Business Systems Modernization: IRS Has Made Significant Progress
in Improving Its Management Controls, but Risks Remain		 
(27-JUN-03, GAO-03-768).					 
                                                                 
As required by law, the Internal Revenue Service (IRS), in	 
November 2002 and March 2003, submitted to the congressional	 
appropriations committees its initial and revised fiscal year	 
2003 expenditure plans, respectively, requesting about $378	 
million for the Business Systems Modernization (BSM) program. GAO
reviewed the plans to (1) determine whether the plans were	 
prepared in accordance with the law, (2) determine what progress 
IRS had made in implementing modernization management controls	 
and capabilities, and (3) provide any other observations about	 
the plans and IRS's BSM program.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-768 					        
    ACCNO:   A07409						        
  TITLE:     Business Systems Modernization: IRS Has Made Significant 
Progress in Improving Its Management Controls, but Risks Remain  
     DATE:   06/27/2003 
  SUBJECT:   Funds management					 
	     Internal controls					 
	     Appropriations					 
	     Program evaluation 				 
	     Budget activities					 
	     IRS Business Systems Modernization 		 
	     Program						 
                                                                 

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GAO-03-768

                                       A

June 27, 2003 Let er t The Honorable Richard Shelby

Chairman The Honorable Patty Murray Ranking Member Subcommittee on
Transportation, Treasury

and General Government Committee on Appropriations United States Senate

The Honorable Ernest J. Istook, Jr. Chairman The Honorable John W. Olver
Ranking Minority Member Subcommittee on Transportation, Treasury

and Independent Agencies Committee on Appropriations House of
Representatives

As required by law, the Internal Revenue Service (IRS), in November 2002
and March 2003, submitted to the congressional appropriations committees
its initial and revised fiscal year 2003 expenditure plans, respectively,
requesting about $378 million from its Business Systems Modernization
(BSM) fund. Our objectives in reviewing the plans were to (1) determine
whether the plans satisfied the conditions specified in the law, 1 (2)
determine what progress IRS had made in implementing modernization

management controls and capabilities, and (3) provide any other
observations about the initial and revised plans and IRS*s BSM program.

1 BSM funds are unavailable until IRS submits to congressional
appropriations committees for approval a modernization expenditure plan
that (1) meets the Office of Management and Budget*s (OMB) capital
planning and investment control review requirements; (2) complies with
IRS*s enterprise architecture; (3) conforms with IRS*s enterprise life-
cycle methodology; (4) is approved by IRS, the Department of the Treasury,
and OMB; (5) is reviewed by GAO; and (6) complies with federal acquisition
rules, requirements, guidelines, and systems acquisition management
practices. See P. L. 108- 7 (Feb. 20, 2003), and intervening continuing
resolutions for fiscal year 2003 funding, and P. L. 107- 67 (Nov. 12,
2001), for fiscal year 2002 funding.

On December 18, 2002, and April 14, 2003, we briefed your respective
offices on the results of our reviews. This report transmits the materials
used at those briefings and reiterates the recommendations that we made to
the then* Acting Commissioner of Internal Revenue that we specified in our
December 2002 briefing. 2 The full briefing materials, including our

scope and methodology, are reprinted in appendixes I and II. In summary,
we made the following four major points in our December 2002 briefing on
the results of our review of IRS*s initial expenditure plan for fiscal
year 2003:

 IRS*s initial expenditure plan satisfied each of the six legislative
conditions.

 IRS had made significant progress in improving its modernization
management controls and capabilities and implementing our recommendations.
For example, IRS had implemented 20 of 23 commitments and is in the
process of implementing the remaining 3 commitments that address
previously reported weaknesses and recommendations. Significant among
these efforts was IRS*s achievements in improving its software acquisition
practices.

 IRS also had taken steps to balance the scope and pace of the BSM
program with the management capacity of IRS and the PRIME Systems
Integration Support contractor (PRIME). In accordance with our
recommendation, IRS completed a reassessment of the fiscal year 2002 BSM
program in May 2002 and took actions to better balance the system
acquisition workload with the management capacity. Specifically, IRS (1)
deferred the start of five new projects until fiscal years 2003 and 2004
to reduce IRS/ PRIME resource demands, (2) reapplied a portion of

these deferred financial resources toward PRIME management processes and
support of the federally funded research and development center to
accelerate correcting modernization management control weaknesses, and (3)
increased its own efforts and

executive focus on management process improvement. 2 Since the time of our
briefings, a new Commissioner of Internal Revenue has been confirmed.

 Although significant progress had been made, certain modernization
management controls and capabilities* related to configuration management,
3 enterprise transition strategy, 4 human capital management, and cost and
schedule estimate validation* had not yet been fully implemented.
Weaknesses in these controls and capabilities increase the risk of cost,
schedule, and performance shortfalls in the BSM program.

We also made the following five observations related to the BSM program
and the initial fiscal year 2003 expenditure plan:

 The number of project milestones experiencing cost and schedule changes
was increasing.

 BSM was entering a critical, high- risk phase as the scope and
complexity of the program continued to grow.

 Opportunities for using performance- based contracts in acquiring
modernized systems were increasing.

 IRS had improved the format of its expenditure plan.  Internal IRS
costs of the BSM program, paid from other IRS appropriations, were
expected to increase, but were not tracked or

known. In our April 2003 briefing on the results of our review of IRS*s
revised fiscal year 2003 expenditure plan, we reported that IRS had
deployed three modernized systems that provide benefits that (1) improve
telecommunications infrastructure, including telephone call management,
call routing, and customer self- service; (2) provide off- the- shelf
software to

IRS revenue agents to allow them to accurately compute complex corporate
transactions; and (3) improve customer self- service by providing 3
Configuration management is the means for ensuring the integrity and
consistency of

system modernization program and project products throughout their life
cycles. Through effective configuration management, for example,
integration among related projects and alignment between projects and the
enterprise architecture can be achieved.

4 An enterprise transition strategy describes how an organization will
migrate from its current operating environment to its future operating
environment.

instant refund status information and instructions for resolving refund
problems via the Internet. In addition, we made the following four major
points in the April 2003 briefing:

 IRS*s revised plan satisfied the conditions specified under the law. 
IRS continued to take steps to balance the pace of the program with

management capacity by reducing the planned scope of the BSM program for
fiscal year 2003. Between November 2002 and March 2003, IRS deferred four
new project releases, discontinued two ongoing project releases, absorbed
one new release into an ongoing project release, and transferred one
ongoing project to another appropriation. Moreover, IRS reduced the scope
of BSM program- level initiatives and core infrastructure projects. As a
result, IRS reduced the initial BSM funding request for fiscal year 2003
by about $72 million.  Most initiatives/ project milestones continued to
experience cost

increases and/ or schedule delays. In the revised fiscal year 2003
expenditure plan, IRS disclosed that 75 percent of program- level
initiatives and acquisition project milestones had cost increases and/ or
schedule delays exceeding 10 percent of the estimated cost and duration
specified in the fiscal year 2002 expenditure plan.

 Schedule delays affected the delivery of benefits. For example, (1) the
opportunity for the first set of taxpayers (single, Form 1040EZ filers) to
enjoy faster refunds, as promised by the first release of the project that
is to replace IRS*s master files of taxpayer information, has been delayed
an additional 13 months; (2) schedule slippages for the first release of
the e- Services project will delay the provision of easy- to- use
electronic products and services targeted at tax practitioners that
inform, educate, and provide services to the taxpaying public; and (3)
remediation of material weaknesses may be delayed. Recommendations for

To improve IRS*s modernization management controls and capabilities, we
Executive Action

recommend that the Commissioner of Internal Revenue direct the Chief
Information Officer (CIO) to complete actions to

 institutionalize configuration management procedures for the Business
Systems Modernization Office;

 implement plans for obtaining, developing, and retaining requisite human
capital resources; and

 implement effective procedures for validating contractor- developed cost
and schedule estimates.

In addition, we recommend that the Commissioner of Internal Revenue direct
the CIO to

 promptly update the enterprise transition strategy to conform to other
changes in IRS*s enterprise architecture and

 establish and implement a process for determining the type of task order
to be awarded in acquiring modernized systems.

Agency Comments In providing written comments on a draft of this report,
the Commissioner of Internal Revenue agreed with this report*s findings
and commented on the actions IRS is taking to implement our
recommendations. The

Commissioner*s comments are reprinted in appendix III. We are sending
copies of this report to the Chairmen and Ranking Minority Members of
other Senate and House committees and subcommittees that have
appropriations, authorization, and oversight responsibilities for the
Internal Revenue Service. We are also sending copies to the Commissioner
of Internal Revenue, the Secretary of the Treasury, the Chairman of the
IRS Oversight Board, and the Director of the Office of Management and
Budget. Copies are also available at no charge on the GAO Web site at
http:// www. gao. gov.

Should you or your offices have questions on matters discussed in this
report, please contact me at (202) 512- 3317. I can also be reached by E-
mail at daceyr@ gao. gov. Key contributors to this report are listed in
appendix IV.

Robert F. Dacey Director, Information Security Issues

Appendi xes Briefing Slides from the December 18, 2002, Briefing to the
Senate and House

Appendi I x Appropriations Subcommittee Staffs Results of Review of IRS s
November 2002 Business Systems Modernization Expenditure Plan

Briefing to the Staffs of the Senate Committee on Appropriations,
Subcommittee on Treasury and General Government

and the House Committee on Appropriations, Subcommittee on Treasury,
Postal Service,

and General Government December 18, 2002

1

Briefing Overview * Introduction Objectives  Scope and Methodology 
Background  Results in Brief  Results  Conclusions  Recommendations

2

Introduction  As mandated by IRS*s FY 2002 appropriations act, 1 and
proposed in its

FY 2003 appropriations bills, 2 Business Systems Modernization (BSM) funds
are unavailable until IRS submits to the congressional appropriations
committees for approval, a modernization expenditure plan that:

 Meets the Office of Management and Budget*s (OMB) capital planning and
information technology (IT) investment control review requirements;

 Complies with IRS*s enterprise architecture (EA); 3  Meets IRS life
cycle management requirements; 4  Is approved by IRS, Treasury, and OMB;
 Is reviewed by GAO; and  Complies with federal acquisition requirements
and management

practices. 1 Treasury and General Government Appropriations Act, 2002 (P.
L. 107- 67). 2 Treasury and General Government Appropriations Act, 2003
(H. R. 5120 and S. 2740). IRS*s FY 2003 funding is provided under a
Current Resolution,

Pub. L. No. 107- 229, as amended by Pub. L. No. 107- 294, that continues
IRS*s funding at the *current rate* of operations, subject to the *authori
ty and

conditions* provided in the FY 2002 appropriations act. 3 An Enterprise
Architecture (EA) is an institutional blueprint defining how an enterprise
operates today, in both business and technology terms,

and how it wants to operate at some point in the future. An EA also
includes a roadmap for transitioning between these environments. 4 IRS
refers to its life cycle management program as the Enterprise Life Cycle
(ELC), which is graphically depicted in the Background Section.

3

Introduction  Since mid- 1999, IRS has submitted a series of expenditure
or

*spending* plans requesting release of BSM appropriated funds. To date,
about $968 million 5 has been appropriated and released for BSM.

 IRS requested about $451 million in its November 2002 expenditure plan
for FY 2003.

 However, OMB only approved $257 million of IRS*s $451 million request.
OMB is deferring decisions on the remaining $194 million until it
completes a more thorough review of IRS*s business cases, receives the
results of Treasury*s analysis on how it plans to proceed with the
Custodial Accounting Project (CAP/ EDW), and more thoroughly reviews IRS*s
modernization plans in the context of the President*s management agenda
and the 24 government- wide E- gov initiatives.

 On November 18, 2002, IRS submitted its expenditure plan for $451
million, seeking release of the $257 million approved by OMB.

5 This does not include the $14 million from IRS*s FY 2002 supplemental
appropriation that has not yet been released. 4

Objectives  As agreed with IRS*s appropriations subcommittees, our
objectives were

to  determine whether the November 2002 expenditure plan satisfies

the legislative conditions,  determine what progress IRS has made in
implementing

modernization management controls and capabilities, and  provide any
other observations about the November 2002 plan and

IRS*s BSM program. 5

Scope and Methodology  To accomplish our objectives, we

 Reviewed the November 2002 expenditure plan submitted by IRS in the
context of both the amount originally requested by IRS and the amount
approved by OMB;

 Analyzed the plan against the legislative conditions to identify any
variances;

 Reviewed program and project management reports and briefings to assess
progress in implementing modernization management controls and
capabilities;

 Observed modernization executive steering committee and subcommittee
meetings to, among other things, document how the plan was developed and
reviewed;

 Interviewed IRS program and project management officials to corroborate
our understanding of the plan and other BSM activities.

6

Scope and Methodology  Analyzed available evidence on recent efforts to
implement

modernization management controls and capabilities. Specifically, we
analyzed progress and plans for

 software acquisition management, as defined by the Software Engineering
Institute*s (SEI) Software Acquisition Capability Maturity Model*( SA-
CMM),

 ELC definition and implementation, including configuration management,
quality assurance and risk management,

 enterprise architecture (EA) definition and implementation,  human
capital management,  cost and schedule estimation practices,  integrated
program schedule development,  contract management,  transition
management, and  the Customer Account Data Engine (CADE) project, which
is

intended to replace IRS*s taxpayer master files. 7

Scope and Methodology  Collaborated with the Treasury Inspector General
for Tax

Administration (TIGTA) to avoid duplication of effort in reviewing BSM
initiatives and incorporated TIGTA results in this briefing where
appropriate.

 Projects addressed by TIGTA included CADE.  Program- level processes
addressed by TIGTA included cost and

schedule estimation, contract management, and transition management.

8

Scope and Methodology  Consistent with prior reviews, we did not
independently validate planned

initiatives* cost estimates or confirm, through system and project
management documentation, the validity of IRS- provided information on the
initiatives* content and progress.

 We provided a draft of this briefing on December 16, 2002, to IRS BSM
program executives, and have incorporated their comments where
appropriate.

 We performed our work from November through December 2002 in accordance
with generally accepted government auditing standards.

9

Background  The November 2002 plan that IRS submitted to OMB is to (1)
continue

ongoing program- level initiatives through mid- November 2003 and 12
ongoing projects to their next milestones and (2) start 8 new projects or
new releases of existing projects. See appendix I for a description of
projects and initiatives. Examples of new projects are Modernized e- file
and Modernized Data Access.

 The plan reported completion of several projects, including the Internet
Refund/ Fact of Filing, Enhance Call Routing, and Enterprise Systems
Management applications and the first part of the Security and Technology
Infrastructure Release (STIR).

 However, OMB has only approved funding for IRS to (1) continue ongoing
program- level initiatives for 3 months and 9 ongoing projects to their
next milestones and (2) start 3 new projects or new releases of existing
projects.

 Like its previous plans, IRS*s November 2002 expenditure plan covers
contractor costs, such as the Prime Systems Integration Support contractor
(PRIME) and the systems engineering and technical services provided by the
Federally Funded Research and Development Center (MITRE).

 A summary of the plan follows. 10

Background Summary of IRS*s November 2002 Expenditure Plan ($ 000) 6

OMB Program- Level Initiatives IRS Request Approved

Architecture & Integration $43,577 Business Integration $11,413 Management
Processes $13, 828 Federally Funded Research and Development Center
(FFRDC) - MITRE $20,750 Program Management Office $9, 908

Subtotal $99,476 $25, 000

Projects 7

Core Infrastructure Projects (e. g. Infrastructure Shared Services) $99,
261 $99, 000 Data Projects (e. g. Customer Account Data Engine, Integrated
Financial Services) $152,798 $115,000 Business Projects (e. g. e-
Services, HR Connect) $94, 800 $18,000

Subtotal $346, 859 $232, 000

Addition to Management Reserve* $4, 342

Total* * $450, 677 $257, 000 * - Includes $677 from Remaining FY2001 and
FY2002 Appropriated Funds ** - Includes $14, 000 from FY 2002 Supplemental
Appropriation

Source: IRS 6 See appendix II for a more detailed summary of the plan. 7
The 3 categories under this heading include 20 separate projects.

11

Background  To date, GAO has reviewed and reported on seven requests for
BSM

funding releases. 8  Since mid- 1999, we have reported 9 on the risks
associated with

IRS*s approach of concurrently building systems while developing and
implementing program management capabilities such as having a fully
operational program management office and implementing its enterprise life
cycle (ELC). IRS*s ELC is a structured method for managing system
modernization program and project investments throughout their life cycles
(see next slide for a simplified diagram of the life cycle).

 We reported that attempting to acquire modernized systems before having
the requisite management capability increases the risk that systems will
experience cost, schedule, and performance shortfalls.

8 For details on our past review results, see appendix III. 9 For example,
see U. S. General Accounting Office, Business Systems Modernization:
Results of Review of IRS March 2001 Expenditure Plan , GAO01-

716 (Washington, D. C.: June 29, 2001) and U. S. General Accounting
Office, Internal Revenue Service: Progress Continues But Serious

12

Management Challenges Remain , GAO- 01- 562T (Washington, D. C.: April 2,
2001).

& Vision Strategy Architecture

Background

Enterprise Life Cycle Phases and Development

( MS)

Int egration Deployment

IRS s Milestones ELC Phases Support &

Operations MS

MS MS

MS MS 1

2 3

4 5 ELC Milestones

System Enterprise

Post Strategic

Concept Deployment

Plan Definition

Design Deployment

Evaluation

13

Background  We have also reported 10 that the risk of cost increases and
schedule

slippages associated with building systems without the requisite
management controls is not as severe early in projects* life cycles when
they are being planned (project definition and preliminary system design),
but escalates as projects are built (detailed design and development) and
implemented (enterprise deployment).

 In the case of IRS and its ELC, this point of risk escalation is
Milestone 3. From this point through deployment (Milestone 4) to
operations and support (Milestone 5), risk can increase significantly.

 In our February 2002 report, 11 we identified key IRS projects that were
approaching or had passed Milestone 3 that were beginning to experience
cost, schedule, and performance shortfalls, and concluded that program
risks were increasing.

10 For example, see U. S. General Accounting Office, Tax Systems
Modernization: Results of Review of IRS Third Expenditure Plan , GAO- 01-
227 (Washington, D. C.: January 22, 2001). 11 U. S. General Accounting
Office, Business Systems Modernization: IRS Needs to Better Balance
Management Capacity with Systems Acquisition Workload, GAO- 02- 356
(Washington, D. C.: Feb. 28, 2002).

14

capability.

requirements.

Results in Brief  Although significant progress has been made, certain
modernization

management controls and capabilities, related to configuration management,
enterprise transition strategy, human capital management, and cost and
schedule estimate validation, have not yet been fully implemented.
Weaknesses in these controls and capabilities contributed, at least in
part, to BSM project cost, schedule, and performance shortfalls.

 We also make five observations related to the BSM program and November
2002 expenditure plan:  The number of project milestones experiencing
cost and schedule

changes is increasing  BSM is entering a critical, high- risk phase as
the scope and

complexity of the program continue to grow 16

Results in Brief  Opportunities for using performance- based contracts
are increasing  IRS has improved the format of its expenditure plan 
Internal costs of the BSM program, expected to increase, are not

tracked or known  To assist IRS in improving and expanding their
modernization

management controls and capabilities, we are making recommendations to the
Acting Commissioner of Internal Revenue.

 In commenting on a draft of this briefing, IRS officials generally
agreed with our findings, conclusions, and recommendations, and indicated
that they have plans in place to address these challenges.

17

Results Objective 1: The November 2002 plan satisfies the conditions
proposed in IRS*s FY 2003 appropriations bills.

Legislative Conditions Expenditure Plan Provisions 1. Meets OMB capital

IRS*s November 2002 expenditure plan provides for planning and IT

managing investments as part of a portfolio through investment control

its Investment Decision Management process. This review requirements.

includes conducting periodic portfolio reviews to assess changes in
business priorities and project schedules.

18

Results

Legislative Conditions Expenditure Plan Provisions 2. Complies with IRS*s

The November 2002 plan provides funds to enterprise

continue definition and implementation of the architecture (EA).

enterprise architecture. For example, it provides for

completing and issuing EA release 2.1

publishing updates to the EA

performing EA compliance certification activities

issuing the 2003 and 2004 release architectures

operating the systems engineering office 3. Meets the

The plan provides funds for meeting the requirements of IRS*s

requirements in IRS*s enterprise life cycle life cycle program.

management program, which IRS refers to as ELC. For example, the plan
calls for

maintaining responsibility for coordinating, tracking, and integrating all
program- wide costs, schedules, releases, issues, and risks

maintaining the ELC

19

Results

Legislative Conditions Expenditure Plan Provisions 4. Approved by IRS,

IRS * October 8 and 10, 2002 Treasury, and OMB. Treasury * November 5,
2002

OMB * November 14, 2002 (partial approval) 13

Submitted to IRS*s appropriations subcommittees * November 18, 2002 5.
Reviewed by GAO. GAO * December 18, 2002 briefing to IRS*s

appropriations subcommittees 6. Complies with the

As part of the ELC, IRS has defined processes, acquisition rules,

roles, responsibilities, etc. for implementing requirements,

Software Engineering Institute (SEI) Software guidelines, and

Acquisition Capability Maturity Model TM practices systems acquisition

within the level 2 key process areas. 14 These management practices

practices are consistent with federal acquisition of the federal

requirements and management practices, and the Government.

plan calls for implementation of the ELC on all projects. Also, all PRIME
cost reimbursement task orders are subject to a final independent audit by
the Defense Contract Audit Agency to ensure that costs incurred are
commensurate with the physical completion of the contract.

13 OMB approved only $257 million of the $451 million requested by IRS. 14
These are Acquisition Planning, Solicitation, Requirements Development and
Management, Project Management, Contract Tracking and Oversight,
Evaluation, and Transition to Support.

20

IRS Commitments to Address Previously Reported Weaknesses and
Recommendations

Software acquisition management

Weaknesses and Recommendations Configuration Management :

project releases by March 2002. 2002.

by March 2002.

Quality Assurance: Risk Management :

implementation by late- December 2001.

IRS Commitments to Address Previously Reported

ELC definition and implementation (Configuration Management, Quality
Assurance, Risk Management)

Weaknesses and Recommendations

Human Capital Management perform IT. staff. staffing.

Cost and Schedule Estimation practices the method by mid- January 2002. by
the end of February 2002.

IRS Commitments to Address Previously Reported

Results IRS and PRIME Have Accomplished Notable Achievements

Related to Their Software Acquisition Practices  The Clinger- Cohen Act
requires the establishment of effective IT

management processes. SEI*s Software Acquisition Capability Maturity
Model* (SA- CMM) defines such processes for managing software
acquisitions. Since 1995, we have recommended that IRS establish the
*repeatable* level of SEI*s software acquisition management processes
(Level 2). 16

 In December 2002, after an independent assessment, the IRS BSM office
was rated SA- CMM Level 2.

 In August 2002, the PRIME systems integration contractor was rated SA-
CMM Level 3. According to SEI, PRIME is the first organization in the
world to achieve this rating. 16 U. S. General Accounting Office, Tax
Systems Modernization: Management and Technical Weaknesses Must Be
Corrected If Modernization Is to Succeed , GAO/ AIMD- 95- 156 (Washington,
D. C.: July 26, 1995).

24

Results IRS Has Taken Steps to Balance Scope and Pace of BSM Program

with Management Capacity of IRS and PRIME Contractor  In accordance with
our recommendation, IRS completed a reassessment of

the FY 2002 BSM Program in May 2002 and took the following actions to
better balance system acquisition project workload with management
capacity:

 IRS deferred the start of 5 new projects until FY 2003 and 2004 to
reduce IRS/ PRIME resource demands, including

 Reporting Compliance,  Customer Account Data Engine Release 3, and 
Enterprise Data Warehouse Release 2.  IRS reapplied a portion of these
deferred financial resources available

from these deferred projects towards PRIME management processes ($ 1.1
million) and MITRE management support ($ 0.75 million) to accelerate
correction of modernization management control weaknesses.

 In addition, IRS has increased its own efforts and executive focus on
management process improvement (not funded out of the BSM account).

25

Results Enterprise- wide Configuration Management Processes

Have Been Established, But Are Not Yet Fully Institutionalized

 Effective configuration management (CM) is an essential control for
ensuring the integrity and consistency of system modernization program and
project products throughout their life cycles.

 In June 2001, we reported 17 that BSM CM was ineffective. Accordingly,
we made recommendations to address this weakness.

 In February 2002, we reported 18 that IRS had made important progress in
addressing our recommendations, but did not yet have effective processes.

17 GAO- 01- 716 18 GAO- 02- 356

26

Results  Since then, IRS has implemented most of our remaining

recommendations and strengthened its CM processes. For example, it has:

 developed and implemented directives, plans, and standard operating
procedures to define and establish an enterprise- wide process,

 established a Modernization Change Control Board (CCB), project CCBs,
and set approval authorities at all levels, and

 completed compliance assessments for 5 projects to assess alignment with
enterprise- wide policies and procedures.

 However, IRS has not yet fully institutionalized these processes. For
example,

 IRS has yet to complete or report on CM compliance assessments for
several key projects, including the Security and Technology Infrastructure
Release, Enterprise Systems Management, and Filing & Payment Compliance.

27

Results  Key activities had not been performed on 4 of the 5 projects

assessed. These activities included preparing complete CM plans, clearly
identifying configuration items, and resolving various configuration
status accounting discrepancies.

 IRS acknowledges the importance of expanding and sustaining its progress
in implementing CM processes and has committed, beginning in FY 2003, to
conduct semi- annual compliance assessments for all BSM projects to verify
that proper practices are being followed and to ensure that all identified
discrepancies are corrected.

 Until IRS fully institutionalizes effective CM processes, it cannot
adequately ensure that systems are being developed in accordance with
enterprise- wide needs and requirements. Consequently, increased risk
exists that projects will eventually require expensive rework.

28

Results IRS*s Enterprise Transition Strategy Lags Behind its

Enterprise Architecture  An enterprise architecture (EA) is an
institutional blueprint defining, in

both business and technology terms, how an enterprise operates today, how
it wants to operate at some point in the future, and how it will *get
there.*

 The Enterprise Transition Strategy (ETS) is the plan for migrating from
the current state to the future state. To remain current and to support
continued coordinated improvements across the enterprise, the ETS should
be maintained and updated as time and circumstances dictate.

29

Results  However, IRS did not promptly update the transition strategy to
conform to

revisions in other components of the EA. For example,  Although IRS
revised its enterprise architecture and issued version 2.0

in March 2002, it does not expect to approve ETS version 2.0 until
December 2002 (9 months later).

 IRS is currently revising its architecture and expects to approve EA
version 2.1 in February 2003. IRS staff indicated that the draft ETS
version 2.0 does not fully align with the content of the draft EA version
2.1 and that IRS plans to complete ETS 2.1 by March 2003.

 IRS officials intend to bring the transition strategy into closer
synchronization with the rest of the architecture. IRS indicated that ETS
version 2.0 was delayed because it decided to first complete its portfolio
reassessment in mid- 2002. IRS officials believed that close management of
the 2002- 2004 release plans mitigated the risk.

 By not promptly updating its transition strategy to conform to other
changes in its architecture, IRS increases the risk that the
implementation of modernized systems will take longer and cost more than
currently planned.

30

Results Although Progress Has Been Made, BSM Human Capital Strategy Is Not
Yet Fully Implemented

 To maintain and enhance the capabilities of IT staff, organizations
should develop and implement a human capital strategy that, among other
things, includes the following steps

 assess knowledge and skills needed to effectively perform IT operations
to support agency mission and goals,

 inventory the knowledge and skills of current IT staff,  identify gaps
between requirements and current staffing, and  develop and implement
plans to fill the gaps.

 We reported in our February 2002 report 19 that IRS had not defined or
implemented a human capital strategy. Accordingly, we recommended that IRS
address this weakness.

19 GAO- 02- 356 31

Results  IRS has made important progress in addressing our

recommendation. For example, it has  analyzed its current human capital
state and conducted a gap

assessment,  developed a human capital plan to better align human capital

resources with the organizational business direction,  established a
Human Factors Life Cycle Office.

 However, IRS has yet to fully implement its plan to ensure that it has
sufficient human capital resources. IRS has yet to

 hire, develop, or retain sufficient human capital resources with the
required competencies, including technical skills, in specific mission
areas, and

 develop a comprehensive multiyear workforce plan in place of the current
annual plan that does not encompass all phases of multiyear projects.

32

Results  IRS recognizes the importance of implementing an effective

strategy, and, for FY 2003, it is committed to  carry- out the
implementation strategy for the human capital plan,  establish and report
on measures for the Human Factors Life

Cycle in support of BSM initiative.  Until IRS fully implements its
strategy, it will not have all of the

necessary IT knowledge and skills to effectively manage the BSM program or
to operate modernized systems as they deploy. Consequently, the risk of
BSM program and project cost, schedule, and performance shortfalls is
increased.

33

Results Although Progress Has Been Made, IRS Practices for Validating Cost
and Schedule Estimates Are Not Yet Fully Implemented

 Organizations require the capability to adequately review and validate
project cost and schedule estimates so that funding, resource allocation,
and technical decisions can be made using credible information. This
capability requires that procedures be developed, approved, and used, and
that staff are sufficiently trained in their use.

 In February 2002, we reported 20 that IRS had not implemented a
capability to effectively estimate project costs and schedules. The cost
and schedule estimates in the November 2001 plan were contractor-
provided, *rough order of magnitude* estimates, that had not been
subjected to meaningful, reliable validation by IRS. We recommended that
IRS correct this weakness.

20 GAO- 02- 356 34

Results  Since then, IRS has assumed responsibility for validating
contractorprovided cost and schedule estimates. To achieve this, IRS has

developed procedures, including a detailed checklist based on an SEI cost
and schedule estimation framework, for independently reviewing contractor-
provided cost and schedule estimates.

 However, these procedures have not been approved or fully implemented,
and staff have not been trained in their use, because IRS underestimated
the amount of time and effort required to implement these procedures.

 Also, IRS has undertaken an effort to validate the PRIME*s cost and
schedule estimation methods, and to establish ways to leverage these
methods in its validation system.

35

Results  These cost validation issues contributed to the fact that BSM

projects have cost more, taken longer, and delivered less functionality
than originally estimated. For example,

 IRS reports that CADE*s (Release 1) Milestone 4 date has slipped by an
additional 6 months, and the cost would have increased, except the
contractor has absorbed the associated increased cost. The slippage has
delayed delivery of CADE functionality and related taxpayer benefits for
another tax filing season.

 IRS recognizes these weaknesses and is committed for FY 2003 to: 
completing a pilot of the new procedures in January 2003  providing
training in PRIME cost and schedule processes and

practices  overseeing PRIME*s progress in completing/ continually

improving its estimating system  fully implementing its validation
approach by mid- 2003

36

Results Objective 3: Other Observations About IRS*s BSM Program and
Expenditure Plan

Observation 1: The Number of Project Milestones Experiencing Cost and/ or
Schedule Changes Is Increasing  In its November 2001 plan, IRS disclosed
that 18 initiatives or project

milestones experienced cost and/ or schedule shortfalls.  In its November
2002 plan, IRS disclosed that 25 of 28 initiatives or

project milestones have experienced cost and/ or schedule shortfalls
against commitments made in its November 2001 plan. Also, IRS reported
cost decreases in certain milestones. A summary of cost performance
follows:  4 program- level initiatives had cost increases ranging from 4%
to 20%

($ 288,000 to $6.4 million)  14 project milestones experienced cost
increases ranging from 1% to

117% ($ 121,000 to $11.7 million)  4 milestones had cost decreases
ranging from 1% to 20% ($ 233,000 to

$4.8 million) 37

Results  A summary of schedule performance follows:

 12 project milestones experienced schedule delays ranging from 1.5
months to 8 months, with 9 experiencing delays of 4 months or more

 one milestone had its schedule shortened by 1 month  schedule
performance for four project milestones could not be

determined since their commitment date for completion is listed as *to be
determined*

 Appendix IV shows the details, including explanations, of the cost and
schedule changes reported by IRS in its November 2002 plan. The following
table illustrates three of the more significant examples:

Projects Commitment Date and Revised Commitment

Change ( % ) Funding as of 10/ 2001

Date and Funding ( $ 000) ( $ 000)

( $ 000)

Internet Refund/ 7/ 31/ 02

TBD Fact of Filing

$ 5,000 $ 8,304 + $ 3,304 ( + 66% )

( Release 1) Milestone 5

e- Services 10/ 31/ 03

4/ 18/ 04 + 6 Months

( Release 1.1 and 1.2) $ 40,191

$ 50,146 + $ 9,955 ( + 25% )

Milestone 4,5 HR Connect

12/ 31/ 02 TBD

( Release 1) $ 10,000

$ 21,700 + $ 11,700( + 117% ) Milestone 4,5

38

Results  IRS has provided a detailed explanation for each cost or
schedule

change in its plan.  Subsequent to the submission of its November 2002
plan to its

appropriations subcommittees, IRS reported an additional $15- 18 million
cost increase for Release 1 of the Integrated Financial Systems project
(milestones 4 and 5). Among the reasons given by IRS for the cost increase
are

 Additional testing resources and tools  Development environment build-
out to support training and

testing  Increased requirements,  Security enhancements to ensure EA
compliance,  Additional training for approximately 8000 users, and 
Prior estimate was made before IFS vendor was selected, and

license fees were known and design was done. 39

Results Observation 2: IRS*s BSM Program Is Entering a Critical, HighRisk
Phase

 The scope and complexity of the BSM Program are growing. The number of
projects underway continues to expand and the tasks associated with those
projects that are moving beyond design (milestone 3) and into development
(milestone 4) are by their nature more complex and risky. The IRS November
2002 plan calls for 8 new projects or new releases of existing projects,
and 10 business and data projects that are in milestone 4 or beyond. OMB
has approved funding for only 3 of the new projects or releases, and 5 of
the projects that are in milestone 4 or beyond.

 Several of these projects, such as CADE and core infrastructure
projects, will provide the foundational infrastructure upon which later
projects will depend, and have already experienced cost and schedule
delays.

 Continued delays and cost increases in these projects could have a
similar, cascading effect on other projects.

40

Results Observation 3: Opportunities For Using PerformanceBased Contracts
Are Increasing

 Federal Acquisition Regulation indicates that performance- based
contracting is the preferred method for acquiring services, should be used
to the maximum extent practicable, and that fixed- price task orders are
the preferred type of performance- based task order.

 In September 2002, TIGTA reported 21 that the use of fixed- price task
orders decreased between FY 2000 and FY 2001 from nearly 57 percent of
task orders issued to less than 21 percent, and recommended BSMO require
the use of fixed- price task orders whenever possible and appropriate for
projects in development and deployment and for any other task orders where
requirements are clearly identified.

 OMB has also encouraged IRS to use performance- based, fixed price task
orders to the maximum extent practicable.

21 Additional Improvements Are Needed in the Application of Performance-
Based Contracting to Business Systems Modernization Projects (Reference
Number 2002- 20- 170, dated September 2002)

41

Results  According to IRS officials, under IRS*s enterprise life cycle,
system

specifications should be reasonably definite at the detailed design
checkpoint prior to exiting milestone 4. The IRS November 2002 plan shows
that 9 projects will proceed towards milestone 4 or 5 for FY 2003. OMB has
approved funding for 4 of these projects (eServices, HR Connect, CADE, and
Integrated Financial System).

 IRS officials state that the vast majority of development projects after
detailed design, when specifications are reasonably definite, should be
under either a fixed- price task order or performancebased task order that
is not fixed price and stated that they are taking steps to implement such
task orders, when appropriate. They also noted that such task orders may
not be appropriate in certain circumstances where a type of project
involve significant uncertainty as to requirements.

 IRS does not have a clearly documented process for determining the type
of task order to be awarded, but recognizes the need to develop such a
process.

42

Results Observation 4: IRS Has Improved the Format of Its

Expenditure Plan  In our February 2002 report, 22 we observed that the
November

2001 plan did not provide sufficient information on changes to project
scope and interdependencies with other modernization projects. IRS has
made improvements in the November 2002 plan*s format. It more clearly
identifies changes in project scope and cross- project dependencies.

22 GAO- 02- 356 43

Results Observation 5: Internal Costs of BSM Program,

Expected to Increase, Are Not Tracked or Known  As we previously
reported, 23 IRS paid its internal modernization

program costs, such as BSM program office staff costs, and certain
external BSM costs from Information Systems (IS) and other non- BSM
appropriations. However, the actual amounts related to the program were
not tracked or known.

 IRS officials said they used *order of magnitude* estimates for capital
planning purposes or developing business cases. However, they did not have
actual costs to later compare or assess the accuracy of their estimates.

 IRS officials also expect funding for the BSM program from IS and other
appropriations to significantly increase as more systems near deployment.

 Consequently, as funding increases, risk also increases because
decision- makers may not have complete information upon which to make
important decisions, such as cost- benefit analyses, developing or
assessing business cases, or making funding and resource allocations.

23 U. S. General Accounting Office, Internal Revenue Service: Results of
Review of IRS Spending for Business Systems Modernization , GAO- 01- 920
(Washington, D. C.: August 17, 2001)

44

Conclusions  IRS*s November 2002 plan satisfies the legislative
conditions. Since our

last report, IRS has made significant progress in implementing
modernization management controls and capabilities. As a result, it is
better- prepared to meet the challenges ahead. At the same time, certain
BSM management capabilities have not been fully implemented.

 IRS faces heightened risks because (1) several key projects are entering
their later stages of development and deployment, (2) some of these
projects provide the foundational infrastructure upon which later projects
depend, (3) an increasing number of project milestones are experiencing
cost increases and schedule delays, and (4) it plans to start more
projects.

 Without sustained top management involvement, improved management
capabilities, and consistent oversight, the successful implementation of
the BSM program could be jeopardized.

45

Recommendations for Executive Action  To improve IRS*s modernization
management controls and capabilities,

we reiterate our prior recommendations that the Acting Commissioner of
Internal Revenue direct the Chief Information Officer (CIO) to 
institutionalize BSMO configuration management procedures;  implement
plans for obtaining, developing, and retaining requisite

human capital resources; and  implement effective procedures for
validating contractor- developed

cost and schedule estimates  In addition, we recommend that the Acting
Commissioner of Internal

Revenue direct the CIO to  promptly update the enterprise transition
strategy to conform to other

changes in IRS*s enterprise architecture and  establish and implement a
process for determining the type of task

order to be awarded 46

Agency Comments  In providing oral comments on a draft of this briefing,
BSM executives,

including the Associate Commissioner for Business Systems Modernization,
stated that they generally agree with this briefing and that

 it is a fair characterization of the progress they have made in maturing
management processes and in indicating areas for further growth.

 they appreciated GAO for their on- going support throughout the year.

 they are making continued progress toward those areas cited in the draft
briefing as needing further progress.

47

Appendix I: BSM Program- Level Initiatives/ Projects

Description of BSM Program- Level Initiatives and Projects

Proposed Modernization Initiatives Description Program- Level Initiatives:

Architecture & Integration Ensures that systems solutions meet IRS
business needs and that the projects are effectively integrated. Business
Integration Ensures that IRS BSM program is aligned with the business
units* reengineering

efforts and that business transformation plans are developed and
maintained to support a seamless *transition to support*. Management
Processes Provides sustaining support for program- level management
processes, including

quality assurance, process improvement, training, program control, and ELC
maintenance and enhancements. FFRDC - MITRE Provides program management
and systems engineering support to BSMO. Program Management Office
Provides overall program management for IRS- PRIME Partnership activities
and

deliverables, and is responsible for coordinating, tracking, and
integrating all program- wide costs, schedules, and performance measures.

Core Infrastructure Projects:

Development Integration & Testing Provides oversight for laboratory
environments which support development, and

Environment testing: (1) Virtual Development Environment * development
environment and

standardized set of tools; (2) Enterprise Integration Testing Environment
* integration testing environment for all projects. Infrastructure Shared
Services Provides foundational enabling infrastructure (infrastructure
technology components

and strategic infrastructure services for all data and business projects:
(1) Enterprise Systems Management * develops and executes a strategy to
provide network and systems management to improve IT infrastructure
availability and performance; (2) Security and Technology Infrastructure
Release * provides infrastructure for secure telephony and electronic
interaction among employees, tax practitioners, and taxpayers.

Source: IRS 48

Appendix I: BSM Program- Level Initiatives/ Projects

Data Projects:

Customer Account Data Engine Builds the modernized database foundation to
replace the existing master file processing systems. Integrated Financial
Services Implements an integrated financial management system using a
commercial off- the- shelf

enterprise resource planning product. Custodial Accounting Project /
Enterprise Data

Provides integrated, reliable tax operations and internal management
information to Warehouse

support evolving decision analytics, performance measurement, and
management information needs. Modernized Data Access Provides a single
integrated approach and software for accessing current processing

environment (legacy) data across the organization, and builds key
infrastructure components that all modernization projects can share.
Information Returns Processing Provides modernized information returns
repository to link third party data directly to

customer accounts to efficiently handle customer service and compliance
inquiries and demands.

Business Projects:

Customer Communications 2001 Improves communications infrastructure,
including telephone call management, call routing, and customer self-
service applications. Internet Refund / Fact of Filing Improves customer
self- service by providing instant refund status information and

instructions for resolving refund problems to taxpayers with Internet
access. Customer Account Management Delivers an enterprise solution to
support access to tax account data, contact

management, case management, outbound correspondence management, and
workflow management. Customer Contact Modernization Provides initial
building blocks to transition IRS from current call center environment to

new customer contact center. e- Services Creates a web portal and value-
adding e- Services to promote the goal of conducting most

of the IRS*s transactions with taxpayers and tax practitioners
electronically. Filing & Payment Compliance Provides support for
detecting, scoring, and working cases in the area of non- filer (filing

compliance) and delinquency (payment compliance) cases. HR Connect
Delivers an enterprise solution to allow IRS employees to access and
manage their

human resources information online. Modernized e- file Provides a single
standard for filing electronic tax returns.

Source: IRS 49

Appendix II: IRS Expenditure Plan Detailed Summary of IRS*s November 2002
Expenditure Plan ($ 000)

Proposed Modernization Initiatives Release 1 Milestone 2 Milestone Amount

OMB Date

Requested Approved

Program Level Initiatives 3

Architecture & Integration FY Nov. 03 $43,577 Business Integration FY Nov.
03 $11,413 Management Processes FY Nov. 03 $13,828 FFRDC - MITRE FY Nov.
03 $20,750 Program Management Office FY Nov. 03 $9, 908

Subtotal - Prog. Mgmt. and Arch. $99,476 $25, 000

Core Infrastructure Projects 3

Development Integration & Testing Environment infrastructure Nov. 03
$13,961 Infrastructure Shared Servi ces i nfrastructure Nov. 03 $85, 300

Subtotal - Core Infrastructure Proj ects $99,261 $99, 000

Data Projects

Customer Account Data Engine R1 5 June 03 $4,851 Customer Account Data
Engine R1 6 Dec. 03 $3, 638 Customer Account Data Engine R2 infrastructure
TBD $6,924 Customer Account Data Engine R3 3 Dec. 03 $15,289 Customer
Account Data Engine R3 infrastructure Dec. 03 $581 Customer Account Data
Engine R4 3 Aug. 04 $6, 756

Subtotal - CADE $38,039 $38, 000 Source: IRS 1 Releases are software
versions that provide a subset of the total planned project functionality.
2 Milestones correspond to phases within IRS*s Enterprise Life Cycle,
which is graphically depicted in the Background Section.

50 3 Program Level Initiatives and Core Infrastructure Projects are funded
on a fiscal year (FY) basis rather than by milestone.

Appendix II: IRS Expenditure Plan Detailed Summary of IRS*s November 2002
Expenditure Plan ($ 000)

Proposed Modernization Initiatives Release 1 Milestone 2 Milestone Amount

OMB Date

Requested Approved

Data Projects ( Cont. )

Integrated Financial Services R1 4 Sept. 03 $67,227 Integrated Financial
Services R1 5 March 04 $6,828 Integrated Financial Services R2 2,3a TBD
$2,500

Subtotal - IFS $76,555 $77,000 Custodial Accounting Project /Enterprise
Data Warehouse R1, B1 4,5 May 03 $4,850 Custodial Accounting Project /
Enterprise Data Warehouse R1, B1. 1 4,5 Sept. 03 $13,613 Modernized Data
Access R1 infrastructure Nov. 03 $16,741 Information Returns Processing R1
1 TBD $3,000

Subtotal - Data Projects $152,798 $115,000

Business Projects

Customer Account Management R1 4 Oct 04 $20,949 Customer Contact
Modernization R1 2 TBD $2,500 e- Services R1.1/ 1.2 5 April 04 $5,846
$6,000 Filing &Payment Compliance R1 4 April 04 $26,159 HR Connect R1 4, 5
TBD $11,500 $12,000 Modernized e- file 4 Nov. 03 $27,846

Subtotal - Business Projects $94,800 $18,000

Addition to Management Reserve $4,342

Total Business Systems Modernization Program $450,677 $257,000 Source: IRS

51

Appendix III: Results of Past GAO Reviews

Spending Plan Results of GAO Review 1 st Spending Plan

The plan satisfied the legislative conditions for the use of ITIA funds
and was

(May 1999)

consistent with our open recommendations.

($ 35 million request)

The plan was an appropriate first step, but the key to success would be
effective implementation of the plan.

Future plans should specify progress against prior plan commitments, and
the next plan should clarify IRS/ contractor roles and responsibilities.
(See Tax Systems Modernization: Results of Review of IRS Initial
Expenditure Plan , GAO/ AIMD/ GGD- 99- 206, June 15, 1999)

1 st Interim Spending Plan

The plan raised concerns about projects that were scheduled to begin
detailed

(Dec 1999)

design and software development before, among other things, the enteprise

($ 33 million request)

architecture was completed and the ELC was defined and implemented.

IRS should expedite completion of the architecture and implementation of
the ELC.

Future plans should explain how IRS plans to manage the risk of performing
detailed design or development work if the architecture is not
sufficiently completed or the ELC is not sufficiently implemented.

52

Appendix III: Results of Past GAO Reviews

Spending Plan Results of GAO Review 2 nd Spending Plan (Mar 2000)

IRS met relatively few commitments in its $35 million first ITIA spending
plan,

($ 176 million request) even though the Service later received an
additional $33 million and nearly 5 months of extra time to accomplish the
goals set forth in the first plan.

The plan satisfied the legislative conditions for the use of ITIA funds,
and was generally consistent with recommendations contained in our earlier
reports.

The key to success would be whether IRS effectively implements the plan.

Until IRS completes its initiated actions to redirect and restructure its
modernization effort, it would continue to lack key modernization and
technical controls. (See Tax Systems Modernization: Results of Review of
IRS Marc h 7, 2000, Expenditure Plan, GAO/ AIMD- 00- 175, May 24, 2000)

2 nd Interim Spending Plan

IRS had not adhered to the approved and funded March 7, 2000, spending
plan.

(Aug 2000)

On selected initiatives, IRS had not met cost and schedule commitments
made

($ 33 million request)

in its March 7, 2000 spending plan.

Most modernization initiatives had nevertheless made important progress
since March 2000. IRS fully addressed two of its modernization management
capability weaknesses, and it was making progress in addressing others.

One project, Custodial Accounting Project (CAP), had been approved for
product development without sufficient definition and without a compelling
business case. Further investment in CAP should be limited until IRS
demonstrates sufficient business value and reports to the House and Senate
committees on risk mitigation.

Another project, Security and Technology Infrastructure Release (STIR),
was being preliminarily designed without sufficient requirements
definition and economic justification. The STIR project should be directed
to complete a security risk assessment as soon as possible, and ensure
that STIR requirements and the proposed design solution are economically
justified through a business case. (See Tax Systems Modernization: Results
of Review of IRS August 2000 Inte rim Spe nding Plan, GAO- 01- 91,
November 8, 2000)

53

Appendix III: Results of Past GAO Reviews

Spending Plan Results of GAO Review 3rd Spending Plan (Oct 2000)

IRS*s plan satisfied the legislative conditions for the use of ITIA funds,
and

($ 200 million request) was making important progress towards satisfying
the congressional direction on two projects * CAP and STIR.

IRS was making important progress in establishing effective modernization
management capability, but important and challenging work remained. Until
IRS completed its initiated actions to fully implement its system life
cycle methodology and business systems modernization office, and resolve
issues concerning the completeness and accuracy of enterprise
architecture, it continued to lack key modernization and technical
controls.

Five modernization initiatives experienced schedule delays and/ or cost
increases. However, the third plan did not address whether projects* prior
commitments for delivery of promised systems capabilities (requirements)
and benefit/ business value were being met.

IRS used contractor- provided *rough order- of- magnitude* estimates in
preparing the third expenditure plan. IRS planned to validate the third
plan*s estimates as part of its process to negotiate and definitize
contract task orders. Previously, this process resulted in finalized
contract costs below the estimates, totaling $9 million. (See Tax Systems
Modernization: Results of Review of IRS Third Expenditure Plan, GAO- 01-
227, January 22, 2001)

54

Appendix III: Results of Past GAO Reviews

Spending Plan Results of GAO Review 4th Spending Plan (March 2001)

IRS*s plan satisfied the conditions specified in the appropriations acts.

($ 128 million request) IRS continued to make important progress in
implementing modernization management controls and capabilities.
Nevertheless, IRS*s modernization management capacity is still not where
it should be, given (1) the number of systems acquisition projects that
the March 2001 plan identifies as underway and planned and (2) the fact
that several of the ongoing projects are entering critical stages in their
life cycles. For example, IRS did not have a sufficiently defined version
of the enterprise architecture to guide and constrain projects, and
employing rigorous configuration management practices.

Due to missing management capacity, key IRS projects were beginning to
experience cost, schedule, and performance shortfalls against the
commitments the agency made in its third expenditure plan. For example,
deployment of the Customer Communications 2001 project was three months
behind schedule, and promised system capabilities and associated benefits
had been deferred. Also, a critical infrastructure project, STIR, was
reported to be 1.5 months late in trying to complete its preliminary
design phase (Milestone 3); and the agency was still working to finalize 6
of 19 work products needed to complete the phase. Thus, the project was
actually almost five months late.

IRS officials recognized the need to address its modernization management
capacity before key ongoing projects moved into critical life- cycle
phases, and before additional projects were started. Accordingly, IRS
planned or had initiated steps to address these weaknesses. In particular
the Commissioner had decided to slow ongoing and new projects, giving
priority to putting in place missing management capacity. We believed this
decision was prudent and appropriate and made recommendations to ensure
IRS followed through on this decision. (See Business Systems
Modernization: Results of Review of IRS Marc h 2001 Expenditure Plan, GAO-
01- 716, June 29, 2001)

55

Appendix III: Results of Past GAO Reviews

Spending Plan Results of GAO Review 5th Spending Plan (Nov 2001)

IRS*s plan satisfied the conditions specified in the appropriations acts.

($ 391 million request) IRS continued to make important progress in
implementing modernization management controls and capabilities.
Nevertheless, IRS*s modernization management capacity is still not where
it needs to be, given (1) the number of systems acquisition projects that
the November 2001 plan identifies as being underway, (2) the fact that
several of these ongoing projects have already entered the critical
building stage of their life cycles (milestone 3) and are to begin
deployment (milestone 4) during this year, and (3) IRS*s plan to begin
additional projects. Examples of modernization management controls and
capabilities that are not yet fully implemented include software
acquisition management, configuration management, quality assurance, risk
management, enterprise architecture implementation, human capital
management, integrated program scheduling, and cost and schedule
estimating.

The increased risk of IRS*s proceeding without these controls and
capabilities had contributed to actual project cost, schedule, and
performance shortfalls. For example, deployment of the CADE Release 1
project was 6 months behind, and its cost had increased by $5 million.

IRS acknowledged the need to strengthen its modernization management
controls, and recognized that these controls become more critical as the
size and complexity of the BSM program continues to increase. It also had
actions underway to fully implement these controls and, until then,
planned to compensate for their immaturity by applying experienced human
capital.

Reliance on a combination of existing immature processes and individual
expertise and heroic efforts was a short- term solution to a long- term
need. We made recommendations to assist IRS in striking a proper balance
between the need to quickly introduce modernized systems yet prudently
manage the risks inherent in such an undertaking. (See U. S. General
Accounting Office,

Business Syste ms Mode rnization: IRS Ne eds to Be tte r Balance Manage me
nt Capacity with Systems Acquisition Workload, GAO- 02- 356 (Washington,
D. C.: Feb. 28, 2002)

56

Appendix IV: IRS Reported Cost / Schedule Changes

Program/ Project Commitment Date and

Revised Commitment Change ( % )

IRS Management Initiative

Funding as of 10/ 2001 Date and Funding

( $ 000) Explanation of Change ( $ 000)

( $ 000)

Customer 10/ 31/ 01

02/ 26/ 02 + 4 months

A performance award dispute ( settled in Communications 2001

$ 45, 174 $ 44,796

- $ 378 ( - 1% ) February 2002) delayed Milestone 5. The

Milestone 4,5 IRS paid the PRIME contractor $ 500K less

in performance awards than the maximum allowed under the task order. Some
of this extra funding was used to cover higher than expected transition to
support costs. Internet Refund/

9/ 30/ 01 9/ 28/ 01

Actual costs came in $ 121K higher than Fact of Filing

$ 10, 696 $ 10,817 + $ 121 ( + 1% )

estimated. ( Release 1) Milestone 3 Internet Refund/

3/ 31/ 02 TBD

Additional hardware requirements ( $ 250k) . Fact of Filing

$ 5,000 $ 6,792 + $ 1, 792 ( + 36% )

Additional testing, transition to support ( Release 1)

needs, increased requirements, and MS4 cost Milestone 4

overrun increase ( $ 1.465M) . Additional FY02 requirements for help desk
( $ 50, 000) . Additional support from ESM project for performance
measurement $ 27, 000. Internet Refund/

7/ 31/ 02 TBD

Maintenance through the remainder of the Fact of Filing

$ 5,000 $ 8,304 + $ 3,304 ( + 66% )

fiscal year and enhancements for FY03 ( Release 1)

filing season ( $ 2.304M) .

Milestone 5 Additional cost due to extension of MS5

from 07/ 31/ 02 to 09/ 30/ 02 ( $ 1. 0M) .

Source : IRS and GAO Analysis 57

Appendix IV: IRS Reported Cost / Schedule Changes

Program/ Project Commitment Date and

Revised Commitment Change ( % )

IRS Management Initiative

Funding as of 10/ 2001 Date and Funding

( $ 000) Explanation of Change ( $ 000)

( $ 000)

e- Services 10/ 31/ 03

4/ 18/ 04 + 6 Months

The delays occurred because infrastructure ( Release 1.1 and 1.2)

$ 40,191 $ 50,146

+ $ 9,955 ( + 25% ) was not completed to meet the e- Services

Milestone 4,5 date. Did not resolve technical issues timely.

Also schedule delays and cost increases because of move of Gaithersburg
Computing Center environment to the Martinsburg and the Tennessee
Computing Centers. Unplanned infrastructure hardware ( $ 4. 255M) .
Additional STIR Integration ( $ 4.200M) . Increased product assurance
testing costs $ 1. 5M. Customer Account

3/ 31/ 02 8/ 30/ 02

+ 5 months New business requirements required update

Management $ 13,100

$ 13,300 + $ 200 ( + 2% )

to future concept of operations, and to ( Release 1)

identify and prioritize their business process Milestone 2

re- engineering opportunities before proceeding to MS3. Proposal for MS3
cost overrun due to changes in business requirements. Customer Account

10/ 31/ 02 6/ 30/ 03

+ 8 months New business requirements required update

Management $ 24,494

$ 19,694 - $ 4,800 ( - 20% )

to future concept of operations, and to ( Release 1)

identify and prioritize their business process Milestone 3b

re- engineering opportunities before proceeding to MS3. Decrease due to
movement of work to MS3a and ITABS. Filing and Payment

1/ 31/ 03 12/ 31/ 02

- 1 month $ 1.0M variance to include unplanned

Compliance $ 17,117

$ 18,117 + $ 1,000 ( + 6% )

transition to support in MS2,3 activities per ( Release 1)

new BSM program guidelines. Milestone 2,3

Source: IRS and GAO Analysis 58

Appendix IV: IRS Reported Cost / Schedule Changes

Program/ Project Commitment Date and

Revised Commitment Change ( % )

IRS Management Initiative

Funding as of 10/ 2001 Date and Funding

( $ 000) Explanation of Change ( $ 000)

( $ 000)

HR Connect 12/ 31/ 02

TBD CBS ESC approval to exit MS3 was delayed

( Release 1) $ 10,000

$ 21,700 + $ 11, 700( + 117% ) until February 2002. Given Treasury s 8- 9

Milestone 4,5 month estimate to complete development

work, this delayed the start of MS5. Deployment schedule for remainder of
IRS will be determined following prototype deployment. Adjustment to
previous estimate ( $ 200k) . FY 2003 cost is $ 11.5M. Customer Account
Data

6/ 30/ 02 12/ 31/ 02

+ 6 months Deployment delayed due to contractor Engine ( CADE)

$ 45,338 $ 45,338

delays in staffing the project, failure to Release 1

acquire a business rules engine, Milestone 4

underestimating the technical complexity of a few key software components,
and late attention to critical project elements. Customer Account Data

12/ 31/ 02 6/ 30/ 03

+ 6 months FY 2002 funding for MS5 ( $ 5. 795M) was

Engine ( CADE) $ 5,795

$ 4,851 - $ 944 ( - 16% )

returned to management reserve because Release 1

schedule delays moved MS5 to FY 2003. Milestone 5

The net MS5 decrease ( $ . 994M) is due to revised estimates to do the
same work. Customer Account Data

12/ 31/ 02 TBD

In the process of replanning Release 2 due to Engine ( CADE)

$ 38,400 $ 46,324 + $ 7,924 ( + 21% )

delays in Release 1. Begin and end dates will Release 2

be determined when the task order is Milestone 4

definitized in November. Planning for future functionality due to CAM/
CADE sequencing ( $ 1.0M) . FY03 infrastructure costs ( $ 6.924M)

Source: IRS and GAO Analysis 59

Appendix IV: IRS Reported Cost / Schedule Changes

Program/ Project Commitment Date and

Revised Commitment Change ( % )

IRS Management Initiative

Funding as of 10/ 2001 Date and Funding

( $ 000) Explanation of Change ( $ 000)

( $ 000)

Customer Account Data 6/ 30/ 03

12/ 31/ 03 + 6 months

Deferred to FY03 to align with CAM and Engine ( CADE)

$ 9,779 $ 15,870

+ $ 6,091 ( + 62% ) CADE Release 2 capabilities, which impact

Release 3 Release 3 scope, schedule, and costs.

Milestone 3 Custodial Accounting

3/ 31/ 03 5/ 15/ 03

+ 1. 5 months Delay due to temporary reassignment of

Project/ Enterprise Data $ 51,430

$ 62,924 + $ 11, 494 ( + 22% )

IMF programmer resources to support tax Warehouse ( CAP/ EDW)

filing season changes. Variance ( $ 6. 664M Release EDW R1 B1

FY 2002 and $ 4. 850M FY 2003) due to Milestone 4,5

integration with STIR components, revenue interface with IFS, CAP- CADE
interface, schedule delays, changes to IMF extract, MCC operational
support, development of changes to the CAP/ CADE interface, and
requirements associated with mid- year IMF changes and CAP/ IFS interface.
Integrated Financial

11/ 30/ 02 11/ 30/ 02

Completed the deliverables originally Services/ Core Financial

$ 17,250 $ 23,000 + $ 5,750 ( + 33% )

scheduled for MS2,3. However, certain Services ( IFS/ CFS)

deliverables needed to exit Milestone 3 Release 1

under Milestone Exit criteria were not Milestone 4A/ 3B

planned using the COTS path through the ELC until MS4A. Extended Milestone
3 by establishing Milestone 3B so we could produce the deliverables needed
to obtain Enterprise Architecture Certification and other design work and
exit Milestone 3. The net MS4A/ 3B variance, $ 5.750M ( - $ 17.250 + $ 23.
000) is due to revised estimates to complete the work and the ISS DCC
communications infrastructure buildout for IFS.

Source: IRS and GAO Analysis 60

Appendix IV: IRS Reported Cost / Schedule Changes

Program/ Project Commitment Date and

Revised Commitment Change ( % )

IRS Management Initiative

Funding as of 10/ 2001 Date and Funding

( $ 000) Explanation of Change ( $ 000)

( $ 000)

Infrastructure Shared 11/ 30/ 02

11/ 30/ 02 Started 3 months early to provide support to

Services $ 39,747

$ 48,846 + $ 9,099 ( + 23% ) FY 2003 Release. Cost increase due to

FY 2002 realignment of projects' schedules, increased

software maintenance, decision to buy rather than lease equipment, and
addition of Modernized e- file requirements. The majority of the cost
overrun is as a result of OMB A- 11requirements to purchase HW/ SW instead
of leasing it as originally planned. Purchasing the equipment in FY 2002
saves money in the out years. Security and

10/ 30/ 01 1/ 31/ 02

+ 3 months Slip in Enterprise Integration and Test Technology

$ 31,287 $ 31,287

Environment ( EITE) Ready For Use ( RFU) Infrastructure Releases

date caused a slip in the MS4 exit date. Late ( STIR)

identification, ordering, and receipt of Milestone 4

equipment caused the slip in EITE. Security and

5/ 31/ 02 11/ 30/ 02

+ 6 months Start date slipped 3 months due to slippage

Technology $ 43,973

$ 55,522 + $ 11, 549 ( + 26% )

in milestone 4 exit date. End date slipped Infrastructure Releases

because STIR was split into two releases to ( STIR)

accommodate projects' schedules. FY 2002

Sub- release 1 supports IR/ FoF; Release 2 supports e- Services. Cost
change due to realignment of projects' schedules, increased software
maintenance, additional security requirements, and OMB A- 11 requirement
to purchase rather than lease equipment ( + $ 11. 340M) , and application
of FY 2001 infrastructure funds to FY 2002.

Source: IRS and GAO Analysis 61

Appendix IV: IRS Reported Cost / Schedule Changes

Program/ Project Commitment Date and

Revised Commitment Change ( % )

IRS Management Initiative

Funding as of 10/ 2001 Date and Funding

( $ 000) Explanation of Change ( $ 000)

( $ 000)

Enterprise Systems 12/ 19/ 01

2/ 19/ 02 + 2 months 60- day extension of MS4 exit to realign the

Management ( ESM) $ 9, 184

$ 9, 184 schedule with STIR and EITE RFU, re

Milestone 4 evaluate the system requirements document

relative to the evolving needs of the modernized projects, specifically
IR/ FoF, evaluate the current ITS organization s ability to support the
existing ESM release plan. Enterprise Systems

7/ 31/ 02 11/ 30/ 02

+ 4 months Start date slipped 3 months due to slippage

Management ( ESM) $ 11, 323

$ 11, 090 - $ 233 ( - 2% )

in milestone 4 exit date. End date slipped to FY 2002

coincide with ESM PMAR release 1. 3 to support IR/ FoF. Cost decrease due
to revised period of performance, enhancements in Web Hosting facilities,
and Security Test & Evaluation overrun. Development

11/ 15/ 02 11/ 15/ 02

Increased support for Help Desk, Data Integration and Test

$ 12, 916 $ 17, 194 + $ 4, 278 ( + 33% )

Modeling, Rational Tools, Customer Guide, Environment ( DITE)

and increase in maintenance costs. Cost of FY 2002

relocating projects from GCC to MCC. Cost to move Z900 from GCC to TCC for
Disaster Recovery. Program Management

11/ 10/ 02 11/ 10/ 02

Savings realized as a result of negotiation of FY 2002

$ 7, 918 $ 8, 206 + $ 288 ( + 4% )

the fee position and reaching agreement on the price for the full period
of performance. New requirements requests received so late in the fiscal
year are, in some cases, only achievable by extra costs, such as having
contractors.

Source: IRS and GAO Analysis 62

Appendix IV: IRS Reported Cost / Schedule Changes

Program/ Project Commitment Date and

Revised Commitment Change ( % )

IRS Management Initiative

Funding as of 10/ 2001 Date and Funding

( $ 000) Explanation of Change ( $ 000)

( $ 000)

Architecture and 11/ 10/ 02

11/ 10/ 02 Cost increase ( $ 6.409M) transferred from

Integration $ 32,539

$ 38,948 + $ 6,409 ( + 20% ) Business Integration to cover the cost of

FY 2002 Release Management.

Management Processes 11/ 10/ 02

11/ 10/ 02 Cost increase ( $ 1.108M) needed to fund the

FY 2002 $ 10,082

$ 11,190 + $ 1,108 ( + 11% ) PRIME' s SA CMM activities to prepare for

and conduct the SA CMM Level 3 assessment. FFRDC MITRE

11/ 10/ 02 11/ 10/ 02

Additional work identified to support FY 2002

$ 18,070 $ 18,820 + $ 750 ( + 4% )

Program Management ( acquisition management) , Management Processes (
process improvement, ELC, risk management) and Architecture & Engineering
( data management) .

Source: IRS and GAO Analysis 63

Briefing Slides from the April 14, 2003, Briefing to the Senate and House

Appendi I I x Appropriations Subcommittee Staffs Results of Review of IRS
s Revised Fiscal Year 2003 Business Systems Modernization Expenditure Plan

Briefing to the Staffs of the Senate Committee on Appropriations,
Subcommittee on Transportation, Treasury and

General Government and the House Committee on Appropriations, Subcommittee
on Transportation, Treasury, and

Independent Agencies April 14, 2003

1

Briefing Overview  Introduction Objectives  Scope and Methodology 
Background  Results in Brief  Results  Conclusions  Agency Comments 
Appendices

 I * Description of BSM Program- Level Initiatives and Projects  II *
Detailed Summary of IRS*s March 2003 Expenditure Plan  III * Detailed
Comparison of IRS*s Initial (November 2002) and

Revised (March 2003) FY 2003 Expenditure Plans  IV * IRS Reported Cost
and Schedule Changes

2

Introduction  As mandated by IRS*s FY 2003 appropriations act, 1 Business
Systems

Modernization (BSM) funds are unavailable until IRS submits to the
congressional appropriations committees for approval, a modernization
expenditure plan that:

 Meets the Office of Management and Budget*s (OMB) capital planning and
investment control review requirements;

 Complies with IRS*s enterprise architecture (EA); 2  Conforms with
IRS*s Enterprise Life Cycle methodology; 3  Is approved by IRS, Treasury,
and OMB;  Is reviewed by GAO; and  Complies with federal acquisition
rules, requirements, guidelines,

and systems acquisition management practices. 1 Consolidated
Appropriations Resolution, 2003 (P. L. 108- 7). 2 An Enterprise
Architecture (EA) is an institutional blueprint defining how an enterprise
operates today, in both business and technology terms,

and how it wants to operate at some point in the future. An EA also
includes a roadmap for transitioning between these environments. 3 IRS
refers to its life cycle management program as the Enterprise Life Cycle
(ELC).

3

Introduction  Since mid- 1999, IRS has submitted a series of expenditure
or

*spending* plans requesting release of BSM appropriated funds. To date,
about $1.35 billion has been appropriated for BSM, including $366 million
for FY 2003. Of the $1.35 billion appropriated, about $1.2 billion has
been released.

 On November 18, 2002, IRS submitted its initial FY 2003 expenditure plan
for about $451 million, seeking release of the $257 million approved by
OMB at that time.

 On January 9, 2003, IRS reduced its initial release request from $257
million to $231.7 million to narrow the scope of the BSM program and
reduce related risks, and to focus on the timely remediation of material
weaknesses.

 The relevant House and Senate appropriations subcommittees subsequently
approved the release of the requested $231.7 million on January 10 and 22,
2003, respectively.

 On March 14, 2003, IRS submitted a revised FY 2003 expenditure plan for
about $378 million, seeking release of the remaining $146.6 million from
the BSM account.

4

Objectives  As agreed with IRS*s appropriations subcommittees, our
objectives were

to  determine whether the March 2003 expenditure plan satisfies the

legislative conditions,  provide any observations about the March 2003
plan and IRS*s BSM

program. 5

Scope and Methodology  To accomplish our objectives, we

 Reviewed the revised FY 2003 expenditure plan submitted by IRS in March
2003;

 Analyzed the plan against the legislative conditions to identify any
variances;

 Compared the revised (March 2003) plan to the initial (November 2002)
plan to identify changes in the scope of BSM activities planned for FY
2003;

 Observed modernization executive steering committee and subcommittee
meetings to, among other things, document how the plan was developed and
reviewed;

 Interviewed IRS program and project management officials to corroborate
our understanding of the plan and other BSM activities.

6

Scope and Methodology  Consistent with prior reviews, we did not
independently validate planned

initiatives* cost estimates or confirm, through system and project
management documentation, the validity of IRS- provided information on the
initiatives* content and progress.

 We provided a draft of this briefing on April 11, 2003, to IRS BSM
program executives, and have incorporated their comments, as appropriate.

 We performed our work from March through April 2003 in accordance with
generally accepted government auditing standards.

7

Background  IRS BSM program has deployed projects and reported the
following

benefits, including:  Customer Communications 2001 * improves
telecommunications

infrastructure, including telephone call management, call routing, and
customer self- service applications

 Customer Relationship Management Examination * provides commercial off-
the- shelf software to IRS revenue agents to allow them to accurately
compute complex corporate transactions

 Internet Refund/ Fact of Filing * improves customer self- service by
providing instant refund status information and instructions for resolving
refund problems to taxpayers with Internet access. IRS reports that this
application has had over 12 million users.

8

Background  In our December 2002 briefing on the results of our review of
IRS*s initial

FY 2003 (November 2002) BSM Expenditure Plan, we reported, among other
things, that:

 IRS had made significant progress in improving its modernization
management controls and capabilities and implementing our recommendations.
Further, IRS had taken steps to better balance the pace of the FY 2002 BSM
program with its management capability.

 Although significant progress had been made, certain modernization
management controls and capabilities, related to configuration management,
enterprise transition strategy, human capital management, and cost and
schedule estimate validation, had not yet been fully implemented.
Weaknesses in these controls and capabilities contributed, at least in
part, to BSM project cost, schedule, and performance shortfalls.

9

Background  We also made five observations in our December 2002 briefing
related

to the BSM program and IRS*s initial (November 2002) FY 2003 BSM
Expenditure Plan:

 The number of project milestones experiencing cost and schedule changes
was increasing

 BSM was entering a critical, high- risk phase as the scope and
complexity of the program continued to grow

 Opportunities for using performance- based contracts were increasing

 IRS had improved the format of its expenditure plan  Internal costs of
the BSM program, expected to increase, were not

tracked or known  To assist IRS in improving and expanding its
modernization

management controls and capabilities, we made several recommendations to
the Acting Commissioner of Internal Revenue.

10

Background  We also reported in our December 2002 briefing that sustained
top

management involvement, improved management capabilities, and consistent
oversight are critical to the successful implementation of the BSM
program.

 Like its previous plans, IRS*s March 2003 expenditure plan covers
contractor costs, such as the Prime Systems Integration Support contractor
(PRIME) and the systems engineering and technical services provided by the
Federally Funded Research and Development Center (MITRE).

 A summary of the revised plan follows. 11

Background Summary of IRS*s March 2003 Expenditure Plan ($ 000) 4

Program- Level Initiatives IRS Request

Architecture & Integration $34,000 Business Integration $8,000 Management
Processes $11,476 Federally Funded Research and Development Center (FFRDC)
- MITRE $16,688 Program Management $10,000

Subtotal $80,164

Projects 5

Core Infrastructure Projects (e. g. Infrastructure Shared Services)
$89,261 Data Projects (e. g. Customer Account Data Engine, Integrated
Financial Systems) $168,251 Business Projects (e. g. e- Services,
Modernized e- file) $59,342

Subtotal $316,854

FY 2003 Management Reserve Request* $11,120

FY 2002 Management Reserve Carryover ($ 10,146)

FY 2002 CAM MS3b Unused Funds ($ 19,694)

Total $378,298 * - Includes $677 from Remaining FY2001 and FY2002
Appropriated Funds.

Source: IRS 4 See appendix I for a description of each program- level
initiative and project, and see appendix II for a more detailed summary of
the plan. 5 The 3 categories under this heading include several separate
projects.

12

benefits

requirements.

Results Objective 1: The March 2003 plan satisfies the conditions in IRS*s
FY 2003 appropriations act.

Legislative Conditions Expenditure Plan Provisions 1. Meets OMB capital

IRS*s March 2003 expenditure plan provides for planning and

managing investments as part of a portfolio through investment control

its Investment Decision Management process. This review requirements.

includes conducting periodic portfolio reviews to assess changes in
business priorities and project schedules.

14

Results

Legislative Conditions Expenditure Plan Provisions 2. Complies with IRS*s

The March 2003 plan provides funds to continue enterprise

definition and implementation of the enterprise architecture (EA).

architecture. For example, it provides for

completing and issuing EA release 2.1

publishing updates to the EA

performing EA compliance certification activities

issuing the 2003 and 2004 release architectures

operating the systems engineering office 3. Conforms with IRS*s

The plan provides funds for meeting the Enterprise Life Cycle

requirements in IRS*s enterprise life cycle methodology.

management program, which IRS*s refers to as ELC. For example, the plan
calls for

maintaining responsibility for coordinating, tracking, and integrating all
program- wide costs, schedules, releases, issues, and risks

maintaining the ELC

15

Results

Legislative Conditions Expenditure Plan Provisions 4. Approved by IRS,

IRS * January 15, 2003 Treasury, and OMB. Treasury * January 16, 2003

OMB * February 25, 2003

Submitted to IRS*s appropriations subcommittees * March 14, 2003 5.
Reviewed by GAO. GAO * April 14, 2003 briefing to IRS*s

appropriations subcommittees 6. Complies with the

As part of the ELC, IRS has defined processes, acquisition rules,

roles, responsibilities, etc. for implementing requirements,

Software Engineering Institute (SEI) Software guidelines, and

Acquisition Capability Maturity Model TM practices systems acquisition

within the level 2 key process areas. 7 These management practices

practices are consistent with federal acquisition of the federal

requirements and management practices, and the government.

plan calls for implementation of the ELC on all projects. Also, all PRIME
cost reimbursement task orders are subject to a final independent audit by
the Defense Contract Audit Agency to ensure that costs incurred are
commensurate with the physical completion of the contract.

7 These are acquisition planning, solicitation, requirements development
and management, project management, contract tracking and oversight,
evaluation, and transition to support.

16

Results Objective 2: Observations About IRS*s BSM Program and Revised
Expenditure Plan

Observation 1: Revised Plan Reduces the Scope of BSM Program IRS*s
initial (November 2002) FY 2003 plan was to (1) continue ongoing program-
level initiatives through mid- November 2003 and 12 ongoing projects to
their next milestones and (2) start 8 new projects or new releases of
existing projects.

However, IRS*s revised (March 2003) FY 2003 plan is to (1) continue
ongoing program- level initiatives at a reduced funding level through mid-
November 2003 and 9 ongoing projects to their next milestones and (2)
start 5 new projects or new releases of existing projects.

See appendix I for a description of projects and initiatives. 17

Results  Since the November 2002 Plan, IRS has:

 Reduced the funding request for BSM program by about $72 million 
Deferred 4 new project releases, discontinued 2 ongoing project

releases, absorbed 1 new release into an ongoing project release, and
transferred 1 ongoing project to another appropriation

 Started a new project release- CAP Release 2 and funded a business case
study for the Work Management project

 Reduced funding for program- level initiatives by 19 percent and core
infrastructure projects by 10 percent

 The changes in scope reduced the number of projects in the more complex
and risky later stages of development. The March 2003 plan calls for 7
business and data projects that are in milestone 4 or beyond.

18

Results  IRS reduced funding for the core infrastructure projects, in
part, to reflect

reduced BSM scope. IRS asserts that it has taken steps to mitigate project
impacts resulting from these reductions. Core infrastructure projects
provide oversight for laboratory environments, which support development
and testing, as well as the foundational enabling infrastructure and
strategic services for all data and business projects. If core
infrastructure is not sufficient or available, the risk of schedule delays
for other projects increases.

 The following slide shows a comparison between the funding levels
requested by the initial and revised FY 2003 plans.

19

Results Comparison of IRS*s Initial (November 2002) and Revised (March
2003) FY 2003 Expenditure Plans ($ 000) 8

Nov. 2002 Mar. 2003

Program- Level Initiatives IRS Request IRS Request Change ( % )

Architecture & Integration $43,577 $34, 000 -$ 9,577 (- 22%) Business
Integration $11,413 $8,000 -$ 3,413 (- 30%) Management Processes $13,828
$11, 476 -$ 2,352 (- 17%) Federally Funded Research and Development Center
(FFRDC) - MITRE $20,750 $16, 688 -$ 4,062 (- 20%) Program Management
$9,908 $10, 000 +$ 92 (+ 1%)

Subtotal $99,476 $80, 164 -$ 19,312 (- 19%)

Projects 9

Core Infrastructure Projects (e. g. Infrastructure Shared Services)
$99,261 $89, 261 -$ 10,000 (- 10%) Data Projects (e. g. Customer Account
Data Engine, Integrated Financial System) $152,798 $168,251 +$ 15,453 (+
10%) Business Projects (e. g. e- Services, Modernized e- file) $94,800
$59, 342 -$ 35,458 (- 37%)

Subtotal $346,859 $316,854 -$ 30,005 (- 9%)

FY 2003 Management Reserve Request* $4,342 $11, 120 +$ 6,778 (+ 156%)

FY 2002 Management Reserve Carryover ($ 10, 146) - $10,146

FY 2002 CAM MS3b Unused Funds ($ 19, 694) - $19,694

Total $450,677 $378,298 -$ 72,379 (- 16%) * - Includes $677 from Remaining
FY2001 and FY2002 Appropriated Funds

Source: IRS 8 See appendix III for a more detailed comparison of IRS*s
initial and revised FY 2003 expenditure plans. 9 The 3 categories under
this heading include several separate projects.

20

Results  Observation 2: Most Initiatives/ Project Milestones Continue to

Experience Cost Increases and/ or Schedule Delays  In its March 2003
plan, IRS disclosed that 25 of 28 initiatives or project

milestones have experienced cost increases and/ or schedule delays against
commitments made in the November 2001 plan. Of the 25, 15 were acquisition
projects and 10 were program- level initiatives.

 21 of 28 (or 75 percent) initiatives/ project milestones experienced
cost increases and/ or schedule delays exceeding 10 percent of the
estimated cost and duration stated in the November 2001 plan:

 12 experienced cost increases  14 experienced schedule delays

 See Appendix IV for details. 21

Results  The cost increases and schedule delays were caused, in part, by:

 Cost and schedule estimating deficiencies  Under- estimating the
complexity of projects  Competing demands of projects for facilities used
to test project

releases  Project interdependencies, whereby delays with one project had
a

cascading effect and caused delays in another project  In response to one
of our previous recommendations, IRS and PRIME

have developed new cost and schedule estimating and validation procedures.
However, current variances were the result of estimates made before or
during the implementation of new procedures.

22

Results Observation 3: Schedule Delays Affect Delivery of Benefits 
Schedule slippages delay direct benefits to the public:

 According to IRS, taxpayers covered under CADE will receive their
refunds much faster than under Master File processing. However, continuing
delays in deploying the first and subsequent releases of CADE will
postpone delivery of this benefit to taxpayers. For example, the
opportunity for the first set of taxpayers (single 1040EZ filers) to enjoy
faster refunds has been delayed 13 months.

 The e- Services project is to provide easy- to- use electronic products
and services targeted at tax practitioners that inform, educate, and
provide services to the taxpaying public. Schedule slippages with the
first release of e- Services will delay deployment of services such as
registration of electronic return originators, taxpayer identification
number matching, and secure e- mail.

23

Results  Remediation of material weaknesses may be delayed:

 IRS has reported a material weakness associated with the design of the
Master Files. CADE is to build the modernized database foundation that
will replace Master Files. Continuing schedule slippages will delay
resolution of this material weakness.

 CAP will address a financial material weakness and permit the tracking
from submissions to disbursement of all revenues received from individual
taxpayers. The first release of CAP is several months behind its May 2003
initial operating capability, primarily due to delays in availability of
necessary infrastructure support functionality, delay in developing the
interface to CADE, and diversion of critical staff to support filing
season 2002.

 Acceleration of the second release of CAP (milestone 4) is an attempt to
resolve the financial material weakness in accordance with the IRS
Financial Remediation Plan.

 Also, IFS Release 1 is currently on schedule for October 2003. 24

Conclusions  IRS*s revised (March 2003) expenditure plan satisfies the
legislative

conditions. Since our last briefing, IRS has reduced the scope of the BSM
program.

 Despite the reduced scope of the IRS BSM program for FY 2003, it
continues to face heightened risks because (1) several key projects are in
or entering their later stages of development and deployment, (2) some of
these projects provide the foundational infrastructure upon which later
projects depend, and (3) project milestones continue to experience cost
increases and schedule delays.

 Continued management attention and effort toward implementing our prior
recommendations are necessary to manage these risks and sustain
improvements in IRS*s BSM management capabilities.

25

Agency Comments  In providing comments via e- mail on a draft of this
briefing, the

Associate Commissioner for Business Systems Modernization, stated that it
is a fair and accurate representation of the BSM program. He also stated
that

 IRS achievements demonstrate its program- wide commitment to reach the
degree of management capability to effectively run such a large, complex
program

 IRS has established a stable management team  IRS*s major concern is
the impact of inconsistent funding of the

program  IRS appreciates GAO*s continued support for the BSM program

 In addition, the Associate Commissioner for BSM provided specific
comments which we have incorporated into the briefing, as appropriate.

26

Appendix I: BSM Program- Level Initiatives/ Projects

Description of BSM Program- Level Initiatives and Projects

Proposed Modernization Initiatives Description Program- Level Initiatives:

Architecture & Integration Ensures that systems solutions meet IRS
business needs and that the projects are effectively integrated. Business
Integration Ensures that IRS BSM program is aligned with the business
units* reengineering

efforts and that business transformation plans are developed and
maintained to support a seamless *transition to support*. Management
Processes Provides sustaining support for program- level management
processes, including

quality assurance, process improvement, training, program control, and ELC
maintenance and enhancements. FFRDC - MITRE Provides program management
and systems engineering support to BSMO. Program Management Provides
overall program management for IRS- PRIME Partnership activities and

deliverables, and is responsible for coordinating, tracking, and
integrating all program- wide costs, schedules, and performance measures.

Core Infrastructure Projects:

Development Integration & Testing Provides oversight for laboratory
environments which support development, and

Environment (DITE) testing: (1) Virtual Development Environment *
development environment and

standardized set of tools; (2) Enterprise Integration Testing Environment
* integration testing environment for all projects. Infrastructure Shared
Services (ISS) Provides foundational enabling infrastructure
(infrastructure technology components

and strategic infrastructure services for all data and business projects:
(1) Enterprise Systems Management (ESM) * develops and executes a strategy
to provide network and systems management to improve IT infrastructure
availability and performance; (2) Security and Technology Infrastructure
Release (STIR) * provides infrastructure for secure telephony and
electronic interaction among employees, tax practitioners, and taxpayers.

Source: IRS 27

Appendix I: BSM Program- Level Initiatives/ Projects

Description of BSM Program- Level Initiatives and Projects (Cont.)

Proposed Modernization Initiatives Description Data Projects:

Customer Account Data Engine (CADE) Builds the modernized database
foundation to replace the existing master file processing systems.
Integrated Financial Systems (IFS) Implements an integrated financial
management system using a commercial off- the- shelf

enterprise resource planning product. Custodial Accounting Project /
Enterprise Data

Provides integrated, reliable tax operations and internal management
information to Warehouse (CAP/ EDW)

support evolving decision analytics, performance measurement, and
management information needs. Modernized Data Access (MDA) Provides a
single integrated approach and software for accessing current processing

environment (legacy) data across the organization, and builds key
infrastructure components that all modernization projects can share.
Information Returns Processing (IRP) Provides modernized information
returns repository to link third party data directly to

customer accounts to efficiently handle customer service and compliance
inquiries and demands.

Business Projects:

Customer Communications 2001 Improves communications infrastructure,
including telephone call management, call routing, and customer self-
service applications. Internet Refund / Fact of Filing (IR/ FoF) Improves
customer self- service by providing instant refund status information and

instructions for resolving refund problems to taxpayers with Internet
access. Customer Account Management (CAM) Delivers an enterprise solution
to support access to tax account data, contact

management, case management, outbound correspondence management, and
workflow management. Customer Contact Modernization (CCM) Provides initial
building blocks to transition IRS from current call center environment to

new customer contact center. e- Services Creates a web portal and value-
adding e- Services to promote the goal of conducting most

of the IRS*s transactions with taxpayers and tax practitioners
electronically. Filing & Payment Compliance (F& PC) Provides support for
detecting, scoring, and working cases in the area of non- filer (filing

compliance) and delinquency (payment compliance) cases. HR Connect
Delivers an enterprise solution to allow IRS employees to access and
manage their

human resources information online. Modernized e- file Provides a single
standard for filing electronic tax returns. Work Management Selects and
integrates software applications to improve IRS*s ability to manage and

allocate staffing resources and track workload more effectively.

Source: IRS 28

Appendix II: IRS Expenditure Plan Detailed Summary of IRS*s March 2003
Expenditure Plan ($ 000)

Proposed Modernization Initiatives Release a Milestone b Milestone Amount

Date Requested

Program- Level Initiatives c

Architecture & Integration FY Nov. 03 $34,000 Business Integration FY Nov.
03 $8,000 Management Processes FY Nov. 03 $11,476 FFRDC - MITRE FY Nov. 03
$16,688 Program Management FY Nov. 03 $10,000

Subtotal - Program- Level Initiatives $ 80, 164 Core Infrastructure
Projects c

Development Integration & Testing Environment infrastructure Nov. 03
$13,961 Infrastructure Shared Services infrastructure Nov. 03 $75,300

Subtotal - Core Infrastructure Projects $ 89, 261 Data Projects

Customer Account Data Engine (CADE) R1 5 Dec. 03 $4,889 Customer Account
Data Engine (CADE) R2 4 TBD $6,924 Customer Account Data Engine (CADE) R3
3 Jun. 04 $15,870

Subtotal - CADE $ 27, 683

Integrated Financial Systems (IFS) R1 3c Feb. 03 $29,700 Integrated
Financial Systems (IFS) R1 4 Sep. 03 $53,655 Integrated Financial Systems
(IFS) R1 5 Mar. 04 $10,700 Integrated Financial Systems (IFS) R2 2, 3a TBD
$2,500

Subtotal - IFS $ 96, 555

Custodial Accounting Project / Enterprise Data Warehouse (CAP/ EDW) R1 4,
5 Feb. 04 $29,013 Custodial Accounting Project / Enterprise Data Warehouse
(CAP/ EDW) R2 4 Dec. 03 $15,000

Subtotal - CAP $ 44, 013

Subtotal - Data Projects $ 168, 251

Source: IRS a Releases are software versions that provide a subset of the
total planned project functionality. b Milestones correspond to phases
within IRS*s Enterprise Life Cycle.

29 c Program Level Initiatives and Core Infrastructure Projects are funded
on a fiscal year (FY) basis rather than by milestone.

Appendix II: IRS Expenditure Plan Detailed Summary of IRS*s March 2003
Expenditure Plan ($ 000) (Cont.)

Proposed Modernization Initiatives Release Milestone Milestone Amount

Date Requested

Business Projects

e- Services R1 & R2 4,5 Sep. 04 $18, 846 Modernized e- file R1 4 Nov. 03
$39, 846 Work Management d FY Jun. 03 $650

Subtotal - Business Projects $ 59, 342 FY 2003 Management Reserve Request*
$ 11, 120 FY 2002 Management Reserve Carryover ( $ 10, 146) FY 2002 CAM
MS3b Unused Funds ( $ 19, 694)

Total FY 2003 Release Request $ 378, 298 FY 2003 Partial Release of Funds
$ 231, 700 Remaining Unreleased Request $ 146, 598

* - Includes $677 from Remaining FY 2001 and FY 2002 Appropriated Funds
Source: IRS d The Work Management project is being funded on a level of
effort or fiscal year (FY) basis rather than by milestone for FY 2003.

30

Appendix III: IRS Expenditure Plan Comparison

Detailed Comparison of IRS s Initial ( November 2002) and Revised ( March
2003) FY 2003 Expenditure Plans ( $ 000)

Proposed Modernization Initiatives Nov. 02 Mar. 03

Schedule Nov. 02

Mar. 03 Cost Variance ( % )

IRS Explanation of Changes Milestone

Milestone Variance

Amount Amount

Date Date

Requested Requeste

Program Level Initiatives

Architecture & Integration Nov. 03 Nov. 03 - $43,577 $34,000 - $ 9, 577 (
- 22% ) Target funding level based on reduced budget/ fewer projects.

Business Integration Nov. 03 Nov. 03 - $11,413 $8, 000 - $ 3, 413 ( - 30%
) Target funding level based on reduced budget/ fewer projects.

Management Processes Nov. 03 Nov. 03 - $13,828 $11,476 - $ 2, 352 ( - 17%
) Target funding level based on reduced budget/ fewer projects.

FFRDC - MITRE Nov. 03 Nov. 03 - $20,750 $16,688 - $ 4, 062 ( - 20% )
Target funding level based on reduced budget/ fewer projects.

Program Management Nov. 03 Nov. 03 - $9,908 $10,000 + $ 92 ( + 1% )
Refined estimate of required funding for FY 2003 initiatives.

Subtotal - Program- Level Initiatives $ 99, 476 $ 80, 164 - 19, 312 ( -
19% )

Core Infrastructure Projects

DITE Nov. 03 Nov. 03 - $13,961 $13,961

Infrastructure Shared Services Nov. 03 Nov. 03 - $85,300 $75,300 - $ 10,
000 ( - 12% ) Target funding level based on reduced budget/ fewer
projects.

Subtotal - Core Infrastructure Projects $ 99, 261 $ 89, 261 - $ 10, 000 (
- 10% )

Data Projects

CADE R1, Milestone 5 Jun. 03 Dec. 03 + 6 months $4,851 $4, 889 + $ 38 ( +
1% ) Refined funding estimate to support FY 2003 initiatives. ( See Note
1)

CADE R1, Milestone 6 Dec. 03 - - $3,638 $0 - $ 3, 638 ( - 100% ) Policy
change. Milestone 6 will be funded by ISY Appropriation.

CADE R2, Milestone 4 TBD TBD - $6,924 $6, 924

CADE R3, Milestone 3 Dec. 03 Jun. 04 + 6 months $15,289 $15,870 + $ 581 (
+ 4% ) Schedule delayed due to CADE R1 delays. Incorporated infrastructure
costs.

CADE R3, Infrastructure Dec. 03 - - $581 $0 - $ 581 ( - 100% )
Infrastructure costs combined with CADE R3 Milestone 3 costs above.

CADE R4, Milestone 3 Aug. 04 TBD - $6,756 $0 - $ 6, 756 ( - 100% )
Deferred due to CADE program slippage.

Subtotal - CADE $ 38, 039 $ 27, 683 - $ 10, 356 ( - 27% )

Source: IRS 31

Appendix III: IRS Expenditure Plan Comparison

Detailed Comparison of IRS s Initial ( November 2002) and Revised ( March
2003) FY 2003 Expenditure Plans ( $ 000) ( Cont. )

Proposed Modernization Initiatives Nov. 02 Mar. 03

Schedule Nov. 02

Mar. 03 Cost Variance ( % )

IRS Explanation of Changes Milestone

Milestone Variance

Amount Amount

Date Date

Requested Requeste

Data Projects ( Cont. )

IFS R1, Milestone 3c - Feb. 03 - $0 $29,700 + $ 29, 700 ( + 100% ) ( See
Note 2)

IFS R1, Milestone 4 Sep. 03 Sep. 03 - $67,227 $53,655 - $ 13, 572 ( - 20%
) ( See Note 2)

IFS R1, Milestone 5 Mar. 04 Mar. 04 - $6,828 $10,700 + $ 3872 ( + 57% ) (
See Note 2)

IFS R2, Milestone 2/ 3a TBD TBD - $2,500 $2,500

Subtotal - IFS $ 76, 555 $ 96, 555 + $ 20, 000 ( + 26% )

CAP/ EDW R1B1, Milestone 4/ 5 May 03 - - $4,850 $0 - $ 4, 850 ( - 100% )
Incorporated into CAP R1 Milestone 4/ 5 project below.

CAP/ EDW R1B1. 1, Milestone 4/ 5 Sep. 03 - - $13,613 $0 - $ 13, 613 ( -
100% ) Incorporated into CAP R1 Milestone 4/ 5 project below.

CAP R1, Milestone 4/ 5 - Feb. 04 + 9 months $0 $29,013 + $ 29, 013 ( +
100% ) ( See Note 3)

CAP R2, Milestone 4 - Dec. 03 - $0 $15,000 + $ 15, 000 ( + 100% ) ( See
Note 4)

Subtotal - CAP $ 18, 463 $ 44, 013 + $ 25, 550 ( + 138% )

MDA R1, Infrastructure Nov. 03 TBD - $16,741 $0 - $ 16, 741 ( - 100% )
Deferred pending funding.

IRP R1, Milestone 1 TBD - - $3,000 $0 - $ 3, 000 ( - 100% ) Deferred
pending funding.

Subtotal - Data Projects $ 152, 798 $ 168, 251 + $ 15, 453 ( + 10% )

Business Projects

CAM R1, Milestone 4 Oct. 04 TBD - $20,949 $0 - $ 20, 949 ( - 100% )
Deferred pending funding.

CCM R1, Milestone 2 TBD - - $2,500 $0 - $ 2, 500 ( - 100% ) Deferred
pending funding.

e- Services R1 & R2, Milestone 4/ 5 Apr. 04 Sep. 04 + 5 months $5,846
$18,846 + 13, 000 ( + 222% ) ( See Note 5)

F& PC R1, Milestone 4 Apr. 04 TBD - $26,159 $0 - $ 26, 159 ( - 100% )
Deferred pending funding.

HR Connect R1, Milestone 4/ 5 TBD - - $11,500 $0 - $ 11, 500 ( - 100% )
Decision made to fund HR Connect from ISY Appropriation.

Modernized e- File R1, Milestone 4 Nov. 03 Nov. 03 - $27,846 $39,846 + $
12, 000 ( + 43% ) ( See Note 6)

Work Management - Jun. 03 - $0 $650 + $ 650 ( + 100% ) Follow- on to FY
2002 study to develop implementation strategy/ business case.

Subtotal - Business Projects $ 94, 800 $ 59, 342 - $ 35, 458 ( - 37% )

FY 2003 Management Reserve Request $ 4, 342 $ 11, 120 + $ 6, 778 ( + 156%
)

Increase to management reserve based on OMB guidance.

FY 2002 Management Reserve Carryover $ 0 - 10, 146 - $ 10, 146 ( - 100% )

Management Reserve remaining at end of FY 2002 to carryover to FY 2003

FY 2002 CAM MS3b Unused Funds $ 0 - 19, 694 - $ 19, 694 ( - 100% )

CAMproject discontinued in FY 03. FY 2002 funds go to management reserve.

Total FY 2003 Release Request $ 450, 677 $ 378, 298 - $ 72, 379 ( - 16% )

Source: IRS 32

Appendix III: IRS Expenditure Plan Comparison

Detailed Comparison of IRS s Initial ( November 2002) and Revised ( March
2003) FY 2003 Expenditure Plans ( $ 000) ( Cont. )

IRS Explanation of Changes : Note 1: Deployment was delayed due to
contractor delays in staffing the project, failure to acquire a business
rules engine, underestimating the technical complexity of a few key
software components, and late attention to critical project elements.
Additional slippage was due to mandatory relocation of development site to
satisfy security certification concerns.

Note 2: Infrastructure hardware and software procurements and labor to
conduct IFS preliminary development activities originally planned to begin
in Milestone 4 have been moved forward into a new Milestone 3c segment.
This allows the project to continue to move forward on schedule for an
October 1, 2003, *go live* while incomplete Milestone 3 activities are
being satisfied. The net budget increase of $20 million for Milestones 3c,
4, and 5 reflects a revised estimate of actual labor costs and an increase
in infrastructure costs.

Note 3: CAP/ EDW R1B1 and R1B1.1 have been combined and renamed CAP R1 as
a result of a major CAP replan effort. Delays in obtaining the
Infrastructure Shared Services (ISS) schedule, and other additional
activities impacting the schedule, necessitated the major schedule replan.
This ultimately resulted in a 9 month delay (from May 2003 to Feb. 2004)
in the scheduled completion of Milestone 5. The revised total CAP R1 cost
($ 29,013) consists of CAP EDW R1B1 ($ 4,850), CAP EDW R1B1.1 ($ 13,613),
and a cost increase of $10,550. The cost increase was due in large part to
the schedule delays discussed above.

33

Appendix III: IRS Expenditure Plan Comparison

Detailed Comparison of IRS s Initial ( November 2002) and Revised ( March
2003) FY 2003 Expenditure Plans ( $ 000) ( Cont. )

IRS Explanation of Changes ( cont. ) :

Note 4: CAP R2 Milestone 4 was moved up from FY 2004 to FY 2003, in an
attempt to resolve the custodial accounting material weakness as soon as
possible and comply with the current remediation plan dates.

Note 5: Schedule delays occurred due to late completion of infrastructure,
competing demand for testing resources, and additional scope of new e-
Services R2. E- Services R2 will provide Modernized e- file participants
access to the eservices registration and application process, tax year
updates, and an enhanced Transcript Delivery System. Cost increases were
due to delays in and enhancements to E- Services subreleases R1.1 and
R1.2, as well as the additional scope of R2.

Note 6: Prior to being funded by BSM, Modernized e- File was made up of
two Tier B projects. Many of the management and infrastructure estimates
for these former Tier B projects were either inaccurate or did not reflect
the additional capacity of integrating with the modernized environment.
The revised cost includes increases for PRIME integration and
infrastructure support, and changes to the customer database.

34

Appendix IV: IRS Reported Cost / Schedule Changes

Program/ Project Commitment Date and

Revised Commitment Change ( % ) IRS Explanation of Management Initiative

Funding as of 10/ 2001 Date and Funding

Change ( $ 000)

( $ 000)

Customer 10/ 31/ 01

02/ 26/ 02 + 4 months ( + 22% )

CC01 went live on 07/ 27/ 01. However, a Communications 2001

$ 45,174 $ 44,796

- $ 378 ( - 1% ) performance award dispute ( settled in

Milestone 4,5 February 2002) delayed Milestone 5. The

IRS paid the PRIME contractor $ 500K less in performance awards than the
maximum allowed under the Task Order. Some of this extra funding was used
to cover higher than expected Transition to Support costs. Internet
Refund/

9/ 30/ 01 9/ 28/ 01

Actual costs came in $ 261K higher than Fact of Filing

$ 10,696 $ 10,957 + $ 261 ( + 2% )

estimated to complete MS4,5 proposal. ( Release 1) Milestone 3 Internet
Refund/

3/ 31/ 02 11/ 7/ 02

+ 7 months( + 117% ) Definitization of this Task Order occurred

Fact of Filing $ 5,000

$ 13,193 + $ 8,193 ( + 164% )

after submission of the October 2001 ( Release 1)

Expenditure Plan. Final negotiations placed Milestone 4

the MS 4 exit date at 05/ 03/ 02. However, the PRIME contractor
experienced difficulties due to significant delays in completing release
level system integration and testing ( RSIT) and meeting performance
requirements. MS 4 completion was delayed until the PRIME demonstrated
resolution of performance problems and corrected outstanding items in the
Defects Report ( DR) . Additional costs include $ 1. 465M due to Product
Assurance need for contractors to perform testing, identified transition
to support needs, increased RIS costs, and MS4 cost overrun, $ 2.304M to
cover maintenance through the end of the fiscal year and enhancements for
FY03 filing season, and $ 4.683M required to extend MS4 to 11/ 7/ 02.

Source : IRS and GAO Analysis 35

Appendix IV: IRS Reported Cost / Schedule Changes

Program/ Project Commitment Date and

Revised Commitment Change ( % ) IRS Explanation of Management Initiative

Funding as of 10/ 2001 Date and Funding

Change ( $ 000)

( $ 000)

Internet Refund/ 7/ 31/ 02

3/ 12/ 03 + 7 months ( + 175% )

The PRIME contractor experienced Fact of Filing

$ 5,000 $ 3,049

- $ 1,951 ( - 39% ) difficulties due to delays in completing

( Release 1) release level system integration and testing

Milestone 5 ( RSIT) and in meeting performance

requirements. Milestone 5 exit moved to 3/ 12/ 03 at the request of the
Business owner so that the application can be monitored during the 2003
Filing Season. IRS planned to spend $ 2.304M in MS 5 to cover maintenance
through the remainder of the fiscal year and enhancements for FY03 filing
season. However, those funds were used in MS 4 because of the delay in
exiting that Milestone. The IRS estimated the non M& E MS 5 work would
cost $ 6M ( the original $ 5M estimated plus an additional $ 1.0M to
extend MS 5 from 07/ 31/ 02 to 09/ 30/ 02. However, due to the late exit
of MS 4, MS 5 did not begin until11/ 8/ 02. The cost of all MS 5
activities through 3/ 12/ 03 is now estimated at $ 3.049M.

Source: IRS and GAO Analysis 36

Appendix IV: IRS Reported Cost / Schedule Changes

Program/ Project Commitment Date and

Revised Commitment Change ( % ) IRS Explanation of Management Initiative

Funding as of 10/ 2001 Date and Funding

Change ( $ 000)

( $ 000)

e- Services 10/ 31/ 03

9/ 30/ 04 + 11 Months ( + 41% )

The delays occurred because infrastructures ( Release 1.1 and 1.2)

$ 40,191 $ 68,992

+ $ 28,801 ( + 72% ) were not completed to meet the e- Services

Milestone 4,5 date for PSIT. IR/ FoF did not exit test

environment on schedule, delaying eServices. Also schedule delays and cost
increases because of move of Gaithersburg Computing Center environment to
the Martinsburg and the Tennessee Computing Centers. FY 2002 cost
increases for unplanned infrastructure hardware ( $ 4, 255M) , additional
STIR Integration ( $ 4.200M) , and increased product assurance testing ( $
1,500M) . Additional costs include continued support of PRIME ISS
contractors to e- services, non- prime costs for MCC support in FY 2003,
and ITS and Business training for knowledge transfer needed for
transitioning e- services. Customer Account

3/ 31/ 02 8/ 30/ 02

+ 5 months ( + 56% ) New business requirements required update

Management $ 13,100

$ 13,300 + $ 200 ( + 2% )

to future concept of operations, and to ( Release 1)

identify and prioritize their business process Milestone 2

re- engineering opportunities before proceeding to MS3. Proposal for MS3
cost overrun ( $ 200K) due to changes in business requirements.

Source: IRS and GAO Analysis 37

Appendix IV: IRS Reported Cost / Schedule Changes

Program/ Project Commitment Date and

Revised Commitment Change ( % ) IRS Explanation of Management Initiative

Funding as of 10/ 2001 Date and Funding

Change ( $ 000)

( $ 000)

Filing and Payment 1/ 31/ 03

12/ 31/ 02 - 1 month ( - 6% )

$ 1.0M variance to include unplanned Compliance

$ 17,117 $ 18,117

+ $ 1,000 ( + 6% ) transition to support in MS2,3 activities per

( Release 1) new BSM program guidelines.

Milestone 2,3 HR Connect

12/ 31/ 02 12/ 31/ 02

The initial FY 2002 amount for MS4 and 5 ( Release 1)

$ 10,000 $ 10,200 + $ 200( + 2% )

was based on available funds instead of Milestone 4,5

usable segment cost. This was done to cover Treasury' s anticipated
activity in FY 2002 and not the entire MS4 and MS5 cost ( i. e. , MS5 work
was never planned to be completed in FY 2002) . The project is now broken
into MS4 and MS5 usable segments. The estimate for MS4 is $ 10. 2M and is
compared with the original plan amount of $ 10M. The BSM account will no
longer fund MS5 work. Customer Account Data

6/ 30/ 02 7/ 13/ 03

+ 13 months Deployment delayed due to contractor

Engine ( CADE) $ 45,338

$ 45,338 ( + 108% )

delays in staffing the project, failure to Release 1

acquire a business rules engine, Milestone 4

underestimating the technical complexity of a few key software components,
late attention to critical project elements, and re- location of the
development site to satisfy security certification concerns. Customer
Account Data

12/ 31/ 02 12/ 31/ 03

+ 12 months FY 2002 funding for MS5 ( $ 5. 795M) was

Engine ( CADE) $ 5,795

$ 4,889 ( + 200% )

returned to management reserve because Release 1

- $ 906 ( - 16% ) schedule delays moved MS5 to FY 2003.

Milestone 5 The net MS5 decrease ( $ . 906M) is due to

revised estimates to do the same work.

Source: IRS and GAO Analysis 38

Appendix IV: IRS Reported Cost / Schedule Changes

Program/ Project Commitment Date and

Revised Commitment Change ( % ) IRS Explanation of Management Initiative

Funding as of 10/ 2001 Date and Funding

Change ( $ 000)

( $ 000)

Customer Account Data 12/ 31/ 02

TBD In the process of replanning Release 2 and

Engine ( CADE) $ 38,400

$ 46,324 + $ 7,924 ( + 21% ) beyond due to delays in Release 1. Cost

Release 2 increases are for planning for future

Milestone 4 functionality due to CAM/ CADE

sequencing ( $ 1.0M) and FY03 infrastructure costs ( $ 6.924M) . Customer
Account Data

6/ 30/ 03 6/ 30/ 04

+ 12 months Focus redirected to build foundation for

Engine ( CADE) $ 9,779

$ 15,870 ( + 100% )

requirements. Deferred to FY03 to align Release 3

+ $ 6,091 ( + 62% ) with CADE Release 2 capabilities, which

Milestone 3 impact Release 3 scope, schedule, and costs.

Source: IRS and GAO Analysis 39

Appendix IV: IRS Reported Cost / Schedule Changes

Program/ Project Commitment Date and

Revised Commitment Change ( % ) IRS Explanation of Management Initiative

Funding as of 10/ 2001 Date and Funding

Change ( $ 000)

( $ 000)

Custodial Accounting 3/ 31/ 03

2/ 16/ 04 + 11 months ( + 39% )

The first schedule variance resulted from Project ( CAP)

$ 51,430 $ 87,087

+ $ 35,657 ( + 69% ) temporary reassignment of IMF programmer

Release 1 resources to support 2002 tax filing season

Milestone 4,5 changes, thus delaying MS5 from 03/ 31/ 03

to 05/ 15/ 03. The next major change in the CAP schedule delayed M5 from
5/ 15/ 03 to 11/ 3/ 03. A delay in obtaining the ISS schedule, and other
additional activities impacting the schedule, necessitated the major
schedule replan. As a result, 11/ 3/ 03 transition to Production
Environment was redesignated as Initial Operational Capability ( IOC) and
established MS5 as 2/ 16/ 04. FY 2002 variance ( $ 6.664M) due to
integration with STIR components, revenue interface with IFS, CAP- CADE
interface, schedule delays, mid- year IMF changes. FY03 request of $
29,013 is comprised of CY03 format changes, ISS/ STIR and other schedule
delays, IFS/ PACER modernized interface development, ISS hardware and
software to upgrade processing capacity, implementation of modernized
standards to CAP in- process development.

Source: IRS and GAO Analysis 40

Appendix IV: IRS Reported Cost / Schedule Changes

Program/ Project Commitment Date and

Revised Commitment Change ( % ) IRS Explanation of Management Initiative

Funding as of 10/ 2001 Date and Funding

Change ( $ 000)

( $ 000)

Enterprise Data 5/ 31/ 02

12/ 19/ 02 + 7 months ( + 78% )

Requirements expanded to include Warehouse ( EDW)

$ 6,700 $ 6,950

+ $ 250 ( + 4% ) additional data sets for analysis and

Milestone 2,3 additional time needed to establish Business

User priorities. Upon completion and formal exit of MS3 work for EDW, the
IRS decided to rescope EDW to focus on the original CAP requirements.
Meeting these original requirements will provide a resolution to material
weaknesses that currently exist in Custodial Accounting. Integrated
Financial

11/ 30/ 02 11/ 30/ 02

Completed the deliverables originally System/ Core Financial

$ 17,250 $ 23,000 + $ 5,750 ( + 33% )

scheduled for MS2,3. However, certain System ( IFS/ CFS)

deliverables needed to exit Milestone 3 Release 1

under Milestone Exit criteria were not Milestone 4A/ 3B

planned using the COTS path through the ELC. Extended Milestone 3 by
establishing Milestone 3B to produce the deliverables needed to obtain
Enterprise Architecture Certification and other design work and exit
Milestone 3. The net MS4A/ 3B variance, $ 5.750M ( - $ 17. 250 + $ 23.000)
is due to revised estimates to complete the work and the ISS DCC
communications infrastructure buildout for IFS.

Source: IRS and GAO Analysis 41

Appendix IV: IRS Reported Cost / Schedule Changes

Program/ Project Commitment Date and

Revised Commitment Change ( % ) IRS Explanation of Management Initiative

Funding as of 10/ 2001 Date and Funding

Change ( $ 000)

( $ 000)

Infrastructure Shared 11/ 30/ 02

11/ 30/ 02 Started 3 months early to provide support to

Services $ 39,747

$ 48,846 + $ 9,099 ( + 23% ) FY 2003 Release. Cost increase due to

FY 2002 realignment of projects' schedules, increased

software maintenance, decision to buy rather than lease equipment, and
addition of Modernized e- file requirements. The majority of the cost
overrun is as a result of OMB A- 11requirements to purchase HW/ SW instead
of leasing it as originally planned. Purchasing the equipment in FY 2002
saves money in the out years. Security and

10/ 30/ 01 1/ 31/ 02

+ 3 months ( + 25% ) Slip in Enterprise Integration and Test Technology

$ 31,287 $ 31,287

Environment ( EITE) Ready For Use ( RFU) Infrastructure Releases

date caused a slip in the MS4 exit date. Late ( STIR)

identification, ordering, and receipt of Milestone 4

equipment caused the slip in EITE. Security and

5/ 31/ 02 11/ 30/ 02

+ 6 months ( + 86% ) Start date slipped 3 months due to MS4 exit

Technology $ 43,973

$ 56,041 + $ 12,068 ( + 27% )

delay. End date slipped because STIR was Infrastructure Releases

split into two releases to accommodate ( STIR)

projects' schedules. Sub- release 1 supports FY 2002

IR/ FoF; Release 2 supports e- Services, which will be completed under
ISS. Cost change due to realignment of projects' schedules, increased
software maintenance, additional security requirements, and OMB A- 11
requirement to purchase rather than lease equipment ( + $ 11.340M) , and
application of FY 2001 infrastructure funds to FY 2002.

Source: IRS and GAO Analysis 42

Appendix IV: IRS Reported Cost / Schedule Changes

Program/ Project Commitment Date and

Revised Commitment Change ( % ) IRS Explanation of Management Initiative

Funding as of 10/ 2001 Date and Funding

Change ( $ 000)

( $ 000)

Enterprise Systems 12/ 19/ 01

2/ 19/ 02 + 2 months ( + 40% ) 60- day extension of MS4 exit to realign
the

Management ( ESM) $ 9,184

$ 9,184 schedule with STIR and EITE RFU, re-

Milestone 4 evaluate the system requirements document

for the evolving needs of the modernized projects, specifically IR/ FoF,
evaluate the current ITS organization s ability to support the existing
ESM release plan. Enterprise Systems

7/ 31/ 02 1/ 31/ 03

+ 6 months ( + 75% ) Start date slipped 3 months due to slippage

Management ( ESM) $ 11,323

$ 11,090 - $ 233 ( - 2% )

in milestone 4 exit date. End date slipped to FY 2002

coincide with ESM PMAR release 1.3 to support IR/ FoF. Cost decrease due
to revised period of performance, enhancements in Web Hosting facilities,
and Security Test & Evaluation overrun. Development

11/ 15/ 02 11/ 15/ 02

Increased support for Help Desk, Data Integration and Test

$ 12,916 $ 17,194 + $ 4,278 ( + 33% )

Modeling, Rational Tools, Customer Guide, Environment ( DITE)

and increase in maintenance costs. Cost of FY 2002

relocating projects from GCC to MCC. Cost to move Z900 from GCC to TCC for
Disaster Recovery.

Source: IRS and GAO Analysis 43

Appendix IV: IRS Reported Cost / Schedule Changes

Program/ Project Commitment Date and

Revised Commitment Change ( % ) IRS Management Initiative

Funding as of 10/ 2001 Date and Funding

Explanation of Change ( $ 000)

( $ 000)

Program Management 11/ 10/ 02

11/ 9/ 02 Savings ( $ 14K) were realized as a result of

FY 2002 $ 7,918

$ 9, 260 + $ 1, 342 ( + 17% ) negotiation of the fee position and reaching

agreement on the price for the full period of performance and refined cost
estimates. Cost increases ( $ 1.026M) are to fund the Executive Support
Council. Unplanned requests for information services ( RIS) are estimated
at $ 330K. Architecture and

11/ 10/ 02 11/ 10/ 02

Cost increase ( $ 6.409M) transferred from Integration

$ 32,539 $ 38,910 + $ 6, 371 ( + 20% )

Business Integration to cover the cost of FY 2002

Release Management. Cost decrease ( $ 38K) to complete Case for Action and
Project Management Plan transferred to Customer Contact Engineering Study.
Management Processes

11/ 10/ 02 11/ 9/ 02

Cost increase ( $ 1, 108,000) needed to fund FY 2002

$ 10,082 $ 11,190 + $ 1, 108 ( + 11% )

the PRIME' s SA- CMM activities to prepare for and conduct the SA- CMM
Level 3 assessment. FFRDC MITRE

11/ 10/ 02 11/ 10/ 02

Additional work identified to support FY 2002

$ 18,070 $ 18,820 + $ 750 ( + 4% )

Program Management ( acquisition management) , Management Processes (
process improvement, ELC, risk management) and Architecture & Engineering
( data management) .

Source: IRS and GAO Analysis 44

Appendi I I I x Comments from the Internal Revenue Service

Appendi V I x GAO Contacts and Staff Acknowledgments GAO Contact Gregory
C. Wilshusen (202) 512- 6244 Staff

In addition to the individual named above, other key contributors were
Acknowledgments

Bernard R. Anderson, Timothy D. Hopkins, and Chetna Lal.

(310190)

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Report to Congressional Committees

June 2003 BUSINESS SYSTEMS MODERNIZATION IRS Has Made Significant Progress
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GAO- 03- 768

Letter 1 Recommendations for Executive Action 4 Agency Comments 5

Appendixes

Appendix I: Briefing Slides from the December 18, 2002, Briefing to the
Senate and House Appropriations Subcommittee Staffs 7

Appendix II: Briefing Slides from the April 14, 2003, Briefing to the
Senate and House Appropriations Subcommittee Staffs 70

Appendix III: Comments from the Internal Revenue Service 114

Appendix IV: GAO Contacts and Staff Acknowledgments 117 GAO Contact 117
Staff Acknowledgments 117

Abbreviations

BSM Business Systems Modernization CIO Chief Information Officer IRS
Internal Revenue Service

OMB Office of Management and Budget PRIME PRIME Systems Integration
Support contractor

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a

GAO United States General Accounting Office

IRS*s initial (November 2002) and revised (March 2003) fiscal year 2003
expenditure plans were prepared in accordance with the law. IRS made
significant progress in improving its modernization management controls
and capabilities and implementing GAO*s recommendations. For example:

IRS implemented 20 of 23 commitments and is implementing the remaining 3
commitments that address previously reported weaknesses and
recommendations. Significant among these efforts were IRS*s achievements
in improving its software acquisition practices. IRS deployed 3 modernized
systems that are currently providing benefits

that (1) improve telecommunications infrastructure, including telephone
call management, call routing, and customer self- service; (2) provide
offthe- shelf software to IRS revenue agents to allow them to accurately
compute complex corporate transactions; and (3) improve customer
selfservice by providing instant refund status information and
instructions for resolving refund problems via the Internet.

IRS also took steps to balance the scope and pace of the BSM program with
the management capacity of IRS and its prime contractor. These steps
included reassessing the portfolio of projects that IRS had planned to
proceed with during the remainder of fiscal year 2002 and reducing the
planned scope and pace of the BSM program for fiscal year 2003. Although
significant progress has been made, certain controls and

capabilities for modernization have not yet been fully implemented,
including human capital management and validation of cost and schedule
estimates. Weaknesses in these controls and capabilities contributed, in
part, to cost, schedule, and performance shortfalls in the BSM program.
For example, in the revised fiscal year 2003 expenditure plan, IRS
disclosed that 75 percent of program- level initiatives and acquisition
project milestones had cost increases and/ or schedule delays exceeding 10
percent of the estimated cost and duration specified in the fiscal year
2002 expenditure plan. Schedule delays affect the delivery of benefits.
For example, (1) the opportunity for Form 1040EZ filers to enjoy faster
refunds, as promised by the first release of the project that is to
replace IRS*s master files of taxpayer

information, has been delayed for an additional 13 months and (2) schedule
delays for the first release of the e- Services project will defer the
provision of easy- to- use electronic products and services targeted at
tax practitioners who inform, educate, and provide services to the
taxpaying public. As required by law, the Internal Revenue Service (IRS),
in

November 2002 and March 2003, submitted to the congressional
appropriations committees its initial and revised fiscal year 2003
expenditure plans, respectively, requesting about $378 million for the
Business Systems Modernization (BSM) program. GAO reviewed the plans to

(1) determine whether the plans were prepared in accordance with the law,
(2) determine what progress IRS had made in implementing modernization

management controls and capabilities, and (3) provide any other
observations about the plans and IRS*s BSM program.

GAO recommends that the Commissioner of Internal Revenue direct the Chief
Information Officer (CIO) to continue improvements in IRS*s modernization
management controls. GAO also recommends

that the Commissioner direct the CIO to promptly update the enterprise
transition strategy to conform to other changes in IRS*s

enterprise architecture and establish and implement a process for
determining the type of task order to be awarded in acquiring modernized
systems. The Commissioner agreed with GAO*s findings and commented on
actions to address the recommendations.

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 768. To view the full product,
including the scope and methodology, click on the link above. For more
information, contact Robert F. Dacey at (202) 512- 3317 or daceyr@ gao.
gov. Highlights of GAO- 03- 768, a report to

congressional committees

June 2003

BUSINESS SYSTEMS MODERNIZATION

IRS Has Made Significant Progress in Improving Its Management Controls,
but Risks Remain

Page i GAO- 03- 768 IRS's Fiscal Year 2003 Expenditure Plan

Contents

Page 1 GAO- 03- 768 IRS's Fiscal Year 2003 Expenditure Plan United States
General Accounting Office

Washington, D. C. 20548 Page 1 GAO- 03- 768 IRS's Fiscal Year 2003
Expenditure Plan

A

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Appendix I

Appendix I Briefing Slides from the December 18, 2002, Briefing to the
Senate and House Appropriations Subcommittee Staffs

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Appendix I Briefing Slides from the December 18, 2002, Briefing to the
Senate and House Appropriations Subcommittee Staffs

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Senate and House Appropriations Subcommittee Staffs

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Appendix II

Appendix II Briefing Slides from the April 14, 2003, Briefing to the
Senate and House Appropriations Subcommittee Staffs

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Appendix III

Appendix III Comments from the Internal Revenue Service

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Appendix III Comments from the Internal Revenue Service

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Appendix IV

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