Tax Systems Modernization: Results of Review of IRS' Initial Expenditure
Plan (Letter Report, 06/15/1999, GAO/AIMD/GGD-99-206).

Because of serious management and technical weaknesses, GAO has included
the Internal Revenue Service's (IRS) tax systems modernization effort on
its list of federal programs at high-risk for waste, fraud, abuse and
mismanagement. Congress limited IRS' ability to spend funds on
information technology until the agency submitted an expenditure plan.
GAO reviewed this plan. This report discusses (1) whether the plan
satisfies the conditions specified in IRS' fiscal year 1998 and 1999
appropriations act, (2) whether the plan is consistent with earlier GAO
recommendations on IRS' systems modernization, and (3) other GAO
observations on the modernization effort.

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

 REPORTNUM:  AIMD/GGD-99-206
     TITLE:  Tax Systems Modernization: Results of Review of IRS'
	     Initial Expenditure Plan
      DATE:  06/15/1999
   SUBJECT:  Tax administration systems
	     Accountability
	     Systems development life cycle
	     Systems conversions
	     Information resources management
	     Strategic information systems planning
	     ADP procurement
	     Private sector practices
	     Systems design
	     Financial management
IDENTIFIER:  IRS Tax System Modernization Program
	     Software Capability Maturity Model
	     IRS System Life Cycle Management Program

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    United States General Accounting Office GAO
    Report to Congressional Requesters June 1999              TAX
    SYSTEMS MODERNIZATION Results of Review of IRS' Initial
    Expenditure Plan GAO/AIMD/GGD-99-206 United States General
    Accounting Office
    Accounting and Information Washington, D.C. 20548
    Management Division B-282877.1
    Letter June 15, 1999 The Honorable Ben Nighthorse Campbell
    Chairman The Honorable Byron L. Dorgan Ranking Minority Member
    Subcommittee on Treasury and General Government Committee on
    Appropriations United States Senate The Honorable Jim Kolbe
    Chairman The Honorable Steny H. Hoyer Ranking Minority Member
    Subcommittee on Treasury, Postal Service, and General Government
    Committee on Appropriations House of Representatives This report
    provides the results of our review of the Internal Revenue
    Service's (IRS) initial Information Technology Investments Account
    (ITIA) expenditure plan pursuant to the fiscal year 1998 Treasury
    and General Government Appropriations Act (Public Law 105-61) and
    the fiscal year 1999 Omnibus Consolidated and Emergency
    Supplemental Appropriations Act (Public Law 105-277).  In these
    acts, the Congress limited IRS' ability to obligate ITIA funds
    until the service and the Department of the Treasury submit to the
    Congress for approval an expenditure plan that as stated in the
    acts, (1) implements the IRS Modernization Blueprint,1 (2) meets
    Office of Management and Budget (OMB) investment guidelines for
    information systems, (3) is reviewed and approved by IRS'
    Investment Review Board,2 OMB, and Treasury's IRS Management Board
    and is reviewed by GAO, 1In the conference report accompanying the
    fiscal year 1997 Omnibus Appropriations Act (Public Law 104-208),
    the Congress directed Treasury to, among other things, develop a
    blueprint to define, direct, and control future tax systems
    modernization efforts.  Treasury submitted the IRS Modernization
    Blueprint to the Congress on May 15, 1997. 2According to IRS, the
    investment review board has been replaced by the Core Business
    Systems Executive Steering Committee, which is chaired by IRS'
    Commissioner. Letter           Page 1
    GAO/AIMD/GGD-99-206  IRS' Initial Expenditure Plan B-282877.1 (4)
    meets the requirements of IRS system life cycle management
    program,3 and (5) is in compliance with acquisition rules,
    requirements, guidelines, and system acquisition management
    practices of the federal government. These conditions are
    consistent with recommendations on IRS' tax systems modernization
    that we have made over the past 5 years. IRS provided us a copy of
    the expenditure plan that it submitted to the Congress.  As agreed
    with your offices, we reviewed this plan to determine whether (1)
    the plan satisfies the conditions specified in IRS' fiscal year
    1998 and 1999 appropriations acts, (2) the plan is consistent with
    our past recommendations on IRS' systems modernization, and (3) we
    have any other observations on the modernization efforts.  The
    results of this review are based on our ongoing monitoring of IRS'
    modernization efforts that is being performed at the request of
    your offices.  Our work was performed from January 1999 through
    May 1999 in accordance with generally accepted government auditing
    standards.  (See appendix I for details on our scope and
    methodology.)  The Commissioner provided us with written comments,
    which are discussed in the "Agency Comments" section of this
    report and are reprinted in appendix II. Results in Brief
    IRS' initial expenditure plan is the first in a series of
    incremental expenditure plans that IRS plans to prepare over the
    life of the modernization.  As such, the initial plan specifies
    IRS' modernization initiatives through October 31, 1999, or about
    the next 5 months, and it seeks approval to obligate about $35
    million to complete these initiatives. Such an incremental
    approach to investing in systems modernization efforts is a
    recognized "best practice" that leading public and private sector
    organizations use to mitigate the risk of program failure on
    large, complex, multiyear modernization programs.  Further, both
    the Clinger-Cohen Act of 19964 and OMB policy5 endorse such an
    incremental investment management approach. 3This program includes
    the policies, processes, and products for managing information
    technology investments from conception, development, and
    deployment through maintenance and support. 4Public Law 104-106,
    February 10, 1996. 5Evaluating Information Technology Investments,
    A Practical Guide, Version 1.0 (Executive Office of the President,
    OMB, November 1995) and OMB Memorandum M-97-02, Funding
    Information Systems Investments (October 1996), informally
    referred to as the "Raines Rules." Letter    Page 2
    GAO/AIMD/GGD-99-206  IRS' Initial Expenditure Plan B-282877.1 IRS'
    initial expenditure plan is an appropriate first step toward
    successful systems modernization and, with regard to the $35
    million being requested for this increment, satisfies the
    conditions that the Congress placed on the use of ITIA funds.
    Moreover, the plan is consistent with our past recommendations.
    To illustrate, the initial expenditure plan provides for, among
    other things, additional blueprint precision and specificity, such
    as validation of selected business requirements, definition of
    selected systems design specifications, and development of
    selected system business case justifications.  Additionally, it
    provides for definition of system infrastructure specifications
    and a revised plan for sequencing the introduction of the new
    technology needed to achieve the target systems architecture over
    the next 3 to 5 years.  These initiatives are consistent with our
    past recommendations for completing the blueprint and collectively
    they represent the first steps needed to satisfy the legislative
    condition to implement the blueprint. To further illustrate, the
    initial expenditure plan provides for definition and targeted
    implementation of an "Enterprise Life Cycle," which is consistent
    with our past recommendations for instituting project management
    rigor, software process maturity, and investment management
    discipline.  If implemented properly, this effort should satisfy
    the legislative condition for an IRS system life cycle and
    investment management program that meets OMB guidelines. Building
    on its initial expenditure plan, IRS plans to define in subsequent
    expenditure plans the follow-on efforts and funding requirements
    needed (1) to continue to incrementally add needed architectural
    precision and project-specific management discipline and (2) to
    incrementally implement, in accordance with its revised sequencing
    plan, its Enterprise Life Cycle, and its target systems
    architecture.  If IRS effectively implements the initiatives
    described in its initial expenditure plan and fulfills its
    commitment to incrementally request and expend future
    modernization funds, IRS would be acting in a manner that is
    consistent with the legislative conditions and our past
    modernization recommendations. IRS could strengthen its approach
    to incrementally investing in modernized information technology by
    including in subsequent expenditure plans its progress against the
    previous expenditure plan's goals and deliverables and the
    benefits realized to date from the funds expended.  Measuring and
    tracking on these items are critical to successful implementation
    of Page 3                           GAO/AIMD/GGD-99-206  IRS'
    Initial Expenditure Plan B-282877.1 incremental investment
    management, and thus should be disclosed to the Congress to
    facilitate its deliberations on future expenditure plans.
    Background    In 1995, we reported on management and technical
    weaknesses with IRS' tax systems modernization that jeopardized
    its successful completion and made over a dozen recommendations to
    correct the weaknesses.6 Because of the seriousness of the
    weaknesses, we placed the modernization on our 1995 list of high-
    risk federal programs.7  In June 1996, we reported that IRS had
    made progress in implementing our recommendations.8  However, to
    minimize the risk of IRS investing in systems before the
    recommendations were fully implemented, we suggested that the
    Congress limit IRS' information technology (IT) spending to
    certain cost-effective categories.  These spending categories were
    those that (1) support ongoing operations and maintenance, (2)
    correct pervasive management and technical weaknesses, such as a
    lack of requisite systems life cycle discipline, (3) are small,
    represent low technical risk, and can be delivered in a relatively
    short time frame, or (4) involve deploying already developed
    systems that have been fully tested, are not premature given the
    lack of a complete systems architecture, and produce a proven,
    verifiable business value.  The act providing IRS' fiscal year
    1997 appropriations9 limited IRS' IT spending to efforts
    consistent with these categories. In 1997, we again included the
    modernization on our high-risk list because IRS had not yet
    implemented our recommendations.10  However, we also reported that
    IRS had made progress on the recommendations.  For example, in May
    1997, IRS issued its modernization blueprint.  This blueprint
    consisted of four principal components: (1) a systems life cycle,
    6Tax Systems Modernization: Management and Technical Weaknesses
    Must Be Corrected If Modernization Is To Succeed (GAO/AIMD-95-156,
    July 26, 1995). 7High-Risk Series: An Overview (GAO/HR-95-1,
    February 1995). 8Tax Systems Modernization: Actions Underway But
    IRS Has Not Yet Corrected Management and Technical Weaknesses
    (GAO/AIMD-96-106, June 7, 1996). 9Public Law 104-208, September
    30, 1996. 10High-Risk Series: Information Management and
    Technology (GAO/HR-97-9, February 1997). Page 4
    GAO/AIMD/GGD-99-206  IRS' Initial Expenditure Plan B-282877.1 (2)
    business requirements, (3) functional and technical
    architectures,11 and (4) a sequencing plan.12  We briefed IRS
    appropriations and authorizing committees on the results of our
    assessment of IRS' Modernization Blueprint in September 1997.  In
    those briefings and in a subsequent report,13 we concluded that
    the Modernization Blueprint was a good first step that provided a
    solid foundation from which to define the level of detail and
    precision needed to effectively and efficiently build a modernized
    system of interrelated systems.  However, we also noted that the
    blueprint was not yet complete and did not provide enough detail
    for building and acquiring new systems.  As a result, IRS' fiscal
    year 1998 appropriations act again limited IRS' fiscal year
    spending to efforts that were consistent with the aforementioned
    spending categories.  The act providing IRS' fiscal year 1999
    appropriations continued these spending limitations.14 In its
    fiscal year 1998 and 1999 budget requests, IRS requested over $1
    billion for its ITIA account, and the Congress provided $506
    million for the account.  Specifically, it appropriated $325
    million in fiscal year 1998, $30 million of which was rescinded in
    May 1998 for urgent Year 2000 requirements.  The Congress also
    provided $211 million in fiscal year 1999. In providing these
    sums, the Congress limited IRS' ability to obligate them until IRS
    and the Treasury submitted to the Congress for approval an
    expenditure plan that, as stated in the law, (1) implements the
    IRS Modernization Blueprint, (2) meets OMB investment guidelines,
    (3) is reviewed and approved by IRS' Investment Review Board, OMB,
    and Treasury's IRS Management Board and is reviewed by GAO, (4)
    meets requirements of IRS' life cycle program, and (5) is in
    compliance with acquisition rules, requirements, guidelines, and
    systems acquisition management practices of the federal
    government.  IRS is not requesting any ITIA funds for fiscal year
    2000 but is asking for $325 million for fiscal year 2001.  In our
    April 1999 testimony, we reported this request was not 11A system
    architecture defines the critical attributes of an agency's
    collection of information systems in both business/functional and
    technical/physical terms. 12A sequencing plan defines the actions
    that must be taken, and their schedules along with costs, to cost
    effectively evolve from the current to the future systems
    operating environment. 13Tax Systems Modernization: Blueprint Is a
    Good Start But Not Yet Sufficiently Complete to Build or Acquire
    Systems (GAO/AIMD/GGD-98-54, February 24, 1998). 14Public Law 105-
    277, October 21, 1998. Page 5
    GAO/AIMD/GGD-99-206  IRS' Initial Expenditure Plan B-282877.1
    adequately justified and suggested that the Congress not provide
    the funds until IRS provided the support.15 In December 1998, IRS
    awarded its Prime Systems Integration Services (PRIME) contract
    for systems modernization.  According to IRS, it planned to
    "partner" with the PRIME contractor, among other things, to (1)
    complete the modernization blueprint, as we recommended, and (2)
    account for changes in systems requirements and priorities caused
    by IRS' organizational restructuring, new technology, and IRS
    Restructuring and Reform Act of 1998 requirements.  In addition,
    IRS stated that it planned to establish disciplined life cycle
    management processes and structures and mature software
    development and acquisition capabilities before it begins building
    modernized systems.  Because of the modernization's high cost and
    importance, we continued in 1999 to categorize it as a high-risk
    federal program.16 IRS Plans to Submit a             To comply
    with its statutory mandate to submit an expenditure plan to the
    Series of Expenditure  Congress before obligating ITIA funds, IRS
    has developed a strategy where, in lieu of a single plan, it
    intends to develop and provide to the Congress a Plans to
    Incrementally  series of expenditure plans over the life of the
    modernization.  This Justify Modernization  expenditure plan
    strategy is a by-product of the Commissioner's overall Initiatives
    approach to the modernization, which is to incrementally invest in
    modernized systems in accordance with (1) rigorous systems and
    software life cycle management processes and (2) a revised
    sequencing plan for migrating from IRS' legacy systems and master
    file environment to the target systems and relational database
    environment specified in the blueprint. The initial plan requests
    $35 million for IRS modernization initiatives to be delivered by
    October 31, 1999.  This plan proposes three categories of
    modernization investments that IRS calls (1) supporting business
    goals, (2) building management capability, and (3) planning a
    modern infrastructure, and is requesting for each category $17
    million, $11.6 million, and $6.5 million, respectively.  The
    supporting business goals initiatives include the early phases of
    selected systems development efforts 15Tax Administration: IRS'
    Fiscal Year 2000 Budget Request and 1999 Tax Filing Season (GAO/T-
    GGD/ AIMD-99-140, April 13, 1999). 16High-Risk Series: An Update
    (GAO/HR-99-1, January 1999). Page 6
    GAO/AIMD/GGD-99-206  IRS' Initial Expenditure Plan B-282877.1 that
    are intended to improve taxpayer service by the year 2001 tax
    filing season.  The building management capability initiatives
    provide for defining and beginning the institutionalization of
    mature modernization management and systems engineering processes
    that are to permit effective blueprint implementation.  The
    planning modern infrastructure initiatives refer to the first
    steps in establishing the technology foundation (e.g., networks,
    operating platforms, system security, etc.) upon which to build,
    interconnect, and operate modernized system applications. IRS'
    stated intention is to submit to the Congress a series of
    expenditure plans in the future, the next being in October 1999.
    According to IRS, the October 1999 plan will define follow-on
    modernization initiatives, deliverables, and funding requirements
    into the year 2000. Leading public and private sector
    organizations use an incremental approach to investing in systems
    modernization efforts.  In addition, the Clinger-Cohen Act and OMB
    policy endorse this approach to funding large system development
    investments.  Using this approach, organizations take large,
    complex modernization efforts and break them into projects that
    are narrow in scope and brief in duration.17  This enables
    organizations to determine whether a project delivers promised
    benefits within cost and risk limitations and allows them to
    correct problems before significant dollars are expended, which in
    turn mitigates the risk of program failure.18 Initial Expenditure
    IRS' initial expenditure plan is an appropriate first step to
    successful Plan Is an Appropriate  systems modernization and, with
    regard to the $35 million being requested for this increment,
    satisfies the conditions that the Congress placed on the First
    Step and Meets             use of ITIA funds.  The key to IRS'
    success is now to effectively implement Legislative
    the initiatives described in its initial expenditure plan and
    fulfill its Requirements                     commitment to
    incrementally request and expend future modernization funds. 17GAO
    Executive Guide: Improving Mission Performance Through Strategic
    Information Management and Technology, Learning From Leading
    Organizations (GAO/AIMD-94-115, May 1994). 18Assessing Risks and
    Returns: A Guide for Evaluating Federal Agencies' IT Investment
    Decision- making (GAO/AIMD-10.1.13, February 1997). Page 7
    GAO/AIMD/GGD-99-206  IRS' Initial Expenditure Plan B-282877.1
    Condition 1:  Implements         IRS' initial expenditure plan
    lays the foundation for blueprint the Modernization Blueprint
    implementation on an incremental basis and begins the
    implementation process for selected modernization initiatives.
    For example, the expenditure plan only requests funds to establish
    and selectively implement an Enterprise Life Cycle (ELC).  This
    ELC is to provide IRS with a disciplined and institutional
    approach for managing its IT investments throughout their life
    cycle--from conception, development, and deployment through
    maintenance and operation.  This ELC is to be an adaptation of the
    PRIME contractor's commercially available and proven systems life
    cycle management approach and associated automated tools,
    incorporating IRS- unique needs such as key investment decision
    points.19  Once in place at IRS, the service plans to begin
    implementing the ELC on its ongoing modernization initiatives.
    According to IRS, future expenditure plans will provide for ELC
    implementation on all future project initiatives. As another
    example, the initial expenditure plan requests funds to add
    missing system architecture precision and detail to selected
    system initiatives. In our February 1998 report,20 we concluded
    that while the architecture in IRS' May 15, 1997, blueprint
    provided a solid foundation from which to build a complete
    architecture, it did not provide sufficient detail and precision
    for building or acquiring new systems.  For example, the
    architecture did not allocate business requirements to specific
    configuration items (i.e., actual hardware and software
    components).  As part of its initial expenditure plan, however,
    IRS plans to validate existing business requirements and develop
    preliminary hardware and software design specifications for IRS'
    ongoing projects.  Additionally, IRS intends for future
    expenditure plans to incrementally provide for architectural
    specificity for future system initiatives. The initial expenditure
    plan also requests funds for IRS to perform business system
    planning, which is to result in a revised modernization sequencing
    plan by October 31, 1999.  This initiative is necessary because
    the May 15, 1997, blueprint sequencing plan does not recognize,
    for example, the need to introduce electronic tax administration
    technologies and capabilities early in the modernization to
    respond to the electronic filing requirements in the IRS
    Restructuring and Reform Act of 1998.  This revised sequencing
    19The key decision milestones are referred to by IRS as project
    definition, preliminary business case, and final business case.
    20GAO/AIMD/GGD-98-54, February 24, 1998. Page 8
    GAO/AIMD/GGD-99-206  IRS' Initial Expenditure Plan B-282877.1 plan
    is to define the general timing, costs, and benefits of future
    modernization projects, and is to be incrementally updated in
    future expenditure plans with more specific cost and benefit
    information as projects are initiated and business case
    justifications are developed. Condition 2:  Meets OMB       If
    properly implemented, the ELC that IRS' initial expenditure plan
    is to Information Systems           establish and selectively
    implement, should meet OMB information system Investment
    Guidelines         investment guidelines.21  These guidelines call
    for agencies to adopt a data- driven, analytically based approach
    to selecting, controlling, and evaluating investments in
    information technology.  The overriding objective is to ensure
    that investment decisions are made in a disciplined and rigorous
    manner on the basis of established criteria, such as return-on-
    investment and architectural compliance, and that system
    investments be broken into a series of increments.  Consistent
    with these guidelines, IRS' ELC is to include processes for
    identifying alternative solutions, calculating their projected
    returns-on-investment, and requiring that selected solutions be
    architecturally compliant.  Through its ELC, IRS also plans to
    require that systems be acquired and implemented in phased
    segments that are narrow in scope and brief in duration.
    According to IRS, system initiatives in future expenditure plans
    will be conducted in accordance with the ELC. Condition 3:  Meets
    the       IRS' blueprint included a high-level system life cycle
    framework that could Requirements of IRS' Life     be used to
    define a disciplined set of processes for managing Cycle Program
    modernization investments.  In lieu of using the system life cycle
    overview contained in the blueprint as the framework for
    developing life cycle management processes, IRS' initial
    expenditure plan provides for establishing the aforementioned ELC.
    IRS decided to do this because it concluded that adapting the
    PRIME contractor's commercially available methodology to meet its
    needs would be less costly and faster than completing its own
    unique system life cycle contained in its May 15, 1997, blueprint.
    IRS officials also stated that the PRIME contractor's methodology
    offered more capability than the blueprint system life cycle
    overview, such as processes for managing business process
    reengineering. 21Evaluating Information Technology Investments, A
    Practical Guide, Version 1.0 (Executive Office of the President,
    OMB, November 1995) and OMB Memorandum M-97-02, Funding
    Information Systems Investments (October 1996). Page 9
    GAO/AIMD/GGD-99-206  IRS' Initial Expenditure Plan B-282877.1 We
    reviewed the PRIME contractor's commercially available
    methodology, and found that it both meets the requirements
    specified in the blueprint's system life cycle overview and is
    consistent with the approaches that successful private and public
    sector organizations use to manage large IT investments.  If
    implemented correctly, it should provide IRS with effective
    processes and tools for, among other things, planning,
    controlling, developing, and deploying information systems based
    on defined activities, events, milestones, reviews, and products.
    As described above, the initial expenditure plan provides for
    implementing the ELC on ongoing projects, and, according to IRS
    officials, future expenditure plans will provide for implementing
    it on follow-on projects. Condition 4: Approved by            IRS'
    Core Business Systems Executive Steering Committee, which replaced
    IRS, Treasury's IRS                 IRS' Investment Review Board,
    approved the $35 million expenditure plan Management Board, and
    on April 20, 1999.  Treasury's IRS Management Board and OMB
    approved OMB and Reviewed by GAO the plan on June 9, 1999, and
    June 10, 1999, respectively.  On May 13, 1999, IRS provided us
    with a copy of its initial expenditure plan it submitted to the
    Congress, and the results of our review are contained in this
    report. Condition 5:  Complies With  As described in its
    expenditure plan, IRS plans to establish, through its Federal
    Acquisition Rules,          ELC, the life cycle management
    processes and practices for acquiring Requirements, Guidelines,
    modernized systems.  If implemented effectively, these processes
    should and Management Practices            meet federal
    acquisition rules and management practices.  According to federal
    acquisition laws, rules, and regulations,22 agencies should, among
    other things, use disciplined, decision-making processes for
    planning, managing, and controlling the acquisition of IT.  By
    doing so, agencies mitigate the risks of acquiring systems that
    are not delivered on time and on budget and do not work as
    intended.  IRS' expenditure plan requests funds to continue IRS'
    efforts to strengthen its capability to effectively manage its
    contractors.  For example, as part of its building management
    capability initiatives, IRS plans to implement mature
    software/systems acquisition management practices within the IRS
    organization responsible for managing the PRIME contractor and
    other modernization contractors. IRS intends to build the
    capability in accordance with the Software Engineering Institute's
    (SEI) software/system acquisition capability maturity model
    requirements, and plans to have this capability in place by 22For
    example, see the Clinger-Cohen Act of 1996, OMB Circular A-109,
    and the Federal Acquisition Regulation. Page 10
    GAO/AIMD/GGD-99-206  IRS' Initial Expenditure Plan B-282877.1
    October 31, 1999. 23  Among these maturity models' requirements
    are disciplined and rigorous processes and approaches for
    measuring and tracking progress of contracts and acting to correct
    problems quickly, which will be a key to IRS' ability to
    effectively manage the PRIME contractor and successfully
    modernize. Initial Expenditure              In 1995, we first made
    recommendations to correct serious and pervasive Plan Is
    Consistent With  modernization management and technical
    weaknesses.  Since then, IRS has taken actions to address our
    recommendations.  We have monitored these GAO's Past
    actions and have made follow-up recommendations that recognize
    IRS' Recommendations                  progress and define the
    residual steps that IRS needs to take to ensure that it is ready
    and capable to effectively modernize its systems.  Currently, our
    open recommendations fall into three categories: (1) completing
    the modernization blueprint, (2) developing the management and
    engineering capability to effectively modernize systems, and (3)
    until the first two recommendations are implemented, limiting
    modernization spending to certain small, cost-effective, low-risk
    efforts. IRS' initial expenditure plan is consistent with these
    recommendations. Specifically, of the $35.1 million being
    requested, IRS plans to use approximately $14.6 million for
    initiatives relating to completing the blueprint.  For example,
    IRS plans to develop a 5-year "core business systems"
    modernization strategy that leverages new IT and recognizes IRS'
    recent organizational restructuring and business process
    reengineering efforts prompted by the IRS Restructuring and Reform
    Act of 1998.24  The result is intended to be a revised, business
    risk-based sequencing plan that defines the general timing, cost,
    and benefits of new modernization projects over the next 3 to 5
    years. In addition, IRS plans to spend about $11.6 million to
    develop the management and engineering capability to build and
    implement modernized systems.  Specifically, IRS has designated
    about $2.2 million for PRIME and other contractor support to help
    IRS implement mature program management practices that are to (1)
    strengthen IRS' ability to manage and control modernization
    initiatives and (2) ready IRS for an 23A model developed by the
    SEI at Carnegie Mellon University to evaluate an organization's
    software development or acquisition capability. 24Public Law 105-
    206, July 22, 1998. Page 11
    GAO/AIMD/GGD-99-206  IRS' Initial Expenditure Plan B-282877.1
    evaluation by SEI against relevant software/system acquisition
    capability maturity model requirements.  IRS has earmarked $9.4
    million for defining, documenting, and implementing its ELC,
    including training staff in its use, on ongoing modernization
    projects. Last, IRS plans to spend the remaining $8.9 million on
    selected relatively small, low-risk efforts.  For example, IRS is
    seeking $5.1 million to, among other things, validate system
    requirements and update cost-effectiveness (i.e., business case)
    justifications for two ongoing projects intended to provide near-
    term customer service improvements via better routing of taxpayers
    telephone inquiries.  In addition, IRS seeks to spend $3.2 million
    on defining the network and platform technology infrastructure
    needed to support the above two customer service initiatives and
    to provide the foundation for secure future electronic commerce
    between employees, tax practitioners, and taxpayers. Other
    Observations on  Our review disclosed several additional relevant
    items concerning IRS' IRS' Modernization               management
    of the modernization.  First, IRS has established a modernization
    "governance" structure that provides for extensive Efforts
    involvement by IRS' top executives, including the Commissioner.
    This structure is an effective way to mitigate the risks
    associated with the various modernization initiatives that IRS has
    underway and planned. Second, although IRS plans to do so by July
    1999, it has yet to adequately define respective systems
    modernization roles and responsibilities for itself, the PRIME
    contractor, and other support contractors.  Given that IRS'
    modernization approach provides for an unprecedented "partnership"
    with its contractors, ensuring that these roles and
    responsibilities are defined, understood, and enforced is of
    particular importance.  Last, IRS can strengthen its incremental
    approach to investing in modernized systems by regularly
    disclosing to the Congress in its planned future expenditure plans
    IRS' progress against the modernization expectations that it
    defined in the preceding expenditure plan. IRS' Top Executives Are
    IRS has established a governance structure for managing its
    modernization Directly Engaged in              initiatives and
    providing its top executives, including the Commissioner, Ongoing
    Modernization            direct and frequent visibility into and
    control over all initiatives/projects. Initiatives
    This organizational structure is headed by the Core Business
    Systems Executive Steering Committee, which is chaired by IRS'
    Commissioner and includes Treasury's Assistant Secretary for
    Management and Chief Financial Officer, IRS' Chief Information
    Officer, the Chief Operating Page 12
    GAO/AIMD/GGD-99-206  IRS' Initial Expenditure Plan B-282877.1
    Officer, key operating division heads, the PRIME contractor, and
    other key business officials.  The Executive Steering Committee
    meets at least monthly to review modernization progress and direct
    future work.  Under this process, projects are not initiated and
    do not progress to the next phase without the Steering Committee's
    approval, thus mitigating the risk of modernization missteps and
    failures. IRS Has Yet to Adequately     Effective program/project
    and contract management requires a clear Define Modernization
    delineation of the respective roles and responsibilities of the
    agency "Partnership" Roles and       management team and the
    contractors supporting the agency.  In the case Responsibilities
    of IRS and its tax systems modernization program, this is
    particularly important because IRS' stated intention in its
    solicitation and award documentation is to "partner" with the
    PRIME contractor and the supporting contractors.  However, the
    nature of such a "partnership" is not defined in federal
    acquisition regulations, and thus is an ambiguous concept to
    implement and requires clear definition by IRS. In its efforts to
    date, however, IRS has yet to adequately define the respective
    roles of the service and its contractors.  In January 1999, IRS
    tasked the PRIME contractor with (1) defining the roles and
    responsibilities of IRS, itself, and the other contractors and (2)
    explaining the structure and processes for managing the
    "partnership" between the service and itself.  This task was to be
    completed by April 30, 1999. According to IRS officials, this task
    was not adequately completed for several reasons.  First, the
    PRIME contractor's tasking was not adequately defined and thus
    resulted in a deliverable that was too narrow in scope. Second,
    IRS subsequently became concerned that the PRIME contractor was
    not sufficiently independent enough to be defining roles and
    responsibilities for itself and IRS.  Last, funding for the PRIME
    contractor began to run low.  Consequently, IRS recently tasked
    one of its other support contractors to develop a "Concept of
    Operations document by July 1999 that defines the roles,
    responsibilities, authorities, structure, and rules of engagement
    for the PRIME contractor, IRS, and other IRS support contractors."
    IRS Should Disclose           When employing an incremental
    approach to investing in systems Progress and Results in
    modernization efforts, leading public and private sector
    organizations track Subsequent Expenditure        and monitor
    whether each increment is producing promised benefits and Plans
    meeting cost and schedule baselines, and report this information
    to executive decisionmakers.  By doing so, these organizations can
    address Page 13                          GAO/AIMD/GGD-99-206  IRS'
    Initial Expenditure Plan B-282877.1 variances from expectations
    incrementally, before significant dollars are expended.  This is a
    proven way to effectively manage investment risks. To effectively
    employ incremental investment management on its modernization, IRS
    recognizes that it needs to incrementally measure and track
    progress and results.  Accordingly, its governance structure and
    its ELC provide for doing so.  In particular, its ELC is to
    incorporate SEI process maturity model requirements that, among
    other things, define key processes and approaches for measurement,
    analysis, and verification of activities.  However, IRS has yet to
    define whether its planned future expenditure plans will provide
    for disclosure of this information.  Such disclosure would provide
    the Congress with the kind of regular and valuable information
    that is needed to effectively oversee IRS' modernization efforts.
    Conclusions        IRS' initial expenditure plan lays the
    foundation for successful systems modernization; satisfies, for
    this $35 million increment, the conditions that the Congress
    placed on the use of ITIA funds; and is consistent with our past
    recommendations. IRS' stated intention is to fully implement this
    expenditure plan and to submit to the Congress for approval future
    expenditure plans that incrementally build on this modernization
    foundation.  Such an incremental approach to investing in
    modernized systems is an effective way to minimize the inherent
    risk in large, complex, multiyear modernization programs.  The
    next step for IRS is to effectively implement the plan and fulfill
    its commitment to incrementally request and expend future
    modernization funds.  A key factor in implementing its plans will
    be IRS' success in establishing mature and disciplined measurement
    and tracking capabilities so that it can effectively analyze
    progress against incremental goals, deliverables, and benefit
    expectations and reliably report this information to congressional
    decisionmakers.  By including this information in future
    expenditure plans submitted to the Congress, IRS can strengthen
    modernization management and oversight. Recommendations
    Accordingly, we recommend that the Commissioner of Internal
    Revenue ensure that future expenditure plans fully disclose IRS'
    progress against incremental goals, deliverables, and benefit
    expectations and that the expenditure plan that IRS plans to
    submit in October 1999 fully explain the nature and functioning of
    IRS' "partnership" with its contractors, including the respective
    roles and responsibilities of IRS and its contractors. Page 14
    GAO/AIMD/GGD-99-206  IRS' Initial Expenditure Plan B-282877.1
    Agency Comments    In commenting on a draft of this report, IRS
    agreed with our findings and recommendations and stated that it
    would ensure that future expenditure plans would address progress
    against expectations established in previous requests.  IRS also
    commented on the effectiveness of our evaluation efforts and
    stated that our timely observations and comments have allowed IRS
    to move quickly to implement our recommendations. We are sending
    copies of this report to Senator Ted Stevens, Senator Robert C.
    Byrd, Senator William V. Roth, Jr., Senator Daniel Patrick
    Moynihan, Senator Orrin G. Hatch, Senator Max Baucus, Senator Fred
    Thompson, Senator Joseph I. Lieberman, Representative C.W. Bill
    Young, Representative David R. Obey, Representative Bill Archer,
    Representative Charles B. Rangel, Representative Amo Houghton,
    Representative William J. Coyne, Representative Dan Burton,
    Representative Henry A. Waxman, Representative Stephen Horn, and
    Representative Jim Turner in their capacities as Chairmen or
    Ranking Minority Members of Senate and House Committees and
    Subcommittees.  We are also sending copies to Honorable Charles O.
    Rossotti, Commissioner of Internal Revenue, Honorable Robert E.
    Rubin, Secretary of the Treasury, Honorable Lawrence H. Summers,
    Deputy Secretary of the Treasury, and the Honorable Jacob J. Lew,
    Director of the Office of Management and Budget. Copies will also
    be made available to others upon request. If you or your staff
    have any questions about this report please contact me at (202)
    512-6240 or by e-mail at [email protected].  Other key
    contributors to this report are listed in appendix III. Randolph
    C. Hite Associate Director Governmentwide and Defense Information
    Systems Page 15                          GAO/AIMD/GGD-99-206  IRS'
    Initial Expenditure Plan Contents Letter
    1 Appendix I
    18 Objectives, Scope, and Methodology Appendix II
    20 Comments From the Internal Revenue Service Appendix III
    21 GAO Contact and Staff Acknowledgements Abbreviations ELC
    Enterprise Life Cycle IRS        Internal Revenue Service IT
    information technology ITIA       Information Technology
    Investments Account OMB        Office of Management and Budget
    PRIME      Prime Systems Integration Services SEI        Software
    Engineering Institute Page 16                       GAO/AIMD/GGD-
    99-206  IRS' Initial Expenditure Plan Page 17    GAO/AIMD/GGD-99-
    206  IRS' Initial Expenditure Plan Appendix I Objectives, Scope,
    and Methodology
    Appendix I Pursuant to the Department of the Treasury's fiscal
    year 1998 and 1999 appropriations acts, the Congress limited IRS'
    ability to obligate ITIA funds until the service and Treasury
    submitted to the Congress for approval an expenditure plan that
    per the acts, (1) implements the IRS Modernization Blueprint, (2)
    meets OMB's investment guidelines for information systems, (3) is
    reviewed and approved by IRS' Investment Review Board, OMB, and
    Treasury's IRS Management Board and is reviewed by GAO, (4) meets
    the requirements of IRS system life cycle management program, and
    (5) is in compliance with acquisition rules, requirements,
    guidelines, and system acquisition management practices of the
    federal government.  Accordingly, IRS provided us with the
    expenditure plan that it submitted to the Congress (i.e., the
    Senate on May 25, 1999, and the House on June 2, 1999).  We
    reviewed the plan to determine whether (1) the plan satisfied the
    conditions specified in the acts, (2) the plan was consistent with
    our past modernization recommendations, and (3) we had any other
    observations on IRS' systems modernization efforts. To determine
    whether IRS' expenditure plan satisfied the conditions specified
    in appropriations acts,1 we first identified and reviewed the
    relevant IRS and federal documents referenced in the statutory
    conditions, such as the Modernization Blueprint, OMB information
    systems investment guidelines (e.g., Raines Rules), and the
    Federal Acquisition Regulation.  We then documented IRS'
    completed, ongoing, and planned modernization initiatives.  To do
    this, we reviewed IRS' ITIA Expenditure Plan; Initial Request for
    Funds; and other supporting documentation, such as the individual
    initiatives' project plans and descriptions, briefing
    presentations (e.g., expenditure plan briefing to IRS Management
    Board), the PRIME contract and associated task orders, and
    Executive Steering Committee agendas and decision papers proposing
    courses of action.  We also interviewed IRS' Chief Information
    Officer and other service officials working on the modernization
    program to gain an understanding of what IRS is doing to satisfy
    the legislative conditions.  This included receiving weekly
    briefings and reports on how IRS and contractor teams were
    progressing on ongoing initiatives, such as efforts to improve
    customer service, build capability to effectively acquire systems,
    establish a new system development life cycle methodology (i.e.,
    ELC), and define IRS and contractor roles and responsibilities.
    We also reviewed the business and systems development life cycle
    methodology that IRS is modifying to 1Public Law 105-61, Treasury
    and General Government Appropriations Act, 1998, and Public Law
    105- 277, Omnibus Consolidated and Emergency Supplemental
    Appropriations Act, 1999. Page 18
    GAO/AIMD/GGD-99-206  IRS' Initial Expenditure Plan Appendix I
    Objectives, Scope, and Methodology develop its ELC and were
    briefed by IRS and its contractors involved in this effort.  We
    also attended IRS' Executive Steering Committee meetings to
    observe how IRS top management was directing and controlling the
    modernization program and to understand IRS' strategic
    modernization approach and progress.  Last, we analyzed each of
    IRS' modernization initiatives vis--vis the statutory conditions
    to identify any variances or inconsistencies. To determine whether
    IRS' expenditure plan is consistent with our past recommendations
    on the tax systems modernization, we extracted from our inventory
    of open recommendations those pertaining to IRS' modernization and
    grouped them into the following three categories: (1) completing
    the Modernization Blueprint, (2) developing the management and
    engineering capability to effectively modernize systems, and (3)
    limiting modernization spending to certain small, cost-effective,
    low-risk efforts until the first two recommendations are
    implemented.  We then compared IRS' efforts on its completed,
    ongoing, and planned initiatives with the intent of our open
    recommendations to identify any variances or inconsistencies. To
    develop other observations on IRS' systems modernization efforts,
    we analyzed IRS' overall modernization governance structure to
    determine whether it provided for top management involvement and
    analyzed contractor deliverables against task order requirements
    and the December 9, 1998, contract awarded to the PRIME
    contractor.  We also attended Executive Steering Committee
    meetings to observe how the Commissioner and committee members
    functioned with respect to established structures and processes,
    and to understand IRS' plans for submitting future expenditure
    plans.  In addition, we met with and interviewed the Chief
    Information Officer and IRS officials responsible for the day-to-
    day management and control of the program and the PRIME
    contractor, for development of the expenditure plan, and for
    definition of IRS and contractor roles and responsibilities. We
    performed our work at IRS headquarters in Washington, D.C., and
    its facility in Lanham, Maryland, from January 1999 through May
    1999 in accordance with generally accepted government auditing
    standards. Page 19                               GAO/AIMD/GGD-99-
    206  IRS' Initial Expenditure Plan Appendix II Comments From the
    Internal Revenue ServiceAppendix II Page 20       GAO/AIMD/GGD-99-
    206  IRS' Initial Expenditure Plan Appendix III GAO Contact and
    Staff Acknowledgements
    Append Iix II GAO Contact                   Gary Mountjoy,  512-
    6367 Acknowledgments               In addition to the above
    contact, Keith Rhodes, Agnes Spruill, Karen Richey, Lorne Dold,
    Sherrie Russ, Charles Roney, and Frank Maguire made key
    contributions to this report. (511158)        Letter        Page
    21                         GAO/AIMD/GGD-99-206  IRS' Initial
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