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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