IRS Management: Business and Systems Modernization Pose Challenges
(Testimony, 04/15/1999, GAO/T-GGD/AIMD-99-138).

The Internal Revenue Service (IRS) has been the subject of much
criticism and congressional scrutiny in recent years because of its
perceived inability to serve taxpayers and its failed attempts to
replace its antiquated computer systems. GAO has included several key
IRS programs on its list of government operations that are particularly
vulnerable to waste, fraud, abuse, and mismanagement. (See GAO/HR-99-1,
Jan. 1999.) The IRS Restructuring and Reform Act of 1998 provides the
agency with clear guidance on serving taxpayers and helping them to
voluntarily comply with the tax laws. In response, IRS has developed a
restructuring initiative to modernize its business and information
systems. The goal is to (1) make IRS' management and operations results
oriented and (2) acquire information systems that would, among other
things, allow IRS to provide employees and taxpayers with up-to-date
account information. This testimony evaluates IRS' progress in
implementing its new restructuring initiatives.

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

 REPORTNUM:  T-GGD/AIMD-99-138
     TITLE:  IRS Management: Business and Systems Modernization Pose
	     Challenges
      DATE:  04/15/1999
   SUBJECT:  Tax administration systems
	     Strategic information systems planning
	     Systems design
	     Internal controls
	     Personnel evaluation
	     Performance measures
	     Federal agency reorganization
	     Customer service
	     Employee incentives
IDENTIFIER:  IRS Taxpayer Compliance Measurement Program
	     IRS Tax System Modernization Program
	     IRS Restructuring Initiative

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    United States General Accounting Office GAO
    Testimony Before the Subcommittee on Government Management,
    Information, and Technology; and the Subcommittee on National
    Economic Growth, Natural Resources and Regulatory Affairs,
    Committee on Government Reform House of Representatives For
    Release on Delivery 2:00 p.m. EDT            IRS MANAGEMENT
    Thursday April 15, 1999           Business and Systems
    Modernization Pose Challenges Statement of James R. White,
    Director Tax Policy and Administration Issues General Government
    Division GAO/T-GGD/AIMD-99-138 Statement IRS Management:  Business
    and Systems Modernization Pose Challenges Mr. Chairmen and Members
    of the Subcommittees: We are pleased to be here today to discuss
    management challenges facing the Internal Revenue Service (IRS).
    Over the last several years, the IRS has been the subject of much
    criticism and increased congressional scrutiny over its perceived
    inability to serve taxpayers and its failed attempts at replacing
    its antiquated information systems.  Also, several key IRS program
    areas have been on our high-risk list of government programs
    susceptible to waste, fraud, abuse, and mismanagement for several
    years.1 Increased congressional scrutiny culminated in Congress'
    passing the IRS Restructuring and Reform Act of 1998.  The act,
    among other things, provides IRS clearer direction about serving
    taxpayers and assisting them to voluntarily comply with the tax
    laws. To align its business practices with the intent of the act,
    the Commissioner has developed a restructuring initiative that
    focuses on business and information systems modernization.
    Business modernization is to make IRS' management and operations
    results oriented to better address the unique needs of specific
    groups of taxpayers.  Systems modernization is to acquire
    information systems to support IRS' modernized business
    operations, including IRS' ability to provide employees and
    taxpayers with up-to-date account information. Our statement today
    is based on our past work on IRS' management challenges and high-
    risk areas as well as our ongoing work to monitor IRS' progress in
    implementing its new restructuring initiative. Our statement makes
    the following three points: *  IRS' business modernization
    encompasses changing IRS' organizational structure, adopting new
    business practices, and managing for results. A key challenge for
    IRS' business modernization will be developing a balanced
    measurement system and incorporating that measurement system into
    reward and employee-evaluation systems. IRS will have little
    assurance that employees will be motivated to change their
    behavior unless its reward and evaluation systems are aligned with
    its new measures. *  IRS' systems modernization is intended to
    implement IRS' modernized business practices. IRS developed the
    first two levels of a four-level modernization blueprint in May
    1997, which we said was a good first step 1 High Risk Series: An
    Update (GAO/HR-99-1, Jan. 1999). Page 1
    GAO/T-GGD/AIMD-99-138 Statement IRS Management:  Business and
    Systems Modernization Pose Challenges in defining the level of
    detail and precision needed to effectively and efficiently build
    modernized systems.2 However, because the blueprint was developed
    before the Commissioner's restructuring initiative, we said
    questions exist about its validity. IRS acknowledges these
    questions and, in addition to completing the blueprint, plans to
    validate it in light of the restructuring initiative.  Further,
    IRS is working as a partner with a systems integration services
    contractor to complete the final aspects of the blueprint.  Even
    so, as we have said in the past, using contractors for systems
    development is no panacea.3 The success of systems modernization
    will depend on whether IRS can effectively partner with and manage
    its contractors. *  The sheer magnitude of undertaking both
    business and systems modernization will strain IRS' management and
    staff.  Such an ambitious undertaking, along with the need to
    "stay in business," makes the restructuring initiative a high-risk
    venture that will take years to fully implement.  The Commissioner
    acknowledges that the restructuring initiative is a high-risk
    venture and plans to manage it accordingly. Equipped with a new
    mission statement that focuses on customer service,4 Business
    IRS is seeking to fundamentally change the way it does business.
    Business Modernization Holds           modernization holds promise
    for improving service to taxpayers and making managers and
    employees more accountable in achieving IRS' Promise But Faces
    mission. To be successful, IRS will need to sustain this
    initiative beyond Challenges                    the term of the
    current Commissioner and institutionalize managerial improvements.
    IRS' business modernization will also face challenges in the
    overlapping areas of performance management and human capital. The
    challenges we are describing today are not an exhaustive list but
    are examples to illustrate the magnitude of IRS' endeavor.
    Business modernization encompasses (1) changing IRS'
    organizational Planned Changes and Time      structure and
    business practices and (2) adopting a results-orientated Frames
    management approach. Some of the proposed changes in these areas
    are significant, and could take several years to implement. 2 Tax
    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). 3 Major Management Challenges and Program
    Risks: Department of Treasury  (GA0/OCG-99-14, Jan. 1999). 4 IRS'
    new mission is 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. Page 2
    GAO/T-GGD/AIMD-99-138 Statement IRS Management:  Business and
    Systems Modernization Pose Challenges Notwithstanding a reduction
    in the number of field offices, IRS' organizational structure has
    not changed significantly in almost 50 years. Each of its field
    offices is charged with administering the tax laws for its
    respective geographic area.  Accordingly, every taxpayer is served
    by at least one service center and a district office.  Each of
    these units is organized along functional lines-for example,
    examination, collection, and tax return processing. The planned
    organizational changes include shifting from a geographically-
    based structure to one organized by different types of taxpayers.
    IRS' new organizational structure is to include four operating
    divisions that are to serve four groups of taxpayers: (1) 88
    million wage and investment income taxpayers; (2) 40 million small
    business and self-employed taxpayers; (3) 170,000 large and
    midsize businesses; and (4) 1.9 million tax exempt organizations.
    Each operating division is to (1) have end-to-end responsibility
    for serving its cognizant taxpayer group and (2) reengineer
    business practices for its respective group. IRS is completing
    detailed plans for the new divisions and is planning for a
    multiyear transition. According to IRS' preliminary time line,
    employees will be realigned to the new organizational structure
    beginning this fall and throughout calendar years 2000 and 2001.
    By the end of this year, IRS plans to establish the Tax Exempt
    Division and much of the Large and Midsize Business Division.
    Starting in 2000, IRS plans to begin the transition of about (1)
    21,000 employees to the Wage and Investment Income Division; and
    (2) 39,000 to the Small Business and Self-Employed Division. In
    addition to creating new management structures and aligning
    employees accordingly, the plans recommend business process
    changes, implementation of which may extend beyond 2001. For
    example, the Wage and Investment Income plans include new
    examination and collection business processes that are scheduled
    to begin in 2002. Another component of business modernization is
    redefining management roles by defining the skills and experience
    required for senior executives. In the hope of broadening the
    perspective of IRS managers, the new operating divisions are to be
    managed by teams that may include a knowledgeable IRS executive
    teamed with managers with experience outside IRS.  Once these
    teams are established, IRS will need to devolve responsibility to
    these managers so that they can identify business process changes
    and be held accountable for achieving results. Revamping IRS'
    performance measurement system and aligning that system throughout
    the organization is another aspect of business modernization. The
    new measurement system, referred to as a balanced Page 3
    GAO/T-GGD/AIMD-99-138 Statement IRS Management:  Business and
    Systems Modernization Pose Challenges measurement system, is to
    support achievement of IRS' mission and goals.5 The system is to
    encompass three types of measures-business results, customer
    satisfaction, and employee satisfaction. These measures are to be
    aligned from the top of the organization down to IRS' frontline
    employees. Implementing performance-based management includes,
    among other Challenges Are Significant    things, (1) adopting a
    results orientation, which includes defining appropriate results-
    oriented goals and measures and aligning them throughout the
    organization; and (2) building, maintaining, and marshalling the
    human capital needed to achieve results.6 We identified the
    following challenges in performance management, especially in the
    area of human capital, simply to illustrate the magnitude of IRS'
    undertaking. These challenges are not intended to be an exhaustive
    list. For example, as IRS implements its new performance-based
    management system, it will need some new business results measures
    that can be aligned throughout the entire organization.  For many
    years, enforcement statistics were used as part of a composite
    measure to rank the performance of IRS' district offices.
    Accordingly, it was an important factor in evaluating the
    performance of managers of those offices. Yet IRS is prohibited
    from using these measures to evaluate frontline employees. Our
    work showed that IRS employees perceived that enforcement
    statistics affected evaluations despite the prohibition.7
    According to IRS, the disconnect between using the measures for
    managers but not for frontline employees did, in fact, contribute
    to widespread violations of IRS' prohibition. As IRS seeks to
    develop more appropriate business results measures, such as
    voluntary compliance, it faces the obstacle of having limited data
    for a baseline. IRS believes that it will need to develop
    something similar to its discontinued Taxpayer Compliance
    Measurement Program (TCMP) before it can develop a reliable
    measure for voluntary compliance. TCMP studies 5 IRS' three
    corporate goals are serving each taxpayer, serving all taxpayers,
    and fostering productivity through a quality work environment. 6
    Implementing performance management also includes establishing
    financial management capabilities that support effective
    decisionmaking and accountability and effectively using technology
    to achieve program results. We testified on IRS' financial
    management weaknesses in before the Subcommittee on Government
    Management, Information and Technology, House Committee on
    Government Reform, in March 1999. (Internal Revenue Service:
    Results of Fiscal Year 1998 Financial Statement Audit (GAO/T-
    AIMD-99-103, Mar. 1, 1999.) Later in this statement, we discuss
    the effective use of technology. 7 IRS Personnel Administration:
    Use of Enforcement Statistics in Employee Evaluations (GAO/GGD-99-
    11, Nov. 30, 1998). Page 4
    GAO/T-GGD/AIMD-99-138 Statement IRS Management:  Business and
    Systems Modernization Pose Challenges involved doing detailed
    audits of a statistically valid sample of tax returns to determine
    the extent of voluntary compliance among various groups of
    taxpayers. IRS discontinued these studies because of concerns
    regarding the additional burden placed on the taxpayers who were
    the subject of these audits. Since then, IRS has not considered
    TCMP studies to be a viable option for assessing voluntary
    compliance.  We believe a modified version of the TCMP studies,
    that reduces burden on taxpayers, could be useful in assessing
    voluntary compliance. Once IRS develops new measures, reward and
    employee evaluation systems for managers and frontline employees
    must be aligned with those measures if IRS is to use them to help
    accomplish its mission and achieve its three corporate goals.
    Instilling a results orientation throughout all levels of the
    organization is particularly important to the success of
    performance-based management. Without reward and performance
    evaluation systems that are in accord with IRS' new mission
    statement and aligned with its measures, managers and frontline
    employees may have inconsistent or inappropriate incentives. Our
    ongoing review of IRS' current employee evaluation system raises
    questions about the extent to which the system focuses on
    rewarding customer service. Preliminary results indicate that
    employee evaluations tend to emphasize efficiency and revenue over
    customer service. IRS plans to develop a new evaluation system as
    one of its short term customer service improvements. Until that
    system is effectively implemented, IRS will be without a key tool
    for instilling its new values throughout the organization. Another
    human capital implication of IRS' business modernization is a
    significant training challenge.  IRS is currently assessing its
    ability to deliver the requisite training and the associated
    costs. IRS' training plan for calendar years 1999 and 2000
    associated with business modernization includes (1) orientation
    training for all 100,000 employees and managers; (2) leadership
    courses for managers and executives; and (3) technical training
    for employees whose job functions are to be expanded. During this
    same time period, IRS is to provide other training required by the
    Restructuring and Reform Act of 1998. Training for employees whose
    jobs are to be expanded may be significant for some employees and
    may be critical to the success of the restructuring initiative.
    For example, in lieu of having a mass influx of seasonal employees
    for filing season activities, IRS is planning to increase the
    number of permanent employees and expand their job
    responsibilities to Page 5
    GAO/T-GGD/AIMD-99-138 Statement IRS Management:  Business and
    Systems Modernization Pose Challenges encompass both filing season
    activities and non-filing season compliance activities, such as
    examining returns.  This expansion would require significant
    training so that employees who were traditionally involved in
    filing season activities can learn the compliance work. Our past
    work on IRS' challenges in consolidating its customer service
    functions found that attempts to expand customer service
    representatives' responsibilities encountered some pitfalls.  The
    pitfalls stem from expecting too much too soon from employees.8
    The challenge lies in finding the degree of generalization and
    specialization that IRS can reasonably expect of its employees. To
    achieve IRS' business modernization goals, including serving
    taxpayers Successful Systems      in a coherent fashion, IRS must
    successfully modernize its information Modernization Is
    systems.  Modernized systems would provide, for example, IRS
    employees and taxpayers with up-to-date account information.  We
    have made Essential to Business    numerous recommendations to
    address the serious managerial and Modernization
    technical weaknesses in IRS' past systems modernization efforts.
    IRS is committed to addressing these recommendations but has not
    fully implemented them.  For IRS' systems modernization to be
    successful, it must do so. In July 1995, we reported that IRS (1)
    did not have a comprehensive business strategy to reduce paper tax
    return filings in a cost-effective manner; and (2) had not fully
    developed and put in place the requisite management, software
    development, and technical infrastructure necessary to
    successfully implement its ambitious systems modernization. We
    also reported that IRS lacked an overall systems architecture to
    guide the modernization's development and evolution.  At that
    time, we made over a dozen recommendations to address these
    weaknesses, including calling for IRS to (1) implement processes
    for investment management; (2) implement disciplined procedures
    for software development; and (3) complete and enforce an
    integrated systems architecture, including data and security
    subarchitectures.9 IRS agreed with our recommendations. IRS has
    made progress in addressing the managerial and technical
    weaknesses in its systems modernization effort that we identified
    in 1995. However, to minimize the risk of IRS' investing in
    systems before our recommendations were implemented, Congress
    directed IRS, among other 8 Tax Administration: IRS Faces
    Challenges in Reorganizing for Customer Service (GAO/GGD-96-3,
    Oct. 10, 1995). 9 Tax Systems Modernization:  Management and
    Technical Weaknesses Must Be Corrected If Modernization Is To
    Succeed (GAO/AIMD-95-156, July 26, 1995). Page 6
    GAO/T-GGD/AIMD-99-138 Statement IRS Management:  Business and
    Systems Modernization Pose Challenges things to (1) establish a
    schedule for implementing our recommendations and (2) submit an
    information systems architecture for modernization by May 15,
    1997.  IRS completed a modernization blueprint in May 1997 that
    included the first two levels of a four-level modernization
    architecture or blueprint.  In February 1998, we reported that
    IRS' modernization blueprint was a good first step in defining the
    precision needed to build a modernized set of interrelated systems
    effectively and efficiently.10 However, IRS' blueprint was
    completed 8 months before the Commissioner announced his business
    modernization plans. Because business modernization may change the
    very business processes and requirements on which the
    modernization blueprint was based, it raises questions about the
    modernization blueprint's validity.  IRS acknowledges that these
    questions exist and plans to validate the blueprint in light of
    business modernization. In March 1998, a little less than a year
    after completing the first two levels of the blueprint, IRS issued
    a request for proposal for a prime systems integration services
    contractor (PRIME).  In December 1998, IRS awarded its PRIME
    contract for systems modernization. IRS is working as a "partner"
    with the PRIME contractor to complete the modernization blueprint
    as we recommended.  For the PRIME contractor and partner strategy
    to be successful, IRS will need to effectively manage its
    contractors.  Our past work has found that IRS has had
    difficulties in managing contractors.11 IRS is also working with
    the PRIME contractor to account for (1) changes in system
    requirements and priorities caused by IRS' organizational
    restructuring and (2) changes to accommodate new technology and to
    implement the requirements in the IRS Restructuring and Reform Act
    of 1998. Additionally, IRS is in the process of establishing
    disciplined life- cycle management processes and structures and
    mature software development and acquisition capabilities,
    including the capability to manage contractors, before it begins
    building modernized systems. 10 Tax 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). 11
    High Risk Series:  Information Management and Technology (GAO/HR-
    97-9, Feb. 1997). Page 7
    GAO/T-GGD/AIMD-99-138 Statement IRS Management:  Business and
    Systems Modernization Pose Challenges IRS' restructuring
    initiative focuses on both business modernization, Scope of
    Restructuring including organizational changes, and systems
    modernization. However, Initiative Makes it a            the sheer
    magnitude of the changes will strain IRS' management and staff.
    This major restructuring initiative, with its focus on customer
    service, also High-Risk Venture that entails a cultural change for
    IRS.  Such an ambitious undertaking, along IRS Acknowledges
    with the need to "stay-in-business," makes this initiative a high-
    risk venture that will take years to fully implement. The
    Commissioner has concluded, and we agree, that the business and
    systems modernization components of IRS' restructuring initiative
    must be addressed in an integrated fashion.  The Commissioner
    acknowledges that the restructuring initiative is a high-risk
    venture and plans to manage it accordingly. We plan to continue to
    monitor IRS' progress in implementing the business and information
    systems aspects of its restructuring initiative. This concludes my
    prepared statement, and I would be happy to answer any questions.
    Page 8
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