IRS' Year 2000 Efforts: Status and Remaining Challenges (Testimony,
02/24/99, GAO/T-GGD-99-35).

Pursuant to a congressional request, GAO discussed the Internal Revenue
Service's (IRS) year 2000 efforts and the remaining challenges IRS faces
in making its information systems year 2000 compliant, focusing on: (1)
the extent to which IRS monitors the year 2000 status of its
mission-critical systems in their entirety; (2) whether IRS met the
January 31, 1999, completion goal for the areas that it
monitors--application software, systems software, hardware, and
telecommunications networks; (3) the status of two remaining, critical
year 2000 tasks--conducting year 2000 testing and completing 36
contingency plans; and (4) the fact that other business initiatives are
creating competing demands on staff needed for year 2000 efforts.

GAO noted that: (1) a complete picture cannot be provided of the year
2000 status of IRS' 133 mission-critical systems because IRS does not
report year 2000 status for these systems in their entirety; (2)
instead, IRS monitors the year 2000 status of the components of an
information system, such as the application software, systems software,
and hardware, for each of its three types of computers--mainframes,
minicomputers/file servers, and personal computers; (3) IRS reports that
it met the January 31, 1999, completion goal for some of the areas that
it monitors but not for others; (4) IRS reports that it met the January
1999 completion goal for: (a) correcting application software; (b)
upgrading telecommunications networks; and (c) fully implementing one of
its two major system replacement projects; (5) despite significant
progress since GAO's testimony in May, IRS did not meet the goal for:
(a) upgrading systems software and hardware for its three types of
computers; and (b) fully implementing the other major system replacement
project; (6) as a result of not meeting the goal for upgrading systems
software and hardware, some changes will not be tested until late in
1999, reducing the time available to make corrections before January
2000; (7) for the replacement project, some service center staffs will
have no experience before 2000 using the new system to process peak
filing season volumes of remittances; (8) IRS must conduct the year 2000
end-to-end testing of its mission-critical systems; (9) testing is to
begin in April 1999; (10) the second critical task is to develop 36
contingency plans that IRS has determined are needed to address various
failure scenarios for its core business processes; (11) IRS is
developing these plans in response to GAO's June 1998 report; (12) IRS
has delayed the completion dates so that the first set of plans are to
be completed by March 31, 1999, and the second set of plans by May 31,
1999; (13) as IRS continues its year 2000 efforts, it will face the
challenge of how to address the competing demands on its staff; (14)
these competing demands are created by IRS' other major business
initiatives, such as implementing tax law changes and completing the
non-year 2000 portions of one of IRS' major system replacement projects;
and (15) to address these competing demands, in the past several months,
IRS has: (a) transferred staff from other areas; (b) hired additional
staff; and (c) delayed some activities.

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

 REPORTNUM:  T-GGD-99-35
     TITLE:  IRS' Year 2000 Efforts: Status and Remaining Challenges
      DATE:  02/24/99
   SUBJECT:  Y2K
             Computer software
             Human resources utilization
             Systems conversions
             Reporting requirements
             Strategic information systems planning
             Tax administration systems
             Computer software verification and validation
             Information resources management
IDENTIFIER:  Y2K
             
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gg99035t IRS' YEAR 2000 EFFORTS Status and Remaining Challenges

Statement of James R. White, Director Tax Policy and
Administration Issues General Government Division

United States General Accounting Office

GAO Testimony Before the Committee on Ways and Means, House of

Representatives

For Release on Delivery Expected at 9: 00 a. m. EST Wednesday
February 24, 1999




GAO/T-GGD-99-35

  GAO/T-GGD-99-35

Statement

Page 1 GAO/T-GGD-99-35

Mr. Chairman and Members of the Committee: We are pleased to be
here today to discuss the status of the Internal Revenue Service's
(IRS) Year 2000 efforts 1 and the remaining challenges IRS faces
in making its information systems Year 2000 compliant. If IRS'
Year 2000 efforts are unsuccessful, the impacts on taxpayers could
include millions of erroneous tax notices and delayed or erroneous
refunds. IRS had established a goal to complete most of its Year
2000 work by January 31, 1999. IRS established that goal to help
ensure that it would (1) have a Year 2000 compliant environment
implemented for the 1999 filing season and (2) provide time for
working out problems that surfaced in the 1999 filing season and
its Year 2000 testing. 2

Our statement discusses four topics( 1) the extent to which IRS
monitors the Year 2000 status of its mission- critical systems in
their entirety; (2) whether IRS met the January 31, 1999,
completion goal for the areas that it monitors application
software, systems software, hardware, and telecommunications
networks; (3) the status of two remaining, critical Year 2000
tasks conducting Year 2000 testing and completing 36 contingency
plans; and (4) the fact that other business initiatives are
creating competing demands on staff needed for Year 2000 efforts.

 First, we cannot provide a complete picture of the Year 2000
status of IRS' 133 mission- critical systems because IRS does not
report Year 2000 status for these systems in their entirety.
Instead, IRS monitors the Year 2000 status of the components of an
information system, such as the application software, 3 systems
software, 4 and hardware, for each of its three types of computers
mainframes, minicomputers/ file servers, and personal computers.
IRS officials acknowledge that their monitoring reports do not
provide a complete picture on a system- by- system basis. However,
these

1 IRS' Year 2000 efforts are necessary because IRS' information
systems, many of which are over 25 years old, were programmed to
read two- digit date fields. Therefore, if unchanged, these
systems would interpret 2000 as 1900, seriously jeopardizing tax
processing and collection operations. IRS' Year 2000 efforts
include (1) fixing existing systems by correcting application
software and data and upgrading hardware and systems software, if
needed; (2) replacing systems if correcting them is not cost-
beneficial or technically feasible; and (3) retiring systems if
they will not be corrected by 2000.

2 The Year 2000 end- to- end test is to ensure that most of IRS'
mission- critical systems can operate collectively, with all
systems date clocks set forward to simulate the Year 2000. 3
Application software is the collection of computer programs that
allows a user to perform a specific job task. 4 Systems software
is the collection of computer programs that manage the computer's
system hardware components (e. g., operating system, central
processing unit, or disk drives) that allow the application
software to interact with the hardware.

Statement Page 2 GAO/T-GGD-99-35

officials believe the costs of doing so outweigh the benefits,
particularly given the time remaining to complete IRS' Year 2000
work.

 Second, IRS reports that it met the January 31, 1999, completion
goal for some of the areas that it monitors but not for others.
IRS reports that it met the January 1999 completion goal for (1)
correcting application software, (2) upgrading telecommunications
networks, and (3) fully implementing one of its two major system
replacement projects. Despite significant progress since our
testimony last May, 5 IRS did not meet the goal for (1) upgrading
systems software and hardware for its three types of computers and
(2) fully implementing the other major system replacement project.
As a result of not meeting the goal for upgrading systems software
and hardware, some changes will not be tested until late in 1999,
reducing the time available to make corrections before January
2000. Also, for the replacement project, some service center
staffs will have no experience before 2000 using the new system to
process peak filing season volumes of remittances.

 Third, in addition to completing work on upgrading systems
software and hardware, IRS faces two remaining, critical Year 2000
tasks. The first task, and one most important for gauging IRS'
success in achieving Year 2000 compliance, is an unprecedented,
Year 2000 end- to- end test of most of IRS' mission- critical
systems. The end- to- end test is to begin in April 1999. The need
to conduct this test has created an additional new challenge for
IRS meeting a compressed schedule for developing and implementing
tax law changes for the 2000 filing season. The second critical
task is to develop 36 contingency plans that IRS has determined
are needed to address various failure scenarios for its core
business processes. IRS is developing these plans in response to
our June 1998 report. 6 IRS has delayed the completion dates so
that the first set of plans are to be completed by March 31, 1999,
and the second set of plans by May 31, 1999. To the extent that
the plans require additional actions, such as those associated
with testing or preparatory activities needed to implement the
plans, these delays reduce the time available to complete these
activities.

 Fourth, as IRS continues its Year 2000 efforts, it will face the
challenge of how to address the competing demands on its staff.
These competing

5 IRS' Year 2000 Efforts: Status and Risks (GAO/T-GGD-98-123, May
7, 1998). 6 IRS' Year 2000 Efforts: Business Continuity Planning
Needed for Potential Year 2000 System Failures (GAO/GGD-98-138,
June 15, 1998).

Statement Page 3 GAO/T-GGD-99-35

demands are created by IRS' other major business initiatives, such
as implementing tax law changes and completing the non- Year 2000
portions of one of IRS' major system replacement projects. To
address these competing demands, in the past several months, IRS
has (1) transferred staff from other areas, (2) hired additional
staff, and (3) delayed some activities.

Our statement today is based on our past and ongoing Year 2000
work for this Committee's Oversight Subcommittee. As a part of
this work, we have interviewed officials from the National Office
and reviewed IRS' contingency planning documents and IRS' Year
2000 progress reports for the week ending February 6, 1999. We did
not verify the reliability of the data included in the February 6,
1999, reports.

IRS' Year 2000 status reports do not provide a complete picture of
the status of IRS' mission- critical systems because IRS does not
monitor Year 2000 status for its mission- critical systems in
their entirety. Instead, IRS monitors the Year 2000 status of the
components of an information system, such as the application
software, systems software, and hardware for each of its three
types of computers mainframes, minicomputers/ file servers, and
personal computers. IRS also monitors its telecommunications
networks separately.

As part of IRS' Year 2000 risk mitigation efforts, 7 IRS has hired
a contractor to conduct periodic risk assessments. The
contractor's December 1998 report recommended exploring the
feasibility of tracking status on a system- by- system basis to
provide a clear view of IRS' ability to achieve Year 2000
compliance. The report stated that such a system view would permit
IRS to, among other things, help assess the need to target
resources to achieve Year 2000 compliance. IRS officials said that
IRS' approach to monitoring Year 2000 compliance corresponds to
how IRS' Information Systems organization is structured to carry
out its work. Specifically, IRS officials said that separate
organizational units are responsible for application software,
systems software and hardware, and telecommunications networks.
Therefore, IRS monitors its Year 2000 status by these areas. They
do not believe the benefits of monitoring status on a system- by-
system basis outweigh the costs, given the amount of time
remaining to complete IRS' Year 2000 work.

7 IRS' Century Date Change Project Office outlined a risk
management process that is to (1) identify risks to the successful
completion of Year 2000 goals, (2) coordinate the development of
risk mitigation strategies, (3) oversee the execution of the
strategies, and (4) elevate unmitigated risks to the
Commissioner's Executive Steering Committee on the 1999 filing
season and Year 2000 efforts. IRS' Reports Do Not

Provide a Complete Picture of MissionCritical Systems' Status

Statement Page 4 GAO/T-GGD-99-35

IRS' reports indicate that it met the January 1999 completion goal
for some areas but not for others. The reports indicate that IRS
met the January 1999 goal for correcting the application software
for its existing systems and upgrading telecommunications
networks. Since May 1998, when we last testified on this topic,
IRS has also made progress in an area that we said was lagging
upgrading systems software and hardware. Despite this progress,
however, IRS did not achieve its January 1999 completion goal for
any of its three types of computer hardware. IRS fully implemented
the Year 2000 aspects for one of its major system replacement
projects. For the other system replacement project, 6 of the 10
service centers were using the full suite of Year 2000 changes.

Since we testified in May 1998, IRS has continued to make progress
in correcting the application software for its mission- critical
systems. As of February 6, 1999, IRS reports indicate that IRS has
corrected 88 percent of these applications, thereby exceeding its
85 percent goal. 8 In addition to completing this work, IRS has
hired a contractor to review all of the corrected application
software to determine whether IRS made any errors. This effort
began in August 1998 and is scheduled to continue through May
1999.

In addition, IRS reports indicate that it met its goal for
completing work on its telecommunications networks. In May 1998,
we said that, according to IRS, telecommunications networks
presented the most significant correction challenge and were
likely the highest risk for not being completed by January 31,
1999. As of February 6, 1999, with the exception of three areas,
IRS reported that it met its goal for these networks. 9

IRS' reports indicate that IRS made significant progress in an
area that in May 1998 we said was lagging upgrading systems
software and hardware for its three types of computers:
mainframes, minicomputers/ file servers, and personal computers.
Despite this progress, IRS did not meet the January 31, 1999,
completion goal for its three types of computers.

For IRS' mainframe computers, IRS officials said IRS fell short in
meeting its goal because of delays in receiving the Year 2000
upgrades for one of its

8 In assessing progress, IRS determined that it needed to complete
85 percent of its application software work by January 31, 1999.
The work for the remaining 15 percent includes the steps needed to
certify that IRS has achieved Year 2000 compliance. IRS has
deferred correcting about 2 percent of its application software
until July 1999 and January 2000 .

9 The three areas are (1) voice mail for some of IRS' field
locations; (2) telephone routing for IRS' automated collection
system; and (3) telecommunications networks for at least 8,000
terminals. Work on these three areas is to be completed by July
31, 1999. Reports Indicate That

IRS Met the January 1999 Completion Goal for Some Areas but Not
for Others

Reports Indicate That IRS Met its Goal for Application Software
for Existing Systems and Telecommunications Networks

Reports Indicate That IRS Did Not Meet the Goal for Systems
Software and Hardware

Statement Page 5 GAO/T-GGD-99-35

system replacement projects. IRS officials said those upgrades are
to be received and implemented by March 1, 1999.

For minicomputers/ file servers, IRS reports indicate that as of
February 6, 1999, IRS' Information Systems organization had
completed 60 percent of the work for upgrading systems software
and hardware a significant increase from 13 percent that was done
in May 1998, when we last testified on the IRS' Year 2000 status.
10 According to IRS, systems software and hardware for 13 of the
27 mission- critical systems that use minicomputers/ file servers
were not upgraded by January 31, 1999. The systems software and
hardware for 7 of the 13 systems are not scheduled to be Year 2000
compliant until after March 1999. As a result of the delay, some
changes are not to be tested until October 1999, when the second
part of the Year 2000 end- to- end test is to begin. This delay
reduces the time available to make any needed corrections before
January 1, 2000.

For personal computers, IRS officials said they plan to replace
about 35,000 personal computers and the associated systems
software between February 1999 and July 1999 to achieve Year 2000
compliance. As a part of this replacement effort, IRS plans to
reduce the number of commercial software and hardware products in
its inventory from about 4,000 to 60 core standard products.
According to IRS officials, thus far, IRS has completed testing on
5 of the 60 core products. IRS plans to complete the testing for
the remaining 55 products by April 1999. IRS' goal is to eliminate
all nonstandard products by July 1999.

For one of IRS' two major system replacement projects, IRS
implemented the Year 2000 changes at all 10 service centers by
January 31, 1999; for the other system replacement project, 6 of
the 10 service centers were using the full suite of Year 2000
changes for the system by January 31, 1999. IRS' two major system
replacement projects are Service Center Mainframe Consolidation
(SCMC) and the Integrated Submission and Remittance Processing
(ISRP) System. SCMC is to consolidate the mainframe computer tax
processing activities from the 10 service centers to 2 computing
centers thereby reducing the total number of tax processing
mainframe computers from 67 to 12. Specifically, SCMC is to (1)
replace and/ or upgrade mainframe hardware, systems software, and
telecommunications networks; (2) replace about 16,000 terminals
that support frontline customer service and compliance activities;
and (3) replace the system that provides security functions for
on- line taxpayer

10 IRS' goal for systems software and hardware was to complete 80
percent of the work by January 31, 1999. Full Implementation of
Year

2000 Changes Achieved for One of the Two Replacement Projects;
Less Than Full Implementation Achieved for the Other

Statement Page 6 GAO/T-GGD-99-35

account databases with a new system known as the Security and
Communications System (SACS). Replacement of the terminals and the
implementation of SACS are critical to IRS' achieving Year 2000
compliance. The other replacement project is ISRP. ISRP is a
single, integrated system that is to perform the functions of two
systems that are not Year 2000 compliant the Distributed Input
System that IRS uses to process tax returns and the Remittance
Processing System that IRS uses to process tax payments.

IRS completed the Year 2000 critical portions of SCMC by January
31, 1999. Specifically, in early October 1998, IRS completed its
implementation of the 16,000 terminals that are needed for
frontline customer service and compliance activities. Also, as of
January 31, 1999, all 10 service centers were using SACS.

Originally, IRS had planned to have the other aspects of SCMC
besides SACS that is, the tax processing activities of the 10
service centers moved to the 2 computing centers by December 1998.
As of January 31, 1999, the tax processing activities for three
service centers had been moved to the computing centers. IRS is
determining the number of additional service centers that are to
be moved in 1999. SCMC officials have developed several different
schedule options for moving the tax processing activities of the
remaining seven service centers. At the time we prepared this
statement, IRS officials had not yet selected a schedule option.

According to IRS officials, the tax processing activities of all
10 service centers do not need to be moved before 2000 because the
existing mainframes in each of the 10 service centers have been
made Year 2000 compliant. Thus, in all likelihood, at the start of
the 2000 filing season, some service centers will be processing
their data locally, whereas others will have their data processed
at the computing centers. IRS' Year 2000 end- to- end test is
designed to include both processing scenarios.

Both functions of ISRP tax return processing and remittance
processing were to be implemented in November 1998. However, as a
result of problems that occurred during the pilot test of ISRP and
the contingency option IRS implemented for the 1999 filing season
to address those problems, 4 of the 10 service centers are not to
begin using the remittance processing portion of ISRP until August
1999.

For the 1999 filing season, the contingency option for ISRP is to
retain enough of the old tax processing and remittance processing
equipment in SCMC

ISRP

Statement Page 7 GAO/T-GGD-99-35

the service centers so that IRS could revert to the old systems if
ISRP experiences problems. However, four of the service centers
did not have enough floor space to accommodate both the old tax
processing and remittance processing systems and the ISRP
equipment. As a result, these four service centers are to continue
using the old remittance processing equipment during the 1999
filing season and convert to ISRP in August 1999. These four
service centers were among the top five remittance processing
centers during the peak of the 1998 filing season. We recognize
that this contingency option may have been the only feasible one
for IRS. However, as we reported in December 1998, these four
service centers are to receive their equipment so late in 1999
that their staffs will have no experience with the new equipment
before the 2000 filing season in processing the large volume of
remittances that occur in the peak of the filing season. 11

In addition to fixing its existing systems, IRS still needs to
complete two critical activities for its Year 2000 efforts, and
one of these activities is behind schedule. The two critical
activities are the completion of (1) an unprecedented Year 2000
end- to- end test of 97 of IRS' 133 mission- critical systems and
(2) 36 contingency plans for IRS' core business processes.

Using thousands of test cases, IRS' Year 2000 end- to- end test is
to assess the ability of IRS' mission- critical systems to
function collectively in a Year 2000 compliant environment. These
cases are intended to replicate the many different kinds of
transactions that IRS' information systems process on any given
day to help assess whether IRS' systems can perform all date
computations using data and systems date clocks with January 1,
2000, or later. The test will involve 97 of IRS' 133 mission-
critical systems. 12 Most of IRS' mission- critical system
application software has been tested individually; however, the
ability of the application software to operate collectively, using
Year 2000 compliant systems software and hardware, with all
systems date clocks set forward to simulate the Year 2000, has not
been fully tested.

In July 1998, IRS began the preliminary activities associated with
conducting the end- to- end test. These activities included, but
were not

11 Tax Administration: IRS' 1998 Tax Filing Season (GAO/GGD-99-21,
Dec. 31, 1998). 12 According to IRS' Product Assurance officials,
97 systems represent the maximum number of systems Product
Assurance could effectively manage. Testing for the remaining
systems is to be done by those organizations that have
responsibility for maintaining them. SCMC Two Remaining,

Critical Year 2000 Activities Still Remain; One of Which Is Behind
Schedule

Unprecedented End- to- End Test Is to Begin in April 1999

Statement Page 8 GAO/T-GGD-99-35

limited to, establishing a dedicated test environment to replicate
IRS' tax processing environment, developing test plans and
procedures, and doing some preliminary testing of some systems
with the systems date clock set forward to 2000. Currently, IRS is
developing baseline data from the 1999 filing season that will be
ultimately used for the Year 2000 end- to- end test. The end- to-
end test is to have two parts. The first part is scheduled to
begin in April and end in July 1999. The second part is to begin
in October and end in December 1999. The April test is to include
the application software that is currently being used for the 1999
filing season. The October test is to include the application
software changes that are needed for the tax law changes that are
to be implemented for the 2000 filing season.

The need to conduct this test has in turn created an additional
challenge in completing the work necessary for the 2000 filing
season. As shown in table 1, to accommodate the Year 2000 end- to-
end test, IRS revised its traditional milestones for implementing
tax law changes for the 2000 filing season, thereby compressing
the amount of time available to develop and test these changes.
Under this compressed schedule, instead of having until January
2000, IRS must program and test all tax law changes that are to
take effect in the 2000 filing season before September 30, 1999.

Key activity Traditional milestone Revised milestone as a

result of Year 2000 testing requirements

Business requirements developed Summer to January Summer of 1998
to January

1999 Business requirements transmitted to Information Systems
organization

February to June February 1999 Development of application software
March to October

March to Mid- June, 1999 Systems acceptance testing a Late August
to mid- January Mid- June to September, 1999 Final phase of the
Year 2000 end- to- end test N/ A b October to December, 1999
Implementation January January 2000 a IRS' systems acceptance
testing assesses whether an application meets the specified user

requirements. b Not applicable.

Source: IRS data.

Under the compressed schedule, business requirements are to be
delivered to IRS' Information Systems organization by February 28,
1999; the Information Systems organization is scheduled to
complete the application software changes by June 15, 1999; and
testing of these application software changes is be completed by
September 30, 1999.

Table 1: Key Activities Associated With Implementing Tax Law
Changes, Traditional Milestones, and Revised Milestones as a
Result of Year 2000 Test Schedule

Statement Page 9 GAO/T-GGD-99-35

In 1999, IRS is to complete the development of 36 contingency
plans that IRS determined are needed to address various Year 2000
failure scenarios for its core business processes. IRS' initial
goal was to have these plans completed by December 1998; however,
IRS' revised goal is to complete 18 submissions processing
contingency plans, 2 customer service contingency plans, and 3 key
support services 13 plans by no later than March 31, 1999. One key
support services contingency plan and 12 compliance contingency
plans are to be completed by May 31, 1999.

In June 1998, we reported that IRS' Year 2000 contingency planning
efforts fell short of meeting the guidelines included in our Year
2000 Business Continuity and Contingency planning guide. 14
Accordingly, we recommended that the Commissioner of Internal
Revenue take a series of steps to broaden IRS' contingency
planning effort to help ensure that IRS adequately assesses the
vulnerabilities of its core business processes to potential Year
2000 induced system failures. Specifically, we recommended that
the Commissioner take the following steps: (1) solicit the input
of business functional areas to identify core business processes
and identify those processes that must continue in the event of a
Year 2000 failure; (2) map IRS' mission- critical systems to those
core business processes; (3) determine the impact of information
systems failures on each core business process; (4) assess
existing contingency plans for their applicability to potential
Year 2000 failures; and (5) develop and test contingency plans for
core business processes if existing plans are not appropriate.

Since we issued our report, IRS has been taking actions to address
our recommendations. IRS has solicited the input of its business
officials and established working groups to identify failure
scenarios and to develop the contingency plans. The working groups
determined IRS should develop 36 contingency plans that cover
various aspects of its core business areas of submissions
processing, customer service, compliance, and key support
services. One factor influencing the staggered schedule for
completing contingency plans was that the staff assigned to
develop plans have competing responsibilities, such as the
development of business requirements to implement tax law changes
as well as other business improvement initiatives. Under the
staggered schedule, with the exception of the key support services
area, earlier completion milestones were

13 Key support services include internal business processes, such
as maintaining buildings and executing budget functions and
payroll activities. 14 IRS' Year 2000 Efforts: Business Continuity
Planning Needed for Potential Year 2000 System Failures (GAO/GGD-
98-138, June 15, 1998). Staggered Milestones

Developed for Completing IRS' Contingency Plans

Statement Page 10 GAO/T-GGD-99-35

established for those aspects of three other core business areas
that, according to IRS officials, were likely to experience a Year
2000 before the other areas. To the extent that the plans require
additional actions, such as those associated with testing or
preparatory activities, these delays reduce the time available to
complete these activities.

According to IRS officials, the completion milestones of March and
May 1999 reflect when the technical work for the plans is to be
completed. Once that work is completed, the plans are to be
approved by the official responsible for the core business process
and tested. According to IRS officials, a contractor is still
developing the testing approach. As a result, these officials
could not provide us with the completion milestones and staff
requirements for testing the contingency plans.

In addition to Year 2000 efforts, IRS has other ongoing business
initiatives that are placing competing demands on its information
systems and business staff. The Commissioner's Executive Steering
Committee (ESC) and IRS' risk mitigation efforts have provided a
forum for addressing these issues.

Concurrent with its Year 2000 efforts, IRS is continuing to make
changes to its information systems to accommodate changes
resulting from various business initiatives. These initiatives
include the SCMC project that we discussed previously,
implementation of the IRS Restructuring and Reform Act provisions,
and of various taxpayer service initiatives. 15 While we do not
question the importance of these initiatives, as we have said
before, the need to make a significant number of tax law changes
for the 2000 filing season introduces an additional risk, albeit
one that we could not quantify, to IRS' Year 2000 effort. 16

In November 1997, the Commissioner established the ESC Steering
Committee (ESC) to identify risks to the 1999 filing season and
the entire Year 2000 effort and to take actions to mitigate those
risks. In addition, IRS hired a contractor to conduct periodic
risk assessments. The contractor's most recent report was issued
in December 1998.

15 The Commissioner of Internal Revenue established the Taxpayer
Treatment and Service Improvement Program in November 1997 to
plan, coordinate, and manage hundreds of commitments for
improvements in service to taxpayers that have emanated from
various sources. These sources include the National Performance
Review, Senate Finance Committee hearings, and the IRS
Restructuring and Reform Act.

16 Internal Revenue Service: Impact of the IRS Restructuring and
Reform Act on Year 2000 Efforts (GAO/GGD-98-158R, Aug. 4, 1998).
Other Business

Initiatives Are Creating Competing Demands on Certain Staff Needed
for Year 2000 Efforts

Statement Page 11 GAO/T-GGD-99-35

Recent ESC documents, the contractor's December 1998 risk
assessment report, and our interviews with SCMC officials have
identified the following examples of competing demands on staff in
IRS' Information Systems organization and business organizations:

 Documents prepared for the September 1998 ESC meeting stated that
IRS' Information Systems organization that is responsible for
systems software issues was overextended because of Year 2000
demands, SCMC, and support for the Year 2000 end- to- end test.

 The contractor's December 1998 risk assessment report indicated
that some of IRS' core business area staff face competing demands
from the need to (1) identify business requirements for the 2000
filing season and (2) complete Year 2000 contingency plans. As we
said previously, IRS' goal is to have business requirements
completed by the end of February.

 According to the minutes from the January 1999 ESC meeting, IRS'
Internal Audit has also raised a concern about the availability of
sufficient staff to support the Year 2000 end- to- end test given
the other Year 2000 demands. According to IRS officials, Internal
Audit has not released a formal report on this matter.

 IRS' draft paper on the SCMC schedule options states that one of
the risks for each of the schedule options is the resource drain
on IRS staff and contractors from the filing season, the Year 2000
end- to- end test, and critical staff being used to train any new
SCMC staff. The draft option paper notes that the extent of the
drain varies somewhat depending on how many service centers are to
have their tax processing activities moved to the computing
centers in 1999.

Over the last several months, IRS has taken various actions to
address these competing demands. For example:

 To address the overextension of the Information Systems
organization that is responsible for systems software, the Chief
of that organization said that he obtained contractor support and
transferred staff from other areas. He said the additional staff,
coupled with the delays in moving the tax processing activities of
the service centers to the computing centers, helped alleviate
this overextension.

 To address the competing demands on the business staff to develop
Year 2000 contingency plans and finalize business requirements for
the 2000 filing season, IRS officials decided to stagger the
completion milestones

Statement Page 12 GAO/T-GGD-99-35

for contingency plans.

 To help prioritize the work within the Information Systems
organization IRS officials told us they have established another
executive steering committee. In addition, the minutes from the
January 1999 ESC meeting said that the Commissioner has asked the
cognizant staff to identify the source of each of the 2000 filing
season requirements( i. e., IRS Restructuring and Reform Act,
Taxpayer Service Improvement Initiative, etc.). This
identification is the first step for providing the additional
information that would be useful for establishing priorities for
IRS' Information Systems staff.

Since our testimony in May 1998, IRS has made considerable
progress in completing its Year 2000 work. However, IRS did not
complete all the work that it had planned to do by January 1999.
This unfinished work and upcoming critical tasks are to be
completed in the remainder of 1999. At the same time IRS is
addressing its Year 2000 challenge, it is undertaking other
important business initiatives, such as preparing for the 2000
filing season and implementing SCMC. These various initiatives
place competing demands on IRS' business and Information Systems
staff. To date, IRS has taken actions to address these competing
demands, including delaying the completion milestones for some
Year 2000 activities.

In the next 5 months, IRS will pass several key milestones. As IRS
passes each one, it will have more information on the status of
its Year 2000 effort and the amount of remaining work. This
information should help IRS and Congress assess the level of risk
to IRS' core business processes in 2000. For example:

 By the end of February 1999, the business organizations are to
submit their requirements to IRS' Information Systems organization
for the 2000 filing season. In the event that business
requirements for the 2000 filing season are not submitted on time,
IRS increases the risk that some tax law changes may not be
thoroughly tested before they are implemented.

 From April to July 1999, IRS is to conduct its Year 2000 end- to-
end test. The results of this test will be an indicator of the
extent to which, for the work completed thus far, IRS has been
successful in making its systems Year 2000 compliant. The results
of this test should also provide information on how many
Information Systems staff will be needed for correcting any
problems that are identified. Concluding

Observations

Statement Page 13 GAO/T-GGD-99-35

 By the end May 1999, IRS is to complete its contingency plans.
These plans should provide information on any additional steps
needed to implement the plans. We plan to continue to monitor IRS'
progress in meeting these key milestones.

Mr. Chairman, this concludes my prepared statement. I welcome any
questions that you may have.

(268840)

Page 14 GAO/T-GGD-99-35

Page 15 GAO/T-GGD-99-35

Page 16 GAO/T-GGD-99-35

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