IRS Modernization: Business Practice, Performance Management, and
Information Technology Challenges (Testimony, 04/10/2000,
GAO/T-GGD/AIMD-00-144).

The Internal Revenue Service (IRS), acknowledging its serious,
long-standing management problems and its history of ineffective
attempts to deal with them, has revised its mission statement to more
fully embrace customer service and fairness to taxpayers as core
organizational values. IRS has also launched a modernization strategy
that encompasses major changes in the agency's organizational structure,
business practices, human capital and performance management systems,
and information systems. The magnitude of this modernization effort
makes it a high-risk venture that will take years to fully implement.
Although IRS has taken important steps during the last year, some of its
most important and difficult work lies ahead. This testimony discusses
the business practice, performance management, and information
technology challenges facing IRS.

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

 REPORTNUM:  T-GGD/AIMD-00-144
     TITLE:  IRS Modernization: Business Practice, Performance
	     Management, and Information Technology Challenges
      DATE:  04/10/2000
   SUBJECT:  Information resources management
	     Performance measures
	     Tax administration systems
	     Federal agency reorganization
	     Strategic information systems planning
	     Customer service
	     Voluntary compliance
	     Systems conversions
	     Systems design
	     Taxpayers
IDENTIFIER:  Earned Income Tax Credit
	     IRS Tax System Modernization Program
	     EIC
	     IRS Performance Management System

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GAO/T-GGD/AIMD-00-144

United States General Accounting Office
GAO

Testimony

Before the Subcommittee on Government
Management, Information, and Technology,
Committee on Government Reform, House of
Representatives

For Release on Delivery
Expected at
10:00 a.m. EDT
Monday
April 10, 2000
GAO/T-GGD/AIMD-00-144

IRS MODERNIZATION
Business Practice,  Performance Management, and

Information Technology Challenges

Statement of Margaret T. Wrightson
Associate Director, Tax Policy and
Administration Issues
General Government Division

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Statement
IRS Modernization: Business Practice, Performance
Management, and Information Technology Challenges
Page 13                     GAO/T-GGD/AIMD-00-144
Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss key
elements of the Internal Revenue Service's (IRS)
modernization efforts aimed at fundamentally
changing the way it does business.  As IRS
acknowledges, it is an agency fraught with long-
standing and significant management problems and a
history of ineffective attempts to correct them.

Building on the direction set forth in the IRS
Restructuring and Reform Act of 1998
(Restructuring Act),1 IRS hopes that many of these
long-standing issues will ultimately be addressed
through the current modernization effort.  To that
end, Commissioner Rossotti has revised IRS'
mission statement to more fully embrace customer
service and fairness to taxpayers as core
organizational values.  He has also articulated a
supporting modernization strategy that encompasses
major changes in IRS' organizational structure,
business practices, human capital and performance
management systems, and information systems.

As we said before this Subcommittee last year, the
magnitude of this modernization effort makes it a
high-risk venture that will take years to fully
implement.2  IRS has taken some important steps
over the last year; however, some of its most
important and difficult work lies ahead.

My statement discusses the business practice,
performance management and information technology
challenges IRS faces.  It is based on our past
work on IRS management challenges and our ongoing
monitoring of IRS' modernization efforts.
Specifically, my statement makes the following
three points.

ï¿½    IRS acknowledges that it will need to do more
than make marginal improvements in the efficiency
and effectiveness of its current business
practices.  Accordingly, IRS is planning to
implement breakthrough changes to those practices.
Only when these changes are implemented will
taxpayers see any appreciable benefits from IRS'
multiyear modernization. IRS has some initiatives
of this type under way, but they, and other
business practice changes, will not be easy to
implement.  This type of reengineering requires
not only a new way of thinking, but also
investments in human capital, data collection, and
technology.

ï¿½    No matter what organizational structure or
business practices IRS establishes, successful
modernization ultimately depends on whether the
employees who are to lead, manage, and carry out
agency programs and services can deliver IRS' new
mission of top-quality customer service and
improved overall compliance. Historically, IRS'
performance management system emphasized revenue
production at the expense of customer service. IRS
is developing a new system and has taken the
important first step of developing a balanced set
of performance measures that is to capture both
the customer service and compliance aspects of its
new mission. Given the difficulties that attend so
substantial an effort, it is not surprising that
we have identified problems.  At a fundamental
level, it is not clear to us that IRS employees
fully understand that customer service and
compliance can be mutually supporting. Such an
understanding would be fostered by a coherent set
of performance measures, but IRS does not yet have
a key measure for voluntary compliance. Not only
is such a measure important in its own right to
track performance on a key aspect of IRS' mission,
but it would also provide important data for
designing the kinds of products and services
taxpayers need and for targeting compliance
activities. IRS is working to develop this
measure. Eventually, once a complete set of
balance measures is developed, IRS should be able
to assess whether improved customer service
contributes to an increase in voluntary
compliance. IRS acknowledges that it will need to
address these issues as it continues to develop
its new system.

ï¿½    Revamping its time-worn tax processing
systems is a critical aspect of modernization.
However, IRS must overcome several serious
management challenges in its current systems
modernization effort before it will be ready to
build modernized systems. In particular, IRS must
(1) complete, enforce, and maintain an enterprise
systems architecture,3 (2) establish and implement
sound investment management processes to ensure
only incremental, cost-effective system
investments are made, and (3) impose software
acquisition and life cycle management4 discipline
on each system investment it undertakes.

With Reorganization Under Way, Revamped Business
Practices Tailored to Taxpayer Needs Is a Next
Critical Step
IRS has already completed a number of elemental
steps in redefining the way it does business. It
has clarified its mission and articulated
strategic goals to support the mission.  It has
identified its customer segments and key processes
that are to define IRS' primary interactions with
each segment-prefiling, filing, and postfiling.
IRS is institutionalizing its focus on customer
segments through its new organizational structure
built around four operating divisions, each with
end-to-end responsibility for serving a group of
taxpayers with similar needs and interests.5

The reorganization is an important piece of the
modernization process.  IRS is phasing in its new
organizational structure, and our monitoring work
indicates that the reorganization is proceeding
reasonably well.  The new operating divisions
should provide IRS with the management structure
and customer focus needed to facilitate the
breakthrough business practices that taxpayers
need and deserve. Although employees in the new
operating divisions will, for the most part, be
initially constrained by old ways of doing
business, IRS has under way a number of
initiatives to revamp business practices.  My
statement today highlights three such initiatives:

ï¿½    providing cross-functional customer service,
ï¿½    advancing the use of electronic filing, and
ï¿½    developing a new risk-based return
examination process.

None of these, or other business practice changes,
will be easy to implement; success will hinge on
investments in human capital, data collection, and
technology.

Cross-Functional Customer Service
Taxpayers have long been frustrated by the
circuitous routes they often must follow to find
an IRS employee who can address their concerns or
questions.  In large part, this was because IRS'
old structure had separate functions for answering
taxpayer inquiries, clarifying and correcting tax
returns, and collecting unpaid taxes. Each of
these functional areas maintained separate
taxpayer databases, and thus, taxpayers who
contacted IRS were often referred to offices other
than those they had initially contacted. As IRS
learned from its recent Problem Solving Days
initiative, a single point of contact for
resolving issues is, from the taxpayer's
perspective, a far better way of doing business,
and IRS is using this lesson to define a new cross-
functional approach to frontline customer service.

In November 1997, shortly after a series of Senate
Finance Committee oversight hearings that
highlighted taxpayers' problems in dealing with
IRS, the agency began holding monthly Problem
Solving Days at field offices across the country.
During a Problem Solving Day, IRS brought together
employees from various functional groups, such as
Examination and Collection, to provide a range of
expertise to discuss and resolve taxpayers'
problems in a face-to-face meeting.  In our review
of Problem Solving Days, we found that both
taxpayers and IRS staff found the concept to be a
good idea.6

Based on the apparent success of this initiative,
IRS intends to institutionalize the concept of
Problem Solving Days through a new Tax Resolution
Representative (TRR) position.  TRRs are to
provide prefiling assistance and education and
postfiling compliance support to taxpayers at IRS
walk-in sites and other locations convenient to
taxpayers.  Staff at IRS' walk-in sites, some of
whom are employees on detail from other functions,
currently answer tax law questions, distribute tax
forms and publications, help taxpayers prepare
their returns, and resolve some account issues.
TRRs are to be permanent staff who perform
traditional walk-in service duties as well as a
variety of compliance actions, including
installment agreements, lien and levy release,
account adjustments, and simple audits. IRS
intends to begin the process of filling about
1,300 TRR positions early in 2001 and, if funding
is available, plans to have about 2,000 TRRs on
staff by October 2001.

The concept of cross-functional service embodied
in the TRR position is compelling and fits neatly
with IRS' goal to improve service to each
taxpayer.  As with other business practice
changes, though, implementing the TRR concept will
require investments in human capital and
information systems.  Probably the greatest human
capital challenge will be training.  The initial
cross-functional training needs will be
significant because the TRR position combines
elements from several current positions, and
ongoing training to keep such a broad array of
skills up-to-date will be a continuing challenge.
We also expect that this position will require
strong interpersonal skills.  In addition to
training, TRRs will also need enhanced information
system support to do their jobs effectively.  For
example, providing high-quality service to
taxpayers will be difficult without access to a
modern information system that contains accurate
and up-to-date information on taxpayer accounts,
something IRS plans to deliver as part of its
information systems modernization effort.

Electronic Filing
According to IRS customer satisfaction surveys as
well as one done by the President's Management
Council, taxpayers report high satisfaction with
their electronic filing experiences. IRS also
benefits from electronic filing through efficiency
and accuracy gains. While electronic filing is a
breakthrough process that is clearly more
efficient for IRS and satisfies some taxpayers,
the process still includes barriers that make it
unappealing to certain groups of taxpayers.  The
Restructuring Act mandates that by 2007, IRS is to
receive 80 percent of tax and information returns
(i.e., information provided to IRS by third
parties, such as employers and payors of interest
and dividends) electronically, something that may
be difficult to achieve.7  According to IRS'
November 1999 projections, 46 percent of
individual taxpayers, at most, will file
electronically by 2007.  IRS notes that these
projections are not based on complete information
about the impact of future initiatives.  Thus, the
projections could increase.

Maximizing electronic filing is important to IRS
because the agency is currently drowning in paper.
Returns that are filed electronically do not have
to move through IRS' labor-intensive paper return
processing operations.  Paper returns need to be
opened, sorted, reviewed, transcribed, shipped,
and stored. Later, returns must be physically
retrieved if IRS employees need data from the
returns that were not keypunched into computer
records.  Moreover, electronic filing prevents
common taxpayer errors, such as computational
mistakes and erroneous Social Security Numbers,
from entering IRS' tax return processing system.
As a result, electronic filing reduces the need
for contacts with taxpayers regarding those
errors.

Although taxpayers do receive benefits from
electronic filing, such as faster refunds and
notification that IRS has, in fact, received their
returns, IRS has had difficulty inducing taxpayers
who file individual returns to do so
electronically. In 1993 and 1995, we made
recommendations regarding IRS' need to develop
strategies to broaden the use of electronic filing
and to remove operational barriers that made
electronic filing less appealing to certain
taxpayers.8  For example, a major criticism of
electronic filing is that the process is not yet
truly paperless because of the need to submit wage
and tax statements (form W-2s), a signature
document, and payment information if a balance is
owed.

IRS is continuing to grapple with this issue and,
since 1996, has been conducting various tests to
determine how best to eliminate the paper
associated with electronic returns.  In the 2000
filing season, IRS has expanded on the tests that
were done in the 1999 filing season.  These tests
focus on eliminating W-2s and signature documents
for taxpayers that use practitioners or file on-
line from a personal computer and allowing
taxpayers to use paperless payment options, such
as credit cards.

Responding to recommendations that IRS needed a
strategic business plan for advancing electronic
filing, in December 1998, IRS issued a strategic
plan that, among other things, identifies several
challenges or barriers that must be overcome to
advance electronic tax administration.9 IRS
acknowledges that it will need to enhance its
technology to allow the filing of a full range of
returns; resolve security issues to eliminate the
requirements for submitting paper signature
documents; and develop marketing strategies for
different sets of taxpayers, including those that
submit payments. IRS also plans to use some of its
systems modernization funds for various electronic
tax administration initiatives that it expects to
implement in 2002.  According to an IRS official
responsible for these initiatives, they have not
been finalized, in part because IRS is considering
how best to meet the needs of the new operating
divisions.

Risk-Based Return Examination Process
Taxpayers do not want to be audited if they have
complied with the tax law, and if they have not,
they want the audit to be efficient and targeted
only at the questionable return items.  Our past
work has identified some weaknesses in how IRS
determines which taxpayers it should audit and the
audit approach it should use.10 These weaknesses
include relying on outdated information to
identify potential noncompliance and selecting
returns for audit based on manual review and
judgment.  As part of IRS' strategy to change the
way it deals with taxpayers that may have
compliance problems, IRS is developing a risk-
based examination model that is to centrally and
systematically identify which returns to audit as
well as the most efficient and effective way to
audit them. If successful, taxpayers and IRS
should both benefit.

The risk-based examination model includes a number
of elements, such as (1) a statistically-based
model, similar to IRS' current scoring system, to
assign a risk score indicating the probability of
noncompliance; (2) decision support software to be
used by operating divisions to centrally select
returns for audit; and (3) the selection of an
audit method-such as telephone contact,
correspondence examination, or face-to-face
audit-based on multiple factors, including
projected risk, likelihood that taxes due can be
collected, overall compliance objectives, and
workload considerations.

As envisioned, the risk-based examination approach
is data-driven; thus, the quality of the process
is inherently dependent upon the quality of the
data used. At the outset, the lack of a
comprehensive, up-to-date taxpayer account
database will hinder IRS' efforts to compile the
data needed to build the model. As a result, IRS
will need to rely on its fragmented information
systems. Eventually, it will need accurate data on
taxpayers' past compliance histories and reasons
for noncompliance-data that are not currently
available. Recognizing that it has much
preparatory work to do, IRS does not expect to
pilot its risk-based examination model for 2 to 3
years.

A New Performance Management System With
Comprehensive Measures That Employees Understand
Will Be Critical for Long-Term Success
No matter what new business practices IRS
establishes, its successful modernization
ultimately rests on whether the employees who must
lead, manage, and carry out agency programs and
services can deliver IRS' new mission. As we have
said, an organization's human capital policies,
including the performance management system it
uses to manage and motivate its people, must be
aligned to support its mission and expectations of
itself.11

Historically, IRS' performance management system
emphasized revenue production at the expense of
customer service. IRS is developing a new system
and has taken the important first step of
developing a balanced set of performance measures
that captures both the customer service and
compliance aspects of its new mission. Given the
difficulties that attend so substantial an effort,
it is not surprising that we have identified
problems.  At a fundamental level, it is not clear
to us that IRS employees fully understand that
customer service and compliance can be mutually
supportive. Such an understanding would be
fostered by a coherent set of performance
measures.  However, IRS does not yet have a key
measure for voluntary compliance, though it is
working to develop one. Not only is such a measure
important in its own right, but it would also
provide important data for designing the kinds of
products and services taxpayers need and for
targeting compliance activities.  IRS acknowledges
that it will need to address these issues as it
continues to develop its new system.

A Well-Understood Mission Statement Is the
Foundation of a Successful Performance Management
System
In broad terms, a performance management system
can be viewed as a strategy for continuous
improvement.  Ideally, under such a system,
performance measures are developed to
operationalize the organization's goals and
mission.  These measures can be used to assess and
improve the performance of organizational units
and employees.  Over time, the measures may be
refined on the basis of feedback about how well
they are working to meet current organizational
goals as well as future needs.  When an
organization's mission is accurately captured in
its performance measures, the mission and measures
understood by employees, and the measures aligned
with the organization's operations, agency leaders
have a powerful tool for encouraging managers and
employees to achieve their common goals.

Before Congress enacted the Restructuring Act,
there was an uneasy feeling that IRS employees
were so intent on assessing and collecting taxes,
which was emphasized in IRS' old mission
statement, they did not give due regard to
taxpayer needs and rights. As a result, the
Restructuring Act mandated several changes to IRS'
performance management system, including requiring
IRS to develop a new mission statement that placed
a greater emphasis on meeting taxpayers' needs.
Accordingly, IRS developed a new mission-to
"provide America's taxpayers top quality service
by helping them understand and meet their tax
responsibilities and by applying the tax law with
integrity and fairness to all."

If IRS is to fulfill its commitment to high-
quality customer service and ensuring taxpayer
compliance, employees must understand the
relationship between the two, as well as the
performance measures that IRS plans to use to
assess progress toward those goals.  Given IRS'
history and culture, this will not be easy.  Our
monitoring work suggests that the relationship
between customer service and compliance may not
yet be well understood by IRS frontline employees.
One source of confusion may be whether the value
IRS now wishes to place on customer service must
compete with the value it historically has placed
on compliance.  The Commissioner has attempted to
clarify this confusion by stating that the
Restructuring Act asked IRS to do three things:
(1) respect taxpayer rights and provide high-
quality service, (2) ensure that taxes that are
due are paid, and (3) do its work efficiently and
in a quality manner. The Commissioner has said
that he does not envision moving an imaginary
pendulum toward any one of three things-all are
important to improving IRS' overall performance.

     The Commissioner has said he believes that
there is a cause-and-effect relationship between
improvements in customer service and increased
compliance for taxpayers who do not understand the
applicable tax law requirements or find IRS'
processes too daunting. For example, IRS' efforts
to help taxpayers understand the eligibility
requirements for the Earned Income Credit would be
expected to increase voluntary compliance by
reducing the number of inappropriate claims
taxpayers might unwittingly file.

     At the same time, however, IRS should not
hesitate to use the enforcement tools at its
disposal to collect taxes owed by those who
willfully fail to comply with the tax laws.
Understanding that customer service and compliance
are not competing, but complementary, values will
take time and an ample amount of clear
communication and training.

Balanced Measures Are Key to Achieving IRS'
Mission
To better balance the goals of providing high-
quality customer service and ensuring compliance,
IRS has turned to a system of "balanced measures."
Our work on leading private organizations shows
that developing and using a coherent set of
performance measures is one key factor in an
organization's ability to achieve its mission.
Properly used, balanced performance measures help
organizations assess progress toward achieving
strategic goals and improving operations. When
aligned with an employee evaluation system, the
measures can serve as a powerful tool for
encouraging employees at all levels to work
together toward a common end.

The concept of balanced measures originated in the
private sector among industry leaders seeking to
strengthen their companies' long-term financial
performance. The companies recognized that placing
too much emphasis on short-term financial
objectives actually could be detrimental to
success if organizational units and employees
neglected other factors, such as customer
satisfaction, that drive financial success over
the long term. By developing and using a more
comprehensive set of measures, including measures
of key aspects of products and services (e.g.,
convenience and quality) that their customers
valued, the companies hoped to earn the kind of
customer satisfaction and loyalty necessary for
lasting success.

Under the balanced measures approach,
organizations develop and use a comprehensive
suite of measures to address strategic objectives
in four basic areas: financial impacts, customer
needs and service, internal processes, and
employee development and growth. The underlying
premise is not only that companies need to perform
well in each of these areas, but also that these
areas are interrelated and mutually supportive.
For example, providing better training to
employees should lead to improved customer service
and ultimately have a positive impact on the
financial bottom line.

IRS has recognized that a system of balanced
measures might work well to help achieve its new
mission, and it has become one of the leaders in
adapting the concept to the federal sector. Like
the aforementioned private sector companies, IRS
had been focusing heavily on indicators related to
revenue production, and it took steps so that its
performance management system supported this
emphasis.  To revise its performance management
system to better reflect its new mission, IRS is
developing a new suite of measures to address
three strategic goals:  service to each taxpayer,
service to all taxpayers, and productivity through
a quality work environment.  For each strategic
goal, IRS is developing a discrete corresponding
measure--customer satisfaction, business results,
and employee satisfaction, respectively.

IRS Lacks a Key Measure for Voluntary Compliance
While IRS has made some progress in developing the
measures, it does not yet have a complete set of
balanced measures.  A complete set should help
foster a full understanding that customer service
and compliance can be mutually supportive.
However, IRS does not have a key business results
measure for voluntary compliance, but is working
to develop one.  Although it will be difficult to
develop and may take several years, such a measure
is essential for a number of reasons.  Regularly
measuring progress in voluntary compliance is
important to gauge whether IRS is accomplishing a
key aspect of its mission. Also, the information
about taxpayers to be generated as part of
measuring voluntary compliance should help IRS
identify the characteristics of taxpayers who have
difficulty understanding and meeting their tax
responsibilities.  IRS must better understand the
problems of noncompliant taxpayers and the sources
of their problems so that it can develop better
products and services to meet the needs of those
taxpayers.  Finally, the data IRS would develop as
part of any voluntary compliance measurement
effort should allow IRS to better direct its
enforcement resources to those taxpayers that
willfully flaunt the tax laws.  Eventually, once a
complete set of balanced measures is developed,
IRS should be able to assess whether improved
customer service contributes to an increase in
voluntary compliance.

IRS recognizes that it needs reliable and
meaningful measures of voluntary compliance. In
fact, for over 30 years-until the early 1990s-IRS
had measures of voluntary compliance that were
developed by periodically auditing random samples
of taxpayers' returns. In 1995, IRS formally
canceled its plans to continue the random audits
because of concerns that it was costly and overly
intrusive on compliant taxpayers. The Commissioner
has said that in the absence of measures of
voluntary compliance, informed decisions on
strategies to encourage voluntary compliance would
be impossible, and the tendency to fall back on
enforcement revenue as a measure of performance
might reoccur. Using data from the audits that it
does conduct could provide IRS with some
compliance data, but because these returns are not
randomly selected, the audit results would not
provide IRS with the data it needs to determine
whether its customer service and compliance
activities are supporting its mission.

IRS' Office of Program Evaluation and Risk
Analyses is working with a contractor to determine
how to measure compliance and develop a compliance
strategy. However, that effort is still in its
early stages.  We plan to continue to monitor IRS'
efforts in this regard as part of our ongoing work
on IRS' balanced performance measures.

IRS Continues to Face Formidable Systems
Modernization Challenges
Revamping its time-worn tax processing systems is
a critical aspect of modernization.  However, IRS
must overcome several serious management
challenges in its current systems modernization
effort before it will be ready to build modernized
systems. In particular, IRS must (1) complete,
enforce, and maintain an enterprise systems
architecture,12 (2) establish and implement sound
investment management processes to ensure only
incremental, cost-effective system investments are
made, and (3) impose software acquisition and life
cycle management13 discipline on each system
investment it undertakes.

The challenges that IRS faces today are generally
the same ones we reported on in 1995, when we
identified pervasive management and technical
weaknesses with what was then known as Tax Systems
Modernization and made specific recommendations to
correct them.14 Since then, we have reviewed and
reported on IRS' actions to address our
recommendations and strengthen its modernization
capability, such as issuing its May 1997
Modernization Blueprint.15  We have also made
additional recommendations in light of IRS'
actions.16

IRS awarded its Prime Systems Integration Services
(PRIME) contract for systems modernization in late
1998.  In mid-1999, IRS submitted its first
expenditure plan, 17 seeking to spend about $35
million from its Information Technology
Investments Account18 for modernization initiatives
through October 31, 1999. We reported that the
plan was an appropriate first step and was
consistent with congressional direction and our
past recommendations.19  We also said that the key
to success was implementing it effectively.

IRS was unable to finalize its second expenditure
plan before the original $35 million was
obligated, and in December 1999, it requested
approval to obligate $33 million as a "stopgap"
funding measure until the next expenditure plan
was submitted.  In briefings to the relevant
appropriations subcommittees and IRS on our review
of the "stopgap" request, we reported our concerns
about (1) the lack of progress in completing and
implementing its enterprise systems architecture
and systems life cycle and (2) the risks
associated with IRS' plans to develop selected
systems without these critical management controls
in place.  In approving IRS' $33 million plan, the
appropriation subcommittees directed IRS to, among
other things, (1) expedite completion and
implementation of the enterprise architecture and
system life cycle methodology and (2) explain in
future expenditure plans how IRS plans to manage
the risk of performing detailed design or
development work if the architecture is not
completed or the life cycle is not implemented.

In response to these and other concerns raised by
the appropriations committees, the Office of
Management and Budget, and GAO, IRS reassessed and
restructured its modernization program.  It scaled
back its new system development efforts,
recognizing that it must first put in place the
requisite modernization management capability,
including developing its enterprise architecture
and implementing its life cycle methodology, which
IRS refers to as its Enterprise Life Cycle.

In early March 2000, IRS submitted to Congress its
second expenditure plan that (1) sought approval
to obligate an additional $176 million, and (2)
reported on its progress in implementing the first
plan. With respect to IRS' progress, we briefed
the relevant appropriation subcommittee staffs
that IRS' performance on the modernization over
the last 9 months fell far short of the
commitments that IRS had made.  We concluded that
IRS had not corrected its longstanding management
and technical weaknesses and was still not ready
to build major, software-intensive systems.  In
the March plan, IRS included initiatives intended
to address these longstanding weaknesses. For
example, by September 30, 2000, IRS plans to issue
an update to its Modernization Blueprint to
reflect changes in light of technology advances
and IRS' reorganization.  In addition, IRS plans
to have its Enterprise Life Cycle implemented by
June 30, 2000.

We will continue to designate IRS' systems
modernization as a high-risk and "challenged"
federal program until IRS has corrected its
management and technical weaknesses, thus
establishing effective controls for building
modernized systems.

Mr. Chairman, this concludes my prepared
statement. I would be happy to answer any
questions you or other Members of the Subcommittee
may have.

Contact and Acknowledgments

For future contacts regarding this testimony,
please contact Margaret T. Wrightson, at 202-512-
9110.  Ralph Block, Jonda VanPelt, Sherrie Russ,
Deborah Junod, Gary Mountjoy, Agnes Spruill, and
Tim Hopkins made key contributions to this
testimony.

_______________________________
1P.L. 105-206, July 22, 1998.
2IRS Management: Business and Systems
Modernization Pose Challenges (GAO/T-GGD/AIMD-99-
138, Apr. 15, 1999).
3A systems architecture defines the critical
attributes of an agency's collection of
information systems in both business/functional
and technical/physical terms.
4A systems life cycle defines the policies,
processes, and products for managing information
technology investments from conception,
development, and deployment through maintenance
and support.
5The operating divisions and their target start-up
dates are (1) Tax Exempt and Government Entities,
serving pension plans, exempt organizations, and
governments (operational since December 1999); (2)
Large and Mid-Size Business, serving businesses
with assets over $5 million (June 2000); (3)  Wage
and Investment Income, serving individual
taxpayers (October 2000); and (4) Small Business
and Self-Employed, serving fully or partially self-
employed individuals and small businesses with
assets under $5 million (October 2000).
6Tax Administration:  IRS' Problem-Solving Days
(GAO/GGD-99-1, Oct. 16, 1998).
7IRS has interpreted the goal to mean 80 percent
of all tax returns and 80 percent of all
information returns as opposed to 80 percent of
the combined total.
8Tax Administration: Opportunities to Increase the
Use of Electronic Filing (GAO/GGD-93-40, Jan. 22,
1993) and Tax Administration: Electronic Filing
Falling Short of Expectations (GAO/GGD-96-12, Oct.
31, 1995).
9IRS issued a revised strategic plan in November
1999.  See Electronic Tax Administration: A
Strategy for Growth (IRS Publication 3187, Nov.
1999).
10IRS Audits: Weaknesses in Selecting and
Conducting Correspondence Audits (GAO/GGD-99-48,
Mar. 31, 1999) and Tax Administration: IRS' Return
Selection Process (GAO/GGD-99-30, Feb. 22, 1999).
11Human Capital: A Self Assessment Checklist  for
Agency Leaders (GAO/GGD-99-179, Sept. 1999) and
Human Capital: Key Principles From Nine Private
Sector Organizations (GAO/GGD-00-28, Jan. 31,
2000).
12A systems architecture defines the critical
attributes of an agency's collection of
information systems in both business/functional
and technical/physical terms.
13A systems life cycle defines the policies,
processes, and products for managing information
technology investments from conception,
development, and deployment through maintenance
and support.
14 Tax Systems Modernization: Management and
Technical Weaknesses Must Be Corrected If
Modernization Is To Succeed (GAO/AIMD-95-156, July
26, 1995).
15Tax Systems Modernization: Blueprint Is a Good
Start But Not Yet Sufficiently Complete to Build
or Acquire Systems (GAO/AIMD/GGD-98-54, Feb. 24,
1998).
16For example, see Tax Systems Modernization:
Actions Underway But IRS Has Not Yet Corrected
Management and Technical Weaknesses (GAO/AIMD-96-
106, June 7, 1996) and GAO/AIMD/GGD-98-54.
17 Pursuant to the fiscal year 1998 Treasury and
General Government Appropriations Act (P.L. 105-
61) and the fiscal year 1999 Omnibus Consolidated
and Emergency Supplemental Appropriations Act
(P.L. 105-277), IRS and the Department of the
Treasury are required to submit to the Congress
for approval, an expenditure plan that meets
certain conditions (e.g., implements IRS'
Modernization Blueprint, meets IRS system life
cycle management program requirements) before IRS
can obligate funds from the Service's Information
Technology Investments Account (ITIA).
18Established in IRS' fiscal year 1998
appropriations act, this multiyear capital account
is to fund IRS systems modernization initiatives.
19Tax Systems Modernization: Results of IRS'
Initial Expenditure Plan (GAO/AIMD/GGD-99-206,
June 15, 1999).

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