Status of Tax Systems Modernization, Tax Delinquencies, and the Potential
for Return-Free Filing (Testimony, 03/14/96, GAO/T-GGD/AIMD-96-88).

Pursuant to a congressional request, GAO discussed the Internal Revenue
Service's (IRS) Tax Systems Modernization (TSM) Plan, focusing on: (1)
IRS efforts to correct TSM management and technical weaknesses within an
established time frame and cost figure; (2) IRS plans to collect
delinquent taxes and correct accounts receivable discrepancies; and (3)
the viability of return-free filing. GAO noted that: (1) IRS has
attempted to address its management and technical weaknesses, but its
initiatives do not satisfy previous recommendations or provide assurance
that the problems will be timely corrected; (2) IRS continues to spend
billions of dollars on TSM solutions, but it has little confidence in
its ability to deliver an effective system within the established TSM
time frame and cost figure; (3) IRS is rethinking its modernization and
operational initiatives related to accounts receivable and delinquent
taxes, but it projects a 13-percent decrease in collections for fiscal
year 1996; and (4) return-free filing is a viable option if taxpayers
continue to provide information regarding their tax status and number of
dependents, and employers are legally authorized to compute tax
liabilities under final withholding.

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

 REPORTNUM:  T-GGD/AIMD-96-88
     TITLE:  Status of Tax Systems Modernization, Tax Delinquencies, and 
             the Potential for Return-Free Filing
      DATE:  03/14/96
   SUBJECT:  Strategic information systems planning
             Accounts receivable
             Federal agency accounting systems
             Tax administration systems
             Delinquent taxes
             Electronic forms
             Accountability
             Collection procedures
             Information processing operations
             Systems architecture
IDENTIFIER:  IRS Tax System Modernization Program
             TSM
             CMM
             IRS Modernization Integration Plan
             IRS Enforcement Revenue Information System
             
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Cover
================================================================ COVER


Before the Subcommittee on Treasury, Postal Service and General
Government, Committee on Appropriations, House of Representatives

For Release on Delivery
Expected at
10:00 a.m.  EST
Thursday
March 14, 1996


- STATUS OF TAX SYSTEMS
MODERNIZATION, TAX DELINQUENCIES,
AND THE POTENTIAL FOR RETURN-FREE
FILING

Statement for the Record of Lynda D.  Willis, Director, Tax Policy
and Administration Issues, General Government Division; and Dr.  Rona
B.  Stillman, Chief Scientist, Computers and Telecommunications,
Accounting and Information Management Division

GAO/T-GGD/AIMD-96-88

GAO/GGD/AIMD-96-88T


(268724)


Abbreviations
=============================================================== ABBREV

  TSM -
  IRS -

STATUS OF TAX SYSTEMS
MODERNIZATION, TAX DELINQUENCIES,
AND THE POTENTIAL FOR RETURN-FREE
FILING
============================================================ Chapter 0


   SUMMARY
---------------------------------------------------------- Chapter 0:1

Two of the most critical and long-standing operational issues facing
the Internal Revenue Service (IRS) are the management and
implementation of its multibillion dollar Tax Systems Modernization
(TSM) and the collection of tens of billions of dollars in tax debts. 
For years GAO has voiced concern over IRS' planning and management of
TSM and its efforts to accurately report and collect taxes owed the
government.  Because of the significance of these issues and the
problems associated with them, GAO has included them on its list of
high-risk areas and has made numerous recommendations to correct
pervasive management and technical weaknesses.  IRS is taking steps
to address these problems, but their underlying causes remain and
continue to hinder IRS' efforts for significant improvement. 

Regarding TSM, GAO is concerned with weaknesses in (1) electronic
filing strategy, (2) strategic information management; (3) software
development; (4) systems architecture, integration, and testing; and
(5) accountability and control of systems modernization.  Because of
these weaknesses, GAO believes that the government's multibillion
dollar investment in TSM is at serious risk.  Until these weaknesses
are corrected, IRS' ability to successfully complete TSM will remain
highly questionable. 

In addition to more effective use of technology, as IRS pursues its
vision of a modern, almost paperless system, more filing options
could provide benefits for taxpayers and IRS.  For example, if
certain impediments can be overcome, return-free filing can offer
many taxpayers reduced burden while also reducing the amount of paper
IRS must process. 

In tax collection, IRS has made little progress in resolving its
accounts receivable problems.  It continues to contend with (1)
inaccurate and unreliable information; (2) antiquated computer
systems and a rigid collection process; (3) unintended problems with
safeguards against potential taxpayer abuses; (4) a lack of
accountability in its organizational structure; and (5) staffing
imbalances.  As a result, IRS cannot accurately identify how much
money the government is owed or how much of the debt is collectible. 


   STATEMENT
---------------------------------------------------------- Chapter 0:2

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to have this opportunity to assist in your review of
the Internal Revenue Service's (IRS) operations.  As you requested,
our statement today will cover three areas (1) IRS' efforts to
correct management and technical weaknesses that have impeded its Tax
Systems Modernization (TSM) program as well as whether IRS can
successfully complete the program within the time frames and cost
figures it has established; (2) IRS efforts to collect delinquent tax
debts and deal with its accounts receivable problems; and (3) the
viability of return-free filing as an option to the current tax
filing system. 

Our testimony, which is based on past reports and ongoing work, makes
the following points: 

  IRS' efforts to modernize tax processing are jeopardized by
     persistent and pervasive management and technical weaknesses. 
     Our July 1995 report made specific recommendations that were
     intended to correct many of these weaknesses by December 31,
     1995.\1 IRS has initiated some activities to address these
     weaknesses.  However, these weaknesses have not been corrected
     and ongoing efforts provide little assurance that weaknesses
     will be corrected.  IRS has continued with plans to spend
     billions more on TSM solutions with little confidence of
     successfully delivering effective systems within established TSM
     time frames and cost figures. 

  Inaccurate data and IRS' antiquated and rigid collection process
     continue to hinder its efforts to stem the growth of its
     accounts receivable and improve collection of delinquent debts. 
     Little progress has been made in resolving the underlying causes
     of these problems since 1988, when IRS' accounts receivable was
     first identified as a high-risk area.  Both the private sector
     and other government entities could offer IRS valuable lessons
     in improving its collections performance. 

  The size of IRS' total inventory of tax debts--$166 billion at the
     end of fiscal year 1994--is deceiving because it is an
     accumulation of debts for a 10-year period and includes debts
     that are clearly uncollectible--i.e., those of defunct
     businesses and deceased taxpayers.  The inventory also includes
     accounts that have been established for compliance reasons and
     that may not be valid receivables.  According to IRS estimates,
     the net result is that only about 20 percent of the inventory,
     or about $35 billion, is potentially collectible. 

  According to IRS data, collections of delinquent taxes, while
     increasing to $25.1 billion in fiscal year 1995, are still below
     the high of $25.5 billion collected in fiscal year 1990. 
     Because of IRS' decision to absorb fiscal year 1996 budget cuts
     by reducing collections staffing, IRS projects that collections
     will decrease about 13 percent in fiscal year 1996--to about
     $21.9 billion. 

  While return-free filing could provide benefits to both the
     taxpayer and IRS, certain impediments would have to be overcome
     for successful implementation. 


--------------------
\1 Tax Systems Modernization:  Management and Technical Weaknesses
Must Be Corrected If Modernization Is To Succeed (GAO/AIMD-95-156,
July 26, 1995). 


   TSM WILL NOT SUCCEED UNLESS
   PERSISTENT MANAGEMENT AND
   TECHNICAL WEAKNESSES ARE
   CORRECTED
---------------------------------------------------------- Chapter 0:3

Modernizing tax processing is key to IRS' vision of a virtually
paper-free work environment in which taxpayer information is readily
available to IRS employees to update taxpayer accounts and respond to
taxpayer inquiries.  In July 1995, we reported on the need for IRS to
have in place sound management and technical practices to increase
the likelihood that TSM's objectives will be cost-effectively and
expeditiously met.\2 A 1996 National Research Council report on TSM
has a similar message.\3 Its recommendations parallel the more than a
dozen recommendations we made involving IRS' (1) business strategy to
reduce reliance on paper, (2) strategic information management
practices, (3) software development capabilities, (4) technical
infrastructures, and (5) organizational controls. 

The Treasury, Postal Service and General Government Appropriations
Act of 1996 "fences" $100 million in TSM funding until the Secretary
of the Treasury reports to the Senate and House Appropriations
Committees on the progress IRS has made in responding to our
recommendations with a schedule for successfully mitigating
deficiencies we reported.\4 The conference report on the act directed
that we assess for the Committee the status of IRS' corrective
actions.\5 As of March 4, 1996, the Secretary of the Treasury had not
reported to the Committees on TSM.  This testimony is a progress
report to the Committee on actions taken as reported to us by IRS
officials. 

In our July report, we analyzed IRS' strategic information management
practices, drawing heavily from our research on the best practices of
private and public sector organizations that have been successful in
improving their performance through strategic information management
and technology.  These fundamental best practices are discussed in
our report Executive Guide:  Improving Mission Performance Through
Strategic Information Management and Technology (GAO/AIMD-94-115, May
1994), and our Strategic Information Management (SIM) Self-Assessment
Toolkit (GAO/Version 1.0, October 28, 1994, exposure draft). 

To evaluate IRS' software development capability, we validated IRS'
August 1993 assessment of its software development maturity based on
the Capability Maturity Model (CMM) developed in 1984 by Carnegie
Mellon University's Software Engineering Institute, a nationally
recognized authority in the area.  This model establishes standards
in key software development processing areas (i.e., requirements
management, project planning, project tracking and oversight,
configuration management, quality assurance, and subcontractor
management) and provides a framework to evaluate a software
organization's capability to consistently and predictably produce
high-quality products. 

When we briefed the IRS Commissioner in April 1995 and issued our
report documenting its weaknesses in July 1995, IRS agreed with our
recommendations to make corrections expeditiously.  At that time, we
considered IRS' response to be a commitment to correct its management
and technical weaknesses.  In September 1995, IRS submitted an action
plan to Congress explaining how it planned to address our
recommendations.  However, this plan, follow-up meetings with senior
IRS officials, and other draft and "preliminary draft" documents
received through early March 1996 have provided little tangible
evidence that actions being taken will correct the pervasive
management and technical weaknesses that continue to place TSM, and
the huge investment it represents, at risk. 

Our ongoing assessment has found that IRS has initiated a number of
activities and made some progress in addressing our recommendations
to improve management of information systems; enhance its software
development capability; and better define, perform, and manage TSM's
technical activities.  However, none of these steps, either
individually or in the aggregate, has fully satisfied any of our
recommendations.  Consequently, IRS today is not in an appreciably
better position than it was a year ago to ensure Congress that it
will spend its 1996 and future TSM appropriations judiciously and
effectively. 


--------------------
\2 GAO/AIMD-95-156, July 26, 1995. 

\3 Continued Review of the Tax Systems Modernization of the Internal
Revenue Service--Final Report, Computer Science and
Telecommunications Board, National Research Council, 1996. 

\4 Public Law 104-52, 11-19-95. 

\5 H.R.  Report No.  291, 104th Cong., 1st Session (1995). 


      IRS STILL DOES NOT HAVE A
      COMPREHENSIVE STRATEGY TO
      MAXIMIZE ELECTRONIC FILINGS
-------------------------------------------------------- Chapter 0:3.1

We reported that IRS was drowning in paper--a serious problem IRS can
mitigate only through electronic tax filings.  We noted that IRS
would not achieve the full benefits that electronic filing can
provide because it did not have a comprehensive business strategy to
reach or exceed its electronic filing goal, which was 80 million
electronic filings by 2001.  IRS' estimates and projections for
individual and business returns suggested that, by 2001, as few as 39
million returns may be submitted electronically, less than half of
IRS' goal. 

We reported that IRS' business strategy would not maximize electronic
filings because it primarily targeted taxpayers who use a third party
to prepare and/or transmit simple returns, are willing to pay a fee
to file their returns electronically, and are expecting refunds. 
Focusing on this limited taxpaying population overlooked most
taxpayers, including those who prepare their own tax returns using
personal computers, have more complicated returns, owe tax balances,
and/or are not willing to pay a fee to a third party to file a return
electronically. 

We concluded that, without a strategy that also targets these
taxpayers, IRS would not meet its electronic filing goals or realize
its paperless tax processing vision.  In addition, if, in the future,
taxpayers file more paper returns than IRS expects, added stress will
be placed on IRS' paper-based systems.  Accordingly, we recommended
that IRS

     refocus its electronic filing business strategy to target,
     through aggressive marketing and education, those sectors of the
     taxpaying population that can file electronically most
     cost-beneficially. 

IRS agreed with this recommendation and said that it had convened a
working group to develop a detailed, comprehensive strategy to
broaden public access to electronic filing, while also providing more
incentives for practitioners and the public to file electronically. 
It said that the strategy would include approaches for taxpayers who
are unwilling to pay for tax preparer and transmitter services, who
owe IRS for balances due, and/or who file complex tax returns.  IRS
said further that the strategy would address that segment of the
taxpaying population that would prefer to file from home, using
personal computers. 

Since then, IRS has performed an electronic filing marketing analysis
at local levels; developed a marketing plan to promote electronic
filing; consolidated 21 electronic filing initiatives into its
Electronic Filing Strategies portfolio; and initiated a reengineering
project to begin this month with a goal to reduce paper tax return
filings to 20 percent or less of the total volume by 2000.  These
initiatives could result in future progress toward increasing
electronic filings.  However, these initiatives have yet to culminate
in a comprehensive strategy that identifies how IRS will reach its
electronic filings goal, including how it plans to target those
sectors of the taxpaying population that can file electronically most
cost-beneficially, and what efforts it will make to develop requisite
supporting systems. 


      IRS' STRATEGIC INFORMATION
      MANAGEMENT PRACTICES REMAIN
      INEFFECTIVE
-------------------------------------------------------- Chapter 0:3.2

We reported that IRS did not have strategic information management
practices in place.  We found, for example, that, despite the
billions of dollars at stake, information systems were not managed as
investments.  To overcome this, and provide Congress with insight
needed to assess IRS' priorities and rationalization for TSM
projects, we recommended that the IRS Commissioner

     take immediate action to implement a complete process for
     selecting, prioritizing, controlling, and evaluating the
     progress and performance of all major information systems
     investments, both new and ongoing, including explicit decision
     criteria, and using these criteria, to review all planned and
     ongoing systems investments by June 30, 1995. 

In agreeing with these recommendations, IRS said it would take a
number of actions to provide the underpinning it needs for strategic
information management.  IRS said, for example, that it was
developing and implementing a process to select, prioritize, control,
and evaluate information technology investments to achieve
reengineered program missions. 

Since then, IRS has taken steps towards putting into place a process
for managing its extensive investments in information systems.  For
example, IRS has created the executive-level Investment Review Board
for selecting, controlling, and evaluating all information technology
investments; developed initial and revised sets of decision criteria
that it used last summer to rank and prioritize TSM projects and used
in November 1995 to recommend additional changes to information
systems resource allocations, respectively; developed its Investment
Evaluation Handbook and Business Case Handbook to strengthen
management decision-making on systems investments; and is using the
Investment Evaluation Handbook to review operational TSM projects. 

Although these steps represent some progress in responding to our
concerns, none of them to date--individually or collectively--has
fully satisfied our recommendations.  IRS has not demonstrated that
it is following a well-defined, consistent, and repeatable
information technology investment decision-making process for
selecting, controlling, and evaluating its information technology
initiatives and projects.  In particular, working procedures,
required decision documents, decision criteria, and reliable cost,
benefit and return data needed for an investment process are not
complete.  IRS has not provided evidence to demonstrate how analyses
are being conducted on all systems investments using such data as
expected improvement in mission performance, costs to date, technical
soundness, or pilot performance.  Instead, IRS operates on the
assumption that it will receive a specified funding ceiling for
systems development and technology, and then determines how much
funding can be eliminated from projects in order to lower overall
modernization costs to that level. 

Over the last few months, we have communicated several concerns to
IRS about weaknesses in its current investment process that continue
to raise risks and erode confidence in the quality of decisions being
made about TSM investments.  These include: 

  the absence of initial screening criteria to determine if IRS has
     developed sufficient data about an information technology
     project--such as benefit-cost analyses, proposed
     return-on-investment calculations, and an accepted return on
     investment threshold level used as a decisional cut-off
     point--in order for the investment review board to reach an
     informed funding decision;

  the lack of analysis and trade-offs being made among all proposed
     information technology investments as a single portfolio--such
     as spending on legacy, infrastructure, and proposed
     modernization projects--in order to fully justify a ranking and
     prioritization of modernization efforts;

  the lack of mechanisms to ensure that the results of IRS'
     investment evaluation reviews, such as that recently completed
     on the Service Center Recognition/Image Processing System, are
     being used to modify selection and control decision-making
     processes or to change funding decisions for projects. 


      SOFTWARE DEVELOPMENT
      ACTIVITIES ARE STILL
      INCONSISTENT AND POORLY
      CONTROLLED
-------------------------------------------------------- Chapter 0:3.3

We reported that, unless IRS improves its software development
capability, it is unlikely to build TSM in a timely or economical
manner, and systems are unlikely to perform as intended.  To assess
its software capability, in September 1993, IRS rated itself using
the Software Engineering Institute's CMM.  IRS found that, even
though TSM is a world-class undertaking, its software development
capability was immature. 

IRS placed its software development capability at the lowest level,
described as ad hoc and sometimes chaotic and indicating significant
weaknesses in its software development capability.  Our review also
found that IRS' software development capability was immature and weak
in key process areas.  For instance,

  a disciplined process to manage system requirements was not being
     applied to TSM systems,

  a software tool for planning and tracking development projects was
     not consistently used,

  software quality assurance functions were not well defined or
     consistently implemented,

  systems and acceptance testing were neither well defined nor
     required, and

  software configuration management\6 was incomplete. 

To address IRS' software development weaknesses and upgrade IRS'
software development capabilities, we recommended that the IRS
Commissioner

     immediately require that all future contractors who develop
     software for the agency have a software development capability
     rating of at least CMM level 2,\7 and before December 31, 1995,

     define, implement, and enforce a consistent set of requirements
     management procedures for all TSM projects that goes beyond IRS'
     current request for information services process, and for
     software quality assurance, software configuration management,
     and project planning and tracking; and

     define and implement a set of software development metrics to
     measure software attributes related to business goals. 

IRS agreed with these recommendations and said that it was committed
to developing consistent procedures addressing requirements
management, software quality assurance, software configuration
management, and project planning and tracking.  Regarding metrics,
IRS said that it was developing a comprehensive measurement plan to
link process outputs to external requirements, corporate goals, and
recognized industry standards. 

Specifically regarding the first recommendation, IRS has (1)
developed standard wording for use in new and existing contracts that
have a significant software development component requiring that all
software development be done by an organization that is at CMM Level
2, (2) developed a plan for achieving CMM Level 2 capability on all
of its contracts, and (3) initiated plans for acquiring expertise for
conducting CMM-based software capability evaluations of contractors
and designated personnel to perform these evaluations.  We found,
however, no evidence that all contractors developing software for the
agency are being required to develop it at CMM Level 2.  For example,
our review of an IRS electronic filing system being developed by a
contractor found that the system was being developed at CMM Level 1. 

With respect to the second recommendation, IRS is updating three
software development lifecycle methodologies, developed a draft
quality audit procedures handbook, updated its requirements
management request for information services document, and developed
and implemented a requirements management course.  IRS also evaluated
its current contractor management processes, compared these processes
with the CMM goals, and is considering improvement activities. 

However, to progress towards CMM Level 2, IRS must define and
implement the detailed procedures to be used for completing the goals
of CMM's key process areas.  Based on our assessment, we have found
some activities to address our recommendations, but IRS still has not
allocated the resources needed to define and implement these areas. 
It appears that IRS software development projects will continue to be
built using ad hoc and chaotic processes that offer no assurance of
successful delivery. 

Since our review, IRS has also started a three-phase process to (1)
identify data sources for metrics, (2) define metrics to be used, and
(3) implement the metrics.  According to IRS, although phase one has
been completed, no metrics have been defined, and implementation is
currently planned for sometime between June 1996 and January 1997. 
In this regard, although IRS has begun to act on our recommendations,
systems are still being developed without the data and discipline
needed to give management assurance that they will perform as
intended. 


--------------------
\6 Configuration management involves selecting project baseline items
(e.g., specifications), systematically controlling these items and
changes to them, and recording their status and changes. 

\7 The Software Engineering Institute at Carnegie Mellon University
has developed a model, the Software Capability Maturity Model (CMM),
to evaluate an organization's software development capability.  CMM
level 2 denotes that basic project management processes are
established to track cost, schedule, and functionality and that the
necessary process discipline is in place to repeat earlier successes
on similar projects. 


      SYSTEMS ARCHITECTURES,
      INTEGRATION, AND TESTING
      CONTINUE TO BE INADEQUATE
-------------------------------------------------------- Chapter 0:3.4

We reported that IRS' systems architectures,\8 integration planning,
and system testing and test planning were incomplete.  To address
IRS' technical infrastructure weaknesses, we recommended that the IRS
Commissioner

     before December 31, 1995,

     complete an integrated systems architecture, including security,
     telecommunications, network management, and data management;

     institutionalize formal configuration management for all newly
     approved projects and upgrades and develop a plan to bring
     ongoing projects under formal configuration management;

     develop security concept of operations, disaster recovery, and
     contingency plans for the modernization vision and ensure that
     these requirements are addressed when developing information
     system projects;

     develop a testing and evaluation master plan for the
     modernization;

     establish an integration testing and control facility; and

     complete the modernization integration plan and ensure that
     projects are monitored for compliance with modernization
     architectures. 

IRS agreed with these recommendations and said that it was
identifying the necessary actions to define and enforce systems
development standards and architectures agencywide.  IRS' current
efforts in this area follow: 

  IRS is developing a "descriptive overview" of an integrated systems
     architecture, which, for example, includes a security
     architecture chapter.  A draft of the descriptive overview is
     due in April 1996, and an executive summary is due in mid-March. 

  IRS has developed and distributed a Configuration Management Plan
     template, which identifies the elements needed when constructing
     a configuration management plan, and established a charter for
     its Configuration Management branch. 

  IRS has prepared a security concept of operations and a disaster
     recovery and contingency plan. 

  IRS has developed a test and evaluation master plan for TSM. 

  IRS is in the process of establishing an interim integration
     testing and control facility but has not determined an initial
     operating date.  It is also planning a permanent integration
     testing and control facility, scheduled to be completed by the
     end of 1996. 

  IRS has completed an informal draft of its TSM Release Definition
     Document and a draft of its Modernization Integration Plan. 

These activities start to address our recommendations.  However, they
do not fully satisfy any of our recommendations for the following
reasons. 

First, IRS has not completed an integrated systems architecture (the
"blueprints" of TSM), and no evidence has been provided to suggest
that it will have one in the foreseeable future.  The draft
architecture documents received are high-level descriptions that fall
far short of the level of detail needed to provide effective guidance
in designing and building systems.  For example, IRS' concept of a
three-tier, distributed architecture does not provide sufficient
detail to understand the security requirements and implications.  It
does not, for instance, specify what security mechanisms are to be
implemented between and among the three tiers to ensure that only
properly authorized users are allowed to access tax processing
application software and taxpayer data. 

Second, IRS has not brought its development, acceptance, and
production environments under configuration management control.  For
example, there is no disciplined process for moving software from the
test to the production environment. 

Third, our review of the security concept of operations found that
the document does not identify selected security methods and
techniques.  For example, it discusses two methods for providing
identification and authentication for controlling user access to
various systems without specifying which method should be used.  The
security concept of operations is also sometimes inconsistent with
the security mechanisms currently being implemented on systems now
being developed and does not indicate how, when, or if these
inconsistencies will be resolved. 

Fourth, IRS' disaster recovery and contingency plan is a high-level
document for planning that presents basic tenets for information
technology disaster recovery but not the detail needed to provide
guidance.  For example, it does not explain the steps that computing
centers need to take to absorb the workload of a center that suffers
a disaster. 

Fifth, the test and evaluation master plan provides the guidance
needed to ensure sufficient developmental and operational testing of
TSM.  However, it does not describe what security testing should be
performed, or how these tests should be conducted.  Further, it does
not specify the responsibilities and processes for documenting,
monitoring, and correcting testing and integration errors. 

Sixth, the plans for IRS' integration testing and control facility
are inadequate.  The purpose of an off-line test site is to provide a
safe, controlled environment for testing that realistically simulates
the production environment.  This permits new hardware and software
to be thoroughly tested without putting IRS operations and service to
taxpayers at risk.  However, current plans for the facility do not
provide for the testing of all IRS software prior to nationwide
delivery.  It is unclear why this position has been taken or how
difficult and expensive it will be to make the modifications needed
to enable the facility to effectively replicate its operational
environment. 

Finally, IRS' draft TSM Release Definition Document and Modernization
Integration Plan have not been finalized.  In addition, they (1) do
not reflect TSM rescoping and the information systems reorganization
under the Associate Commissioner; (2) do not provide clear and
concise links to other key documents (e.g., its integrated systems
architecture, business master plan, concept of operations, and
budget); and (3) assume that IRS has critical processes in place that
are not implemented (e.g., effective quality assurance and
disciplined configuration management). 


--------------------
\8 A system architecture is an evolving description of an approach to
achieving a desired mission.  It describes (1) all functional
activities to be performed to achieve the desired mission, (2) the
system elements needed to perform the functions, (3) the designation
of performance levels of those system elements, and (4) the
technologies, interfaces, and location of functions. 


      NO SINGLE ENTITY CONTROLS
      ALL INFORMATION SYSTEMS
      EFFORTS
-------------------------------------------------------- Chapter 0:3.5

We reported that IRS had not established an effective organizational
structure to consistently manage and control systems modernization
organizationwide.  The accountability and responsibility for IRS'
systems development were spread among IRS' Modernization Executive,
Chief Information Officer, and research and development division.  To
help address this concern, in May 1995, the Modernization Executive
was named Associate Commissioner.  The Associate Commissioner was to
manage and control systems development efforts previously conducted
by the Modernization Executive and the Chief Information Officer. 

In September 1995, the Associate Commissioner for Modernization
assumed responsibility for the formulation, allocation, and
management of all information systems resources for both TSM and
non-TSM expenditures.  In February 1996, IRS issued a Memorandum of
Understanding providing guidance for initiating and conducting
technology research and for transitioning technology research
initiatives into system development projects. 

It is important that IRS maintain an organizationwide focus to manage
and control all new modernization systems and all upgrades and
replacements of operational systems throughout IRS.  To fully
strengthen systems development accountability and responsibility, we
recommended that the IRS Commissioner

     give the Associate Commissioner management and control
     responsibility for all systems development activities, including
     those of IRS' research and development division. 

We are concerned that IRS still has not established an
organizationwide focus to consistently manage and control information
systems.  Specifically, we have seen no evidence that systems
development, upgrades, and replacements at IRS field locations are
being controlled by the Associate Commissioner.  Although the
Associate Commissioner was given authority for the formulation,
allocation, and management of all information systems resources for
TSM and non-TSM systems, the research and development division still
retains approval authority for initiating technology research
projects and for conducting proof-of-concept systems prototypes.  It
is unclear whether the building processes and budget used for these
systems development areas are controlled by the Associate
Commissioner. 

Again, despite some improvements in consolidating management control
over systems development, IRS still does not have a single entity
with the responsibility and authority to control all of its
information systems projects. 


   LITTLE PROGRESS HAS BEEN MADE
   IN ADDRESSING ACCOUNTS
   RECEIVABLE PROBLEMS
---------------------------------------------------------- Chapter 0:4

The growth in IRS' inventory of tax debt, coupled with its inability
to collect a significant portion of tax delinquencies, prompted us
and OMB to designate IRS' accounts receivable as a high-risk area
several years ago.  Since that initial designation, IRS has made
little progress in resolving the problems at the root of its poor
collections performance.  As shown in figure 1, its inventory of tax
debt grew almost 80 percent, while collections declined about 8
percent from 1990 to 1994. 

   Figure 1:  Inventory of Tax
   Debt, Accounts Receivable, and
   Collections, 1990 Through 1994

   (See figure in printed
   edition.)

Note 1:  The inventory of tax debt includes outstanding debts owed by
taxpayers that are in IRS' detailed accounting records, even though
many are invalid.  IRS currently cannot differentiate financial
(valid) inventory from compliance (invalid) inventory. 

Note 2:  Effective November 1990, Public Law 101-508 extended the
statutory time limit on collections from 6 to 10 years. 

Source:  IRS. 

While collections of delinquent taxes increased in fiscal years 1994
and 1995 to $23.5 billion and $25.1 billion, respectively, IRS
projects a 13-percent decrease in collections in fiscal year 1996 to
$21.9 billion because of its decision to reduce collections staffing
due to cuts in its fiscal year 1996 budget.  This amount would
represent the lowest level of delinquent collections since fiscal
year 1986. 

We realize that it is not an easy task for IRS to fix the underlying
causes of its accounts receivable problems.  IRS has undertaken many
efforts in attempting to do so.  However, some of these efforts have
been curtailed, and others have produced limited improvements. 
Further, IRS is in the process of rethinking and rescoping many of
its modernization and operational initiatives that would affect
accounts receivable and collections.  But, despite these initiatives,
IRS' efforts do not reflect a comprehensive strategy to address the
underlying causes of the problems that cut across the agency and
across lines of managerial authority and responsibility. 


      NATURE OF THE INVENTORY
-------------------------------------------------------- Chapter 0:4.1

When discussing the problems affecting IRS' receivables, it is
important to understand the nature of the tax debt inventory.  In the
simplest terms, this inventory represents delinquent taxes recorded
in IRS' records as being owed by taxpayers.  Delinquent taxes are to
remain in the inventory until they are paid or abated, or until the
10-year collection statute of limitations expires. 

While much attention has been focused on the size of IRS' tax debt
inventory--which as of September 30, 1994, was $166 billion--this
figure is deceiving for several reasons.  Primary among these is the
fact that this figure includes an IRS estimated $97 billion in
potential taxes that have been assessed but which may not be valid
receivables. 

For example, under IRS procedures, when IRS' information return
matching process identifies a taxpayer who received a Form W-2 but
did not file a tax return, IRS creates a return for the taxpayer. 
Generally, this is done using the standard deduction and single
filing status and often results in the taxpayer's owing taxes.  IRS
then sends balance due notices to the taxpayer reflecting the amount
of taxes owed as calculated by IRS--to encourage the taxpayer to file
a return with the correct amount of tax.  If the taxpayer does not
subsequently file the return, IRS records the amount it calculated as
taxes due.  However, since the taxpayer has not agreed with the
assessment and could later provide information that could result in
the full or partial abatement of the tax debt, the amount recorded is
not a valid receivable for financial reporting purposes. 

In the past, IRS used a statistical sampling methodology to estimate
the compliance and financial portions of the inventory for financial
statement purposes.  Using this methodology, IRS estimated that, of
the $166 billion tax debt inventory, about $69.2 billion represented
financial receivables.  IRS recently developed a methodology to
identify how much of its inventory of tax debts represents these
types of assessments.  However, we found that the data upon which the
analysis was based was flawed. 

IRS' inventory of tax debt also includes delinquent debt that may be
up to 10 years old.  This is because there is a 10-year statutory
collection period and IRS generally does not write off uncollectible
delinquencies until the 10 years is over.  As a result, the
receivables inventory includes accounts up to 10 years old that may
be impossible to collect because the taxpayers are deceased or the
corporations are defunct.  Of the $166 billion total receivables
inventory, IRS data show that $1.7 billion was owed by deceased
taxpayers and $19.1 billion was owed by defunct corporations. 

During a review of accounts receivable cases greater than $10 million
as of September 30, 1995, we identified several examples that
illustrate problems with IRS' accounts receivable inventory.  For
example, out of a total of 460 accounts receivable cases that we
reviewed, IRS identified 258 as currently not collectible:  198 of
these represented defunct corporations, while the remaining 60 cases
represented entities that either could not pay or could not be
located.  These cases represented $12 billion of the $26 billion
included in accounts greater than $10 million. 

The age of the receivable also does not reflect the additional time
it took for IRS to actually assess the taxes in the first place.  In
many cases, IRS' processing and use of certain taxpayer-related
information to identify delinquent debt is a significant factor in
determining the ultimate collectibility of the debt.  Enforcement
tools, such as its matching programs and tax examinations, may take
up to 5 years from the date the tax return is due, thus reducing the
likelihood that the outstanding amounts will be collected. 

The age factor significantly affects the collectibility of the debt
because, as both private and public sector collectors have attested,
the collectibility of debt becomes more problematic the older the
debt becomes.  Because of these and other factors, IRS considers many
of the accounts in the inventory to be uncollectible. 

IRS estimated that only about $35 billion of the $166 billion
inventory of tax debt was collectible.  However, for 3 of the 4 years
we audited IRS' financial statements,\9 we could not determine the
reliability of IRS' estimate of accounts receivable and the related
estimated collectable amount.  We were only able to do so for fiscal
year 1992, the first year we audited IRS.  That year, we tested the
validity of amounts IRS reported using a statistical sample.  This
resulted in an estimate of $28 billion in collectable accounts
receivable.  For the subsequent 2 years (fiscal years 1993 and 1994),
IRS performed its own statistical sample to determine the
collectability of its accounts receivable.  As part of our audit, we
assessed the reasonableness of these samples and found that we could
not validate IRS' estimates.  Our inability to rely on these
estimates was based on discrepancies between underlying documentation
we audited and IRS' reported balances. 


--------------------
\9 Financial Audit:  Examination of IRS' Fiscal Year 1992 Financial
Statements (GAO/AIMD-93-2, June 30, 1993); Financial Audit: 
Examination of IRS' Fiscal Year 1993 Financial Statements
(GAO/AIMD-94-120, June 15, 1994); and Financial Audit:  Examination
of IRS' Fiscal Year 1994 Financial Statements (GAO/AIMD-95-141,
August 4, 1995). 


      LONG-STANDING PROBLEMS
      CONTINUE
-------------------------------------------------------- Chapter 0:4.2

As we reported in our February 1995 high-risk report,\10 IRS's
accounts receivable problems reflect pervasive problems throughout
IRS' processes that cumulate in the tax debt inventory and IRS'
difficulties in addressing the underlying causes of these problems. 
For example,

  the failure of returns processing to correctly account for a
     taxpayer's payment may result in the creation of an invalid
     account receivable;

  the failure of taxpayer service to promptly resolve a taxpayer's
     inquiry about a delinquent account may perpetuate the
     receivable; and

  an IRS compliance effort that overstates a taxpayer's liability
     also inflates the inventory, makes additional work for
     collection personnel, and offers little guarantee of revenue
     generation. 

In our February 1995 report, we identified five underlying causes
that tend to create and perpetuate problems in accounts receivable. 
First and most significant is IRS' lack of accurate and reliable
information, which hinders efforts to deal effectively with tax
debts.  Until accurate and reliable information on the validity and
collectibility of the inventory of tax debts is available, IRS will
continue to waste time and resources pursuing debts that are not real
and thus do not generate revenue.  Improving data accuracy and
reliability is a key objective of TSM, but progress has been slow and
the future success of TSM is uncertain. 

In addition, until IRS can effectively identify who owes the tax
receivables and successfully implements a financial management system
that ties its collection results to its operations, it is difficult,
if not impossible, to gauge the return achieved from its collection
efforts or how effective IRS or anyone could be in collecting
outstanding tax receivables. 

Second, IRS' collection process was introduced several decades ago
and, although some changes have been made, the process generally is
rigid, costly, and inefficient.  The three-stage collection
process--computer-generated notices and bills, telephone calls, and
personal visits by collection employees--takes longer and is more
costly than collection processes in the private sector. 

While the private sector emphasizes the use of telephone collection
calls, a significant portion of IRS' collection resources are devoted
to personal visits made by revenue officers.  IRS has initiated
programs and made procedural changes to speed up the collection
process, but historically it has been reluctant to reallocate
resources from the field to the earlier, more productive collection
activities.  Due to budget cuts, however, IRS is in the process of
temporarily reassigning about 300 field staff to telephone collection
sites to replace temporary employees who were terminated. 

In addition to IRS' problems with identifying who currently owes
taxes and the amount it can expect to collect, it has lacked the
capability to accurately track the revenues realized from its various
collection efforts.  To address this problem, IRS has been developing
the Enforcement Revenue Information System (ERIS).  ERIS was designed
to account for actual collections resulting from IRS' enforcement
efforts and to enable IRS to more accurately measure and predict
enforcement costs and revenues.  However, its implementation was
delayed because of inaccuracies found in the system's data; we are
currently reviewing the system to assess its reliability. 

IRS has also undertaken efforts to reengineer the collection process,
but several of these were recently discontinued without changing the
current processes.  This, in part, was a result of IRS' decision to
rethink its overall goals and objectives in light of changing budget
priorities.  IRS is now planning to implement a reengineering project
that will involve all IRS activities that enable taxpayers to fulfill
their tax obligations. 

Third, while Congress has given IRS strong tools, such as levies and
seizures, to collect delinquent taxes, it has also established a
number of statutory safeguards to prevent their unwarranted use.  An
unintended result of these safeguards has been to hamper collections. 
For example, the 1988 Taxpayer Bill of Rights prohibits IRS from
evaluating the performance of its staff on the basis of dollars
collected.  Without the use of this measure, which is used by most
private-sector collectors, IRS staff have less incentive to collect
taxes.  Their performance evaluations do not distinguish between
collection actions that essentially write off a tax debt and actions
that result in the collection of taxes owed--both are considered case
closings.  This practice may be one reason why IRS field collection
staff have been declaring more tax debts "currently not collectible"
each year than they collect. 

We understand the importance of balancing the need to protect the
rights of taxpayers against the need to collect tax debts.  While IRS
must be fair and follow appropriate laws and regulations, taxpayers
must also accept their lawful tax obligations.  Those who evade this
obligation cause all other taxpayers to bear a disproportionate share
of the overall tax burden. 

Fourth, IRS' organizational structure, with its considerable sharing
of responsibility for collecting tax debts, provides little
accountability for results.  IRS is in the process of rethinking and
restructuring its organization, including reducing the number of
employees and the number of regional and district offices and service
centers, but the impact of these changes, if any, on the accounts
receivable problems will not be felt for several years. 

Fifth and finally, staffing imbalances among IRS field offices have
resulted in staff being available in some offices to pursue both
small and large debts, while in other offices even large debts might
go uncollected because of staff shortages. 

In addition, as mentioned earlier, IRS historically has allocated
two-thirds of its collection staff to the field, which comprises the
last and least productive stage of the collection process.  This is
in contrast to private-sector collectors, who devote most of their
resources to the earlier telephone stage. 

Several staffing-related projects have been affected by IRS' actions
taken in response to its reduced appropriations for fiscal year 1996. 
One of these projects was focused on redesigning the operation of
collection groups in the field to improve productivity and reduce
costs.  Although preliminary results appeared to IRS to be positive,
IRS decided to stop the project in October 1995 for budgetary
reasons. 

This Subcommittee's concern of several years' duration about IRS'
delinquent tax collection efforts led to the provisions contained in
IRS' fiscal year 1996 appropriations bill that earmark $13 million
for a pilot program to test the use of private law firms and debt
collection agencies to help collect delinquent tax debts.  IRS issued
a request for proposals from prospective participants in the pilot
program on March 5, 1996.  If done successfully, this program may
open a new avenue for addressing some of IRS' collection problems. 

We recognize that IRS has many initiatives under way that could help
to resolve the accounts receivable problem.  But, we also recognize
that IRS has pursued many initiatives over the years without bringing
about the desired change.  IRS is in the process of rescoping many of
its planned modernization and operational initiatives because of
changed budget priorities.  However, a comprehensive strategy to
guide IRS' efforts to improve collections and accounts receivable has
not been developed.  This strategy, which is critical to the
successful resolution of IRS' accounts receivable problems, must
recognize and address the five underlying causes of the
problem--causes that cut across the agency and across lines of
managerial authority and responsibility. 


--------------------
\10 High-Risk Series:  Internal Revenue Service Receivables
(GAO/HR-95-6, February 1995). 


   RETURN-FREE FILING
---------------------------------------------------------- Chapter 0:5

Almost 100 million American taxpayers currently must file tax
returns, even though most have fully paid their taxes through the
withholding system.  Given its potential for reducing taxpayer burden
and IRS paper processing, we have been studying return-free filing
systems and the potential impact they would have on the federal
income tax system. 

While we are still in the process of finalizing our results, we can
provide some preliminary information on (1) the two most common types
of return-free filing, (2) the number of American taxpayers that
could be affected by return-free filing, and (3) some of the issues
that would need to be addressed before such a system could be used. 

In countries with return-free filing, the most common type of system
we identified was that termed "final withholding." Under this system,
the withholder of income taxes determines the taxpayer's liability
and withholds the correct tax liability from the taxpayer.  With the
final year-end payment to the taxpayer, the withholder makes a final
reconciliation of taxes and adjusts the withholding for that period
to equal the year's taxes. 

Another type of return-free filing--known as "agency
reconciliation"--depends entirely on information reporting and allows
the tax agency to determine the taxpayer's taxes based on these
information documents.  The tax agency then sends the taxpayer either
a refund or a tax bill based on the tax liability and the amount of
withholding.  We identified 36 countries that use some form of
return-free filing--34 with final withholding and 2 with tax agency
reconciliation. 

Given the extent of withholding and information reporting that exists
under our current tax system, we estimated that about 18.5 million
American taxpayers whose incomes derive from only one employer could
be covered under a final withholding system.  Alternatively, an
estimated 51 million taxpayers could be covered under the agency
reconciliation system. 

We estimate that taxpayers could save 52 million hours in preparation
time and millions of dollars in tax preparation costs under the final
withholding system, and 170 million hours and millions of dollars in
preparation time and costs under the tax agency reconciliation
system.  IRS would also save an estimated $45 million in processing
costs under the final withholding system, and about $36 million under
the tax agency reconciliation system, in processing and compliance
costs.  Employers would face additional burden and costs under the
final withholding system, but we were unable to determine how much. 

Several changes to the current tax system would be needed, however,
in order to implement return-free filing.  Under both systems,
taxpayers would continue to provide information on their filing
status and number of dependents.  Employers would need to be
authorized by law to compute tax liabilities under final withholding. 
Consideration would need to be given to certain states where the
state income tax is tied to the federal income tax return.  For
example, IRS would have to speed up the processing of information
documents under the tax agency reconciliation system so that tax
liabilities could be determined before April 15, which is also the
tax filing deadline for some states. 

IRS' own 1987 study of return-free filing recognized this processing
problem and recommended against return-free filing for that reason. 
However, given the many processing changes envisioned with the
modernization of IRS' computer systems, this problem may be less of
an obstacle than it was in 1987. 

Given the current tax system, a tax agency reconciliation system has
the potential to reduce the filing burden on more taxpayers and also
put less burden on payors than a final withholding system. 


-------------------------------------------------------- Chapter 0:5.1

In summary, IRS' TSM and delinquent debt collection efforts remain a
serious concern to us.  Although IRS is attempting to address some of
the problems, their underlying causes remain and continue to hinder
the potential for significant improvement.  TSM, in particular, is at
serious risk, and until the weaknesses are corrected, we believe that
IRS' ability to successfully complete the program will remain highly
questionable. 


*** End of document. ***