRS. 


      PLANS MUST BE DEFINED AND
      CAPABILITIES STRENGTHENED
      BEFORE OBTAINING ADDITIONAL
      CONTRACTOR SUPPORT
---------------------------------------------------------- Letter :6.4

By increasing its reliance on contractors, IRS expects to improve the
accountability for and probability of TSM success.  IRS has outlined
a three-track approach for transitioning over a period of 2 years to
the use of a "prime" contractor that would have, according to IRS,
overall authority and responsibility for the development, delivery,
and deployment of modernized information systems. 

To facilitate this strategy, IRS reported that it would consolidate
the management of all TSM resources, including key TSM contractors,
in its Government Program Management Office (GPMO).  Under the direct
control of the Chief Information Officer, the GPMO will be delegated
authority for the management and control of the IRS staff and
contractors that plan, design, develop, test, and implement TSM
components. 

IRS' approach to expanding the use of contractors to build TSM is
still in the early planning stages.  Because of this, IRS was unable
to provide us with formal plans, charters, schedules or the
definitions of shared responsibilities between the GPMO and the
existing program and project management staff. 

Consequently, at this point, it is unclear what these IRS plans
entail, or how they will work.  However, IRS' approach for expanding
the use of contractors must, for example: 

  -- specify how and when it plans to transfer its development
     activities to contractors, and to what extent contractors could
     be held responsible for existing problems in these
     government-initiated systems;

  -- clarify how the "prime" contractor would direct potential
     competitors that are already under contract with IRS; and

  -- include a schedule for transitioning specific responsibilities
     from IRS to contractors. 

Further, plans to use additional contractors will succeed if, and
only if, IRS has the in-house capabilities to manage these
contractors effectively.  Unless IRS has mature, disciplined
processes for acquiring software systems through contractors, it will
be no more successful in buying software than it has been in building
software. 


   ADDRESSING SERIOUS FINANCIAL
   MANAGEMENT PROBLEMS
------------------------------------------------------------ Letter :7

As part of a pilot program under the Chief Financial Officers (CFO)
Act of 1990, IRS began preparing annual financial statements showing
the results of its operations starting with those for fiscal year
1992.  CFO Act implementation has (1) led to IRS top managers having
a much better understanding than ever before of IRS' serious and
pervasive accounting and reporting problems, (2) provided information
on the magnitude of IRS' tax receivables collection problems, and (3)
identified the need for stronger controls over such areas as payroll
operations.  The CFO Act's requirements also have provided the
impetus for efforts to improve IRS operations and address the
substantial problems identified by our financial audits. 

However, we have been unable to express an opinion on the reliability
of IRS' financial statements for any of the 4 fiscal years from 1992
through 1995.\10 We identified fundamental, persistent problems that
remained uncorrected and, until they are resolved, will continue to
prevent us from expressing an opinion on IRS' financial statements in
the future. 

IRS worked to resolve these issues during our fiscal year 1995
financial statement audit and progress was made, but many of IRS'
efforts were incomplete at the conclusion of the audit.  IRS is
continuing these efforts, which are being done cooperatively with
GAO.  Since we testified before the Committee on June 6, 1996, IRS
and GAO have worked to further develop a plan and strategies for
addressing the major weaknesses preventing IRS from receiving an
opinion on its financial statements.  The following paragraphs
discuss IRS' five major uncorrected financial management problems and
short-term plans for resolving them. 

First, the amounts of total revenue (reported to be $1.4 trillion for
fiscal year 1995) and tax refunds (reported to be $122 billion for
fiscal year 1995) cannot be verified or reconciled to accounting
records maintained for individual taxpayers in the aggregate. 
Second, the amounts reported for various types of taxes collected
(social security, income, and excise taxes, for example) cannot be
substantiated.  As a short-term resolution for these two issues, IRS
has developed software programs that it believes will capture, from
its revenue financial management system, the detailed revenue and
refund transactions that would support reported amounts in its future
financial statements until longer term system fixes can be made to
achieve more reliable reporting of these amounts.  In addition, IRS
plans call for completing documentation of its revenue financial
management system, which is critical to aid in identifying better
interim solutions for reporting revenues and refunds and provide
better insights on the longer term system fixes needed to enable IRS
to readily and reliably provide the underlying support for its
reported revenue and refund amounts. 

Third, the reliability of reported estimates for fiscal year 1995 of
$113 billion for valid accounts receivable and of $46 billion for
collectible accounts receivable cannot be determined.  IRS initially
plans to continue efforts to determine a means of using its current
revenue financial management system's coding to identify its accounts
receivables.  IRS' efforts are focused on correcting known current
coding errors through reviewing 100 percent of all receivables over
$10 million.  In addition, IRS plans to ensure more accurate input
and processing of transactions that underpin accounts receivables by
intensifying training efforts and improving internal control policies
and procedures. 

Fourth, a significant portion of IRS' reported $3 billion in
nonpayroll operating expenses cannot be verified.  IRS believes the
core issue for correcting its receipt and acceptance problems relate
to properly accounting for transactions with other federal agencies. 
IRS, GAO, and a contractor are working together to determine the root
causes of and develop solutions to the issue. 

Fifth, the amounts IRS reported as appropriations available for
expenditure for operations cannot be reconciled fully with Treasury's
central accounting records showing these amounts, and hundreds of
millions of dollars in differences have been identified.  IRS
believes that it has completed the reconciliation of its Fund Balance
with Treasury accounts except for IRS' suspense accounts that
contained reconciling items that were more than 6 months old. 
However, IRS is still in the process of making the necessary
adjustments required to its general ledger and the related Treasury
records to complete this effort.  We plan to review IRS'
reconciliation of outstanding differences and verify the accuracy of
adjustments as they are made. 

It will be essential for IRS to now follow through and ensure that
its planned short-term, interim actions are completed on schedule to
improve the reliability of IRS' financial statements.  We will
continue to work with IRS in doing so.  Additionally, some of IRS'
corrective actions are longer term and involve reprogramming software
for IRS' antiquated systems and developing new systems. 


--------------------
\10 Financial Audit:  Examination of IRS' Fiscal Year 1995 Financial
Statements (GAO/AIMD-96-101,
July 11, 1996); Financial Audit:  Examination of IRS' Fiscal Year
1994 Financial Statements (GAO/AIMD-95-141, August 4, 1995);
Financial Audit:  Examination of IRS' Fiscal Year 1993 Financial
Statements (GAO/AIMD-94-120, June 15, 1994); and Financial Audit: 
Examination of IRS' Fiscal Year 1992 Financial Statements
(GAO/AIMD-93-2, June 30, 1993). 


   PROVIDING EFFECTIVE OVERSIGHT
   TO ENSURE CORRECTIVE ACTIONS
   ARE PROMPTLY AND FULLY
   COMPLETED
------------------------------------------------------------ Letter :8

The recommendations we have outlined provide a road map for bringing
greatly strengthened management to IRS' operations.  IRS needs to
fully implement these actions in order to fulfill any business
strategy it and the Congress decide upon to provide efficient and
effective taxpayer services into the next century.  But, bringing
these actions to fruition and making financial and information
management improvements a reality, will require intense follow
through and sustained oversight by IRS top management, Treasury, OMB,
and the Congress.  This will be especially important, as we have not
always observed the close oversight and strong follow through within
the Executive Branch that it will take to overcome the substantial
problems IRS has experienced in effectively carrying out its business
vision, successfully developing TSM, and obtaining an opinion on its
financial statements. 

Foremost, IRS and Treasury must concentrate on the specific actions
we have outlined.  We are encouraged that Treasury is taking a more
active role in overseeing IRS' efforts to improve its business
operations.  A joint Treasury-IRS Modernization Management Board,
chaired by the Deputy Secretary of the Treasury, has been established
as the primary review and decision body for modernization and TSM
policy and strategic direction.  The Board will review IRS' strategic
plans, investment decisions, and progress against implementation
plans. 

The eight-member board includes (1) from Treasury, the Assistant
Secretary for Management and CFO, the Assistant Secretary (Tax
Policy), the Deputy Assistant Secretary (Departmental Finance and
Management), and the Deputy Assistant Secretary (Information Systems)
and (2) from IRS, the Commissioner, the Deputy Commissioner, the
Associate Commissioner for Modernization, and the Chief Information
Officer.  Advisory Board members include the Treasury Inspector
General and the IRS Chief of Taxpayer Service/Compliance and the IRS
Chief Management and Administration.  For the Board to succeed, it
will be essential for it to have independent sources of information
on IRS' efforts and progress to effectively oversee and track the
cost and schedule of all TSM projects. 

For its part, OMB should emphasize reviewing, in particular, the
investment of the billions of dollars that the government will spend
in developing TSM, the use of technology in IRS' changing business
environment, and the steps IRS plans to take to improve its financial
management.  The CFO Act and the Information Technology Management
Reform Act give OMB important leadership responsibilities in these
areas.  In this regard, for example, the Director of OMB is
responsible for (1) promoting and directing that federal agencies
establish capital planning processes for information technology
investment decisions, (2) evaluating the results of those
investments, and (3) enforcing accountability for them through the
budget process. 

The Congress has established the following legislative framework that
provides the structure necessary to help IRS achieve better financial
and information management and measure the results of implementing
its business vision. 

  -- The CFO Act provides the underpinning for identifying and
     correcting financial management weaknesses and reliably
     reporting on the results of IRS' financial operations. 

  -- The Government Performance and Results Act emphasizes managing
     for results and pinpointing opportunities for improved
     performance and increased accountability. 

  -- Title V of the Federal Acquisition Streamlining Act of 1994
     requires agency heads to define costs, schedules, and
     performance goals for major acquisition programs, including
     information technology, and for monitoring the acquisitions and
     taking appropriate corrective actions when necessary. 

  -- The Paperwork Reduction Act of 1995, as amended, and the
     Information Technology Management Reform Act of 1996 (1)
     explicitly focus the application of information resources on
     supporting agency missions and improving agency performance and
     (2) set forth requirements for improving the efficiency and
     effectiveness of operations and the delivery of services to the
     public through an effective use of information technology. 

These laws also provide a basis for the Congress to hold IRS
accountable for resolving the weaknesses and taking the actions we
have discussed.  In this regard, the Committee's recent hearings on
these matters have brought greater attention to the consequence of
continued delays in solving IRS' management problems.  We encourage
this Committee, and other congressional oversight and appropriations
committees, to use these management statutes to help focus on the
progress IRS is making to correct these important issues. 


   ROLE OF THE NEW COMMISSION ON
   RESTRUCTURING IRS
------------------------------------------------------------ Letter :9

In the appropriations act providing funds for IRS for fiscal year
1996, the Congress established the National Commission on
Restructuring the Internal Revenue Service and gave the Commission a
broad, sweeping charter.  It is charged with reviewing: 

  -- present IRS practices, especially its organizational structure,
     paper and return processing activities, infrastructure, and
     collection process;

  -- what is required for improvements in (1) making returns
     processing "paperless," (2) modernizing IRS operations, (3)
     improving the collections process without major increases in
     personnel or funding, (4) improving taxpayer accounts
     management, (5) improving accuracy of information requested by
     taxpayers in order to file returns, and (6) changing the culture
     of IRS to make it more efficient, productive, and customer
     oriented;

  -- whether IRS could be replaced with a quasi-governmental
     organization with tangible incentives for managing its programs
     and activities, and for modernizing its activities; and

  -- whether IRS could perform other collection, information, and
     financial service functions of the federal government. 

The Commission's 17 members were appointed by congressional leaders
and the President in May 1996.  Cochairing the Commission are Senator
Bob Kerrey and Representative Rob Portman. 

The Congress provided $1 million in direct funding for the Commission
to examine IRS' organization and identify and recommend actions to
expedite the implementation of TSM and improve service to taxpayers. 
We will work with the Commission as it addresses these areas and
explores alternatives to IRS' organization, activities,
infrastructure, and processes.  The Commission's report, which is to
be completed 1 year after its first meeting, should provide the
Congress a current in-depth, comprehensive look at operations and
management structures across IRS and fresh insights for resolving
IRS' persistent uncorrected financial and information management
problems. 

Through the Commission, the Congress has created an excellent
opportunity to bring about long-term, fundamental organizational and
management changes at IRS.  The Commission's work could help provide
the added impetus necessary to (1) develop an effective
implementation strategy for IRS' business vision, (2) manage
information systems as investments, (3) build a strong technical
foundation for TSM, and (4) ensure the reliability of financial
information and systems. 


   AGENCY COMMENTS AND OUR
   EVALUATION
----------------------------------------------------------- Letter :10

In commenting on a draft of this report, IRS provided information on
its efforts to address problems with TSM, customer service, and
financial management.  For TSM, IRS said it (1) was continuing to
refine its investment review process and had made substantial
progress in updating the business cases for TSM projects, (2) had
initiated the tax settlement reengineering project to further reduce
the volume of paper transactions, (3) would continue work on the
systems life cycle and was developing a schedule for completing the
TSM architecture, (4) was establishing the GPMO which will be
responsible for directing and monitoring the activities of all
modernization contractors, and (5) would deliver a revised strategic
plan to the Congress and OMB by September 30, 1997.  In addition, IRS
described the status of actions underway to resolve deficiencies in
its financial management systems.  IRS reaffirmed its commitment to
ensuring the integrity of its financial data.  IRS' response to the
report, along with our comments, is in appendix I. 

An OMB representative agreed with the overall content of the report,
adding that it provided a good summary of IRS' progress and problems
with TSM, customer service, and financial management. 


--------------------------------------------------------- Letter :10.1

We are sending copies of this report to the Chairmen and Ranking
Minority Members of (1) the Senate and House Committees on the
Budget, (2) the Subcommittee on Taxation and IRS Oversight, Senate
Committee on Finance, (3) the Subcommittee on Oversight, House
Committee on Ways and Means, and (4) the House Committee on
Government Reform and Oversight.  We are also sending copies to the
Director of the Office of Management and Budget, the Secretary of the
Treasury, and the Commissioner of Internal Revenue.  Copies will be
available to others upon request. 

The work that was the basis for this report was performed under the
direction of Lynda D.  Willis, Director, Tax Policy and
Administration of the

General Government Division who can be reached at (202) 512-8633;
Dr.  Rona B.  Stillman, Chief Scientist for Computers and
Telecommunications, Accounting and Information Management Division,
who can be reached at (202) 512-6412; and Gregory M.  Holloway,
Director, Governmentwide Audits, Accounting and Information
Management Division, who can be reached at (202) 512-9510. 

Gene L.  Dodaro
Assistant Comptroller General




(See figure in printed edition.)Appendix I
COMMENTS FROM THE INTERNAL REVENUE
SERVICE
============================================================== Letter 



(See figure in printed edition.)



(See figure in printed edition.)

See comment 1. 



(See figure in printed edition.)

See comment 2. 



(See figure in printed edition.)


The following are GAO's comments on the Internal Revenue Service's
letter dated August 26, 1996. 


   GAO COMMENTS
----------------------------------------------------------- Letter :11

1.  IRS' performance statistics differ from ours primarily because
IRS has historically measured performance on taxpayer telephone
assistance differently than we do.  We included, on page 9, the
performance measure IRS calculated for the years ending June 30,
1995, and June 30, 1996.  We are currently working with IRS to
develop an agreement on the data to be reported in the future by GAO
and IRS for telephone taxpayer assistance. 

2.  As discussed on page 17, the amounts of total revenue cannot be
verified or reconciled to accounting records maintained for
individual taxpayers in the aggregate.  Thus, IRS did not know and we
could not determine if the reported amounts were correct.  These
discrepancies further reduce our confidence in the accuracy of the
amount of total revenues collected. 


*** End of document. ***