Business Systems Modernization: Internal Revenue Service's Fiscal
Year 2006 Expenditure Plan (21-FEB-06, GAO-06-360).		 
                                                                 
The Internal Revenue Service's (IRS) Business Systems		 
Modernization (BSM) program is a multibillion-dollar, high-risk, 
highly complex effort that involves the development and delivery 
of a number of modernized information systems intended to replace
the agency's aging business and tax processing systems. As	 
required by law, IRS submitted its fiscal year 2006 expenditure  
plan, in October 2005, to congressional appropriations		 
committees, requesting $199 million from the BSM account. GAO's  
objectives in reviewing the plan were to (1) determine whether it
satisfied the conditions specified in the law and (2) provide any
other observations about the plan and IRS's BSM program.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-360 					        
    ACCNO:   A47361						        
  TITLE:     Business Systems Modernization: Internal Revenue	      
Service's Fiscal Year 2006 Expenditure Plan			 
     DATE:   02/21/2006 
  SUBJECT:   Cost analysis					 
	     Cost overruns					 
	     Internal controls					 
	     Program evaluation 				 
	     Risk management					 
	     Schedule slippages 				 
	     Strategic planning 				 
	     Tax administration systems 			 
	     Technology modernization programs			 
	     Program costs					 
	     IRS Business Systems Modernization 		 
	     Program						 
                                                                 

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GAO-06-360

     

     * Report to Congressional Committees
          * February 2006
     * BUSINESS SYSTEMS MODERNIZATION
          * Internal Revenue Service's Fiscal Year 2006 Expenditure Plan
     * Contents
          * Recommendation for Executive Action
          * Agency Comments
     * Briefing Slides from the November 30, 2005, Briefing to the Senate and
       House Appropriations Subcommittee Staffs
     * Comments from the Internal Revenue Service
     * GAO Contact and Staff Acknowledgments

Report to Congressional Committees

February 2006

BUSINESS SYSTEMS MODERNIZATION

Internal Revenue Service's Fiscal Year 2006 Expenditure Plan

Contents

February 21, 2006Letter

The Honorable Christopher S. Bond Chairman The Honorable Patty Murray
Ranking Member Subcommittee on Transportation, Treasury,   the Judiciary,
Housing and Urban Development,   and Related Agencies Committee on
Appropriations United States Senate

The Honorable Joe Knollenberg Chairman The Honorable John W. Olver Ranking
Member Subcommittee on the Departments of Transportation,   Treasury, and
Housing and Urban Development,   the Judiciary, District of Columbia,  
and Independent Agencies Committee on Appropriations House of
Representatives

As required by law, the Internal Revenue Service (IRS) submitted its
fiscal year 2006 expenditure plan, in October 2005, to the congressional
appropriations committees, requesting $199 million from the Business
Systems Modernization (BSM) account. Our objectives in reviewing the plan
were to (1) determine whether the plan satisfied the conditions specified
in the law1 and (2) provide any other observations about the plan and
IRS's BSM program.

On November 30, 2005, we briefed your respective offices on the results of
our review. This report transmits the materials we used at the briefing
and provides the recommendation that we made to the Commissioner of
Internal Revenue. The full briefing materials, including our scope and
methodology, are reprinted as appendix I.

In summary, we made the following major points:

o IRS's fiscal year 2006 plan satisfies each of the six legislative
conditions.

o IRS has made further progress in implementing BSM, but some projects did
not meet short-term cost and schedule commitments. During 2005, IRS
deployed additional releases of several systems, including the Customer
Account Data Engine (the new taxpayer information database), e-Services (a
new Web portal and electronic services for tax practitioners), and
Modernized e-File (a new electronic filing system). While three project
releases were delivered within the cost and/or schedule commitments
presented in the fiscal year 2005 expenditure plan, others experienced
cost increases or schedule delays. For example, our analysis shows that
Release 1.3.1 of the Customer Account Data Engine was delivered at the
estimated cost and that the e-Services upgrade was completed on time and
within the estimated project cost. However, two project
segments-Integrated Financial System Release 1, Milestone 5, and
Modernized e-File Release 3.2, Milestone 4-experienced cost increases of
93 percent and 29 percent, respectively.

o Future BSM project deliveries face significant risks and issues, which
IRS is addressing. IRS has identified significant risks and issues with
its future planned system deliveries. For example, according to IRS,
schedule delays associated with Release 1.3.1 of the Customer Account Data
Engine, as well as contention for key resources between Releases 1.3.1 and
1.3.2, necessitated the deferral of some functionality to later releases.
These requirements deferrals may negatively impact cost and schedule for
Releases 2.1 and 2.2, which are currently scheduled to be deployed in
August 2006 and December 2006, respectively. The agency, however,
recognizes the potential impact of these project risks and issues on its
ability to deliver planned functionality within cost and schedule
estimates, and, to its credit, has developed mitigation strategies to
address them.

o IRS has made additional progress in addressing high-priority BSM program
improvement initiatives. Its high-priority improvement initiatives appear
to be an effective means of assessing, prioritizing, and addressing BSM
issues and challenges. However, much more work remains for the agency to
fully address these issues and challenges. IRS is currently focusing on 22
high-priority initiatives, which it plans to have completed by the end of
March 2006. These initiatives include establishing requirements management
standards and executing the implementation plan for integrated schedule
and baseline management.

o In response to our prior recommendation, IRS reports having efforts
under way to develop a new Modernization Vision and Strategy to address
BSM changes and provide a modernization roadmap. IRS anticipates having an
approved high-level Vision and Strategy in place in early fiscal year
2006, and expects to complete a more detailed 5-year plan for the
modernization program by mid-March 2006.2 We believe these actions
represent good steps toward addressing our prior recommendation to fully
revisit the vision and strategy for the BSM program and develop a new set
of long-term goals, strategies, and plans consistent with the budgetary
outlook and with IRS's management capabilities.

o The expenditure plan submitted to the Congress contains outdated program
status information and omits key details concerning deferred BSM
functionality. IRS's fiscal year 2006 expenditure plan is substantially
based on information describing the status of BSM projects and program
management initiatives as of April 2005, and, therefore, in key areas did
not adequately describe progress or provide information consistent with
the program's status at the time the plan was submitted to the Congress in
October 2005. Specifically, the plan (1) does not disclose that planned
functionality for two BSM project releases has been deferred to future
releases and (2) contains a number of inconsistencies between project cost
and schedule data shown throughout the document. Without current and
complete information, effective congressional oversight of BSM progress
and accountability is impaired.

Recommendation for Executive Action

To allow for effective congressional oversight of the BSM program, we
recommend that the Commissioner of Internal Revenue direct the Chief
Information Officer to take the following action:

o ensure that future expenditure plans submitted to the congressional
appropriations subcommittees provide current and complete program status
information and report any changes to prior commitments concerning the
delivery of BSM project functionality.

Agency Comments

In providing written comments on a draft of this report, the Commissioner
of Internal Revenue agreed with our findings and stated that the report
fairly represents BSM accomplishments as well as future risks. The
Commissioner also described the actions that IRS is taking to implement
our recommendation, including formulating a policy and initiating dialogue
with the Department of the Treasury and the Office of Management and
Budget to resolve expenditure plan development and review process issues.
The Commissioner's written comments are reprinted in appendix II.

We are sending copies of this report to the Chairmen and Ranking Members
of other Senate and House committees and subcommittees that have
appropriation, 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) 512-9286 or [email protected] . Contact
points for our Offices of Congressional Relations and Public Affairs may
be found on the last page of this report. GAO staff who made major
contributions to this report are listed in appendix III.

David A. Powner Director, Information Technology   Management Issues

Briefing Slides from the November 30, 2005, Briefing to the Senate and
House Appropriations Subcommittee Staffs Appendix I

Comments from the Internal Revenue Service Appendix II

GAO Contact and Staff Acknowledgments Appendix III

David A. Powner, (202) 512-9286

In addition to the contact named above, Timothy D. Hopkins and Sabine R.
Paul made key contributions to this report.

(310809)

www.gao.gov/cgi-bin/getrpt? GAO-06-360 .

To view the full product, including the scope

and methodology, click on the link above.

For more information, contact David A. Powner at (202) 512-9286 or
[email protected].

Highlights of GAO-06-360 , a report to congressional committees

February 2006

BUSINESS SYSTEMS MODERNIZATION

Internal Revenue Service's Fiscal Year 2006 Expenditure Plan

The Internal Revenue Service's (IRS) Business Systems Modernization (BSM)
program is a multibillion-dollar, high-risk, highly complex effort that
involves the development and delivery of a number of modernized
information systems intended to replace the agency's aging business and
tax processing systems. As required by law, IRS submitted its fiscal year
2006 expenditure plan, in October 2005, to congressional appropriations
committees, requesting $199 million from the BSM account.

GAO's objectives in reviewing the plan were to (1) determine whether it
satisfied the conditions specified in the law and (2) provide any other
observations about the plan and IRS's BSM program.

What GAO Recommends

GAO recommends that the Commissioner of Internal Revenue ensure that
future expenditure plans submitted to the congressional appropriations
subcommittees provide current and complete program status information and
report any changes to prior commitments concerning the delivery of BSM
project functionality. In providing comments on a draft of this report,
the Commissioner agreed with GAO's findings and described the actions that
IRS is taking to address GAO's recommendation.

IRS's fiscal year 2006 expenditure plan satisfies the conditions specified
in the law. These conditions include meeting the Office of Management and
Budget's capital planning and investment control review requirements and
complying with federal systems acquisition requirements and management
practices.

GAO's observations on the expenditure plan and BSM program include the
following:

           o  During 2005, IRS made further progress in implementing BSM, but
           some projects did not meet short-term cost and schedule
           commitments. IRS deployed additional releases of several
           modernized systems, including the Customer Account Data Engine
           (the new taxpayer information database), e-Services (a new Web
           portal and electronic services for tax practitioners), and
           Modernized e-File (a new electronic filing system). While three
           project releases were delivered within the cost and/or schedule
           commitments presented in the fiscal year 2005 expenditure plan,
           others experienced cost increases or schedule delays.

           o  IRS has identified significant risks and issues that confront
           future planned system deliveries. The agency recognizes the
           potential impact of these project risks and issues on its ability
           to deliver planned functionality within cost and schedule
           estimates, and, to its credit, has developed mitigation strategies
           to address them.

           o  IRS has made additional progress in addressing high-priority
           BSM program improvement initiatives. Its program improvement
           process appears to be an effective means of assessing,
           prioritizing, and addressing BSM issues and challenges. However,
           much more work remains for IRS to fully address these issues and
           challenges.

           o  In response to GAO's prior recommendation, IRS is developing a
           new Modernization Vision and Strategy to address BSM program
           changes and provide a modernization roadmap. IRS expects to
           complete a high-level Vision and Strategy, as well as a more
           detailed 5-year plan for the modernization program, by mid-March
           2006.

           o  The expenditure plan submitted to the Congress contains
           outdated program status information and omits key details
           concerning deferred BSM functionality. IRS's fiscal year 2006 plan
           is substantially based on information describing the status of BSM
           projects and program management initiatives as of April 2005, and,
           therefore, in key areas did not adequately describe progress or
           provide information consistent with the program's status at the
           time the plan was submitted to the Congress in October 2005.
           Without current and complete information, effective congressional
           oversight of BSM progress and accountability is impaired.
*** End of document. ***