oversight

IRS Management: Business and Systems Modernization Pose Challenges

Published by the Government Accountability Office on 1999-04-15.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                        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
                                                                                          1
               susceptible to waste, fraud, abuse, and mismanagement for several years.
               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
                                                                      2
                             efficiently build modernized systems. 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
                                                                    3
                             systems development is no panacea. 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.
                                                                                                                                   4
                             Equipped with a new mission statement that focuses on customer service,
Business                     IRS is seeking to fundamentally change the way it does business. Business
Modernization Holds          modernization holds promise for improving service to taxpayers and
Promise But Faces            making managers and employees more accountable in achieving IRS’
                             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.

Planned Changes and Time     Business modernization encompasses (1) changing IRS’ organizational
                             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



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                             Statement
                             IRS Management: Business and Systems Modernization Pose Challenges




                                                                                                                                         5
                             measurement system, is to support achievement of IRS’ mission and goals.
                             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.

Challenges Are Significant   Implementing performance-based management includes, among other
                             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
                                                                            6
                             the human capital needed to achieve results. 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
                                                                                     7
                             statistics affected evaluations despite the prohibition. 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
                                                8
                        soon from employees. 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
Essential to Business   and taxpayers with up-to-date account information. We have made
                        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
                                                       9
                        and security subarchitectures. 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
                                                                     10
modernized set of interrelated systems effectively and efficiently.
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
                        11
managing contractors.

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.
High-Risk Venture that   This major restructuring initiative, with its focus on customer service, also
                         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                                                       GAO/T-GGD/AIMD-99-138
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