IRS Management: Formidable Challenges Confront IRS as It Attempts to Modernize

Published by the Government Accountability Office on 1999-07-22.

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

                           United States General Accounting Office

GAO                        Testimony
                           Before the Subcommittee on Oversight, Committee on
                           Ways and Means, House of Representatives

                                           /l NT
For Release on DeliveryS
Expected at
10:00 a.m. EDT
                            RS I1IANACI
                               MVlNAt   El MENT
on Thursday
July 22, 1999

                           Formidable Challenges
                           Confront IRS as It Attempts
                           to Modernize
                           Statement of James R. White, Director
                           Tax Policy and Administration Issues
                           General Government Division

                            0-           G

                              &         GAO
                                     Accountability * Integrity * Reliability
GAQ                                                                             C-87

IRS MANAGEMENT: Formidable Challenges
Confront IRS as It Attempts to Modernize

              Mr. Chairman and Members of the Subcommittee:

              I am pleased to be here today on the 1-year anniversary of the Internal
              Revenue Service (IRS) Restructuring and Reform Act of 1998
              (Restructuring Act)' to discuss management challenges that IRS faces in
              modernizing its organization and reforming its culture. As my testimony
              underscores, the challenges that the agency faces in implementing these
              reforms are no less significant than the value of the improvements that
              could be achieved.

              Depending on the outcome of IRS' efforts, enactment of the Restructuring
              Act may prove to be a significant turning point in the history of IRS. Its
              passage signaled Congress' strong concern that IRS had been
              overemphasizing revenue production and compliance at the expense of
              fairness and service to taxpayers. It also mandated changes to improve the
              situation. Among other things, the Restructuring Act required IRS to (1)
              adopt a new mission statement to place greater importance on serving the
              public and meeting taxpayer needs, (2) develop and implement a
              reorganization plan to include the establishment of new operating units
              serving particular groups of taxpayers having similar needs, (3) conduct
              training programs to ensure that managers and frontline employees are
              schooled in the importance of customer service and have the skills to
              provide it, and (4) carry out numerous specific actions to enhance
              taxpayers' rights.

              Commissioner Rossotti has embraced the spirit of the Restructuring Act
              and provided a compelling vision of what he wants IRS to become--a fully
              modernized agency providing top-quality service to taxpayers. The
              Commissioner has more than a vision, however. In addition to a new
              mission statement and supporting strategic goals,2 he has also outlined and
              begun to implement a modernization strategy that includes five
              interdependent components-what IRS has dubbed its "five levers of
              change." The five components are (1) revamped business practices, (2)
              organizational restructuring, (3) management roles with clear
              responsibility, (4) balanced measures of performance, and (5) new
              technology. If successfully implemented, the modernization strategy could

              'P.L. 105-206 (July 22, 199S).

              2 IRS' new mission statement reads, "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." IRS' supporting strategic goals are to (1) provide top quality service to each taxpayer, (2) provide
              service to all taxpayers by applying the law with integrity and fairness, and (3) increase productivity by
              providing a quality work environment for its employees.

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 IRS MANAGEMENT: Formidable Challenges Confront IRS as It Attempts to Modernize

fundamentally change IRS' culture to one that embraces customer service
as a core organizational value.

Given the reforms that are planned, it should surprise no one that IRS-an
agency with a long history of stovepipe management and a culture driven
by enforcement statistics-will be challenged to accomplish so ambitious
an agenda. IRS has a poor track record for implementation, and many of its
past efforts would be considered modest in comparison to the current

My statement today is based on our past work and our ongoing reviews of
IRS' reorganization process, its performance management system, and
systems modernization efforts. My statement makes the following points.

We agree with the Commissioner that the various components of IRS'
modernization must be implemented in an integrated fashion. Simply
restructuring the organization, for example, without concurrent revisions
to work processes and related information systems, will do little to
improve the quality of service being provided to taxpayers. However,
successfully implementing such a comprehensive modernization strategy,
while continuing the business of day-to-day tax administration, will push
IRS managers and staff to their limits. Particularly important will be the
capacity of middle managers to lead and manage comprehensive change.

No matter how much IRS changes its organization, work processes, and
information systems, its ability to fundamentally change the way it
interacts with taxpayers hinges on its ability to ensure that employees
demonstrate the desired attitudes and behaviors. A results-oriented
approach to managing human capital has the potential to deliver such a
result. To fully realize this potential, IRS must finish developing key
organizational performance measures, deal with an employee evaluation
process that is not currently aligned with IRS' new mission, and develop
and deliver a comprehensive training program for both frontline staff and
middle managers.

IRS continues to face formidable system modernization challenges. They
include (1) completing the modernization blueprint that IRS issued in May
1997 to de:fine, direct, and control future modernization efforts; (2)
establishing the management and engineering capability to build and
acquire modernized systems; and (3) investing in small, low-risk, cost-
effective modernization increments. The key to effectively addressing
these challenges is to ensure that long-standing modernization
management and technical weaknesses are corrected before IRS invests

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                           IRS MANAGEMENT: Formidable Challenges Confront IRS as It Attempts to Modernize

                           large sums of modernization funds. IRS recently initiated appropriate first
                           steps to address these weaknesses via its initial modernization expenditure
                           plan that represents the first step in a long-term, multi-increment

                           One great strength of IRS' modernization strategy is its comprehensive
Ability to Manage and      approach to change. If implemented in an integrated manner, the five
Integrate the              levers of change can fundamentally alter the way IRS interacts with
Interdependent             taxpayers. However, this comprehensive approach also presents a major
Change Efforts Is          challenge for IRS. Effectively implementing such a broad and complex set
Critical to IRS' Success   of interdependent changes will strain IRS managers and staff. Having to do
                           so while continuing to operate the existing tax administration process will
                           strain them even further.

                           The Commissioner believes, and we agree, that to effect real change, IRS
                           must address all five components of its change strategy concurrently
                           because the components are interdependent. Simply restructuring IRS,
                           without concurrent changes in processes for interacting with taxpayers
                           and in the measures that are used to assess those interactions, will have
                           little impact on service to taxpayers. Similarly, it makes little sense to
                           design new work processes without providing employees with the tools
                           they need to effectively implement the new processes. For example, IRS
                           cannot provide top-quality service to taxpayers who have questions about
                           their accounts unless employees can quickly access a modern information
                           system that contains accurate and up-to-date information on taxpayers'

                           Undertaking all of the work associated with business and systems
                           modernization while continuing to process returns, maintain taxpayer
                           accounts, and enforce the tax law will push IRS managers and staff to their
                           limits. Accordingly, the Commissioner and his senior executives are
                           attempting, among other things, to set priorities and adjust time frames.
                           For example, in light of the provision in the Restructuring Act that
                           specified a goal of having 80 percent of all returns filed electronically by
                           2007, the Commissioner adjusted the sequencing of information system
                           development efforts by accelerating electronic filing elements.

                           For IRS modernization to succeed, however, middle managers will also
                           have to play a role. Because of the magnitude of the proposed changes,
                           these managers will have to take responsibility for developing many of the
                           details of change initiatives and pushing the initiatives down through the
                           organization. Particularly important is the capacity of middle managers to

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                     IRS MANAGEMENT: Formidable Challenges Confront IRS as It Attempts to Modernize

                     lead and manage comprehensive change. I will talk more about
                     management capacity later.

                     IRS will also have tough choices to make in balancing "stay-in-business"
                     needs with long-term improvements. For example, IRS will have to
                     evaluate the trade-offs between changing existing information systems to
                     support or enhance current operations and waiting for the new business
                     processes and systems to be rolled out.

                     Based on over a decade of work, we believe that a results-oriented,
                     performance-based approach to management can provide IRS with the
                     tools it needs to meet the formidable challenges inherent in its
                     comprehensive approach to change. We are heartened by the fact that the
                     modernization strategy outlined by the Commissioner is consistent with
                     such an approach. As noted earlier, reorganizing IRS alone will not
                     fundamentally change the way IRS interacts with taxpayers. Indeed, our
                     case studies of leading organizations using performance and accountability
                     management principles found that the organizations had varied structures,
                     but similar results-oriented management strategies. 3 By integrating results-
                     oriented management into the day-to-day activities and culture of the
                     organization and holding managers accountable for doing the same, IRS
                     can help avoid the danger of its reforms becoming hollow, paper-filled
                     exercises. Among other things, results-oriented management includes (1)
                     building, maintaining, and marshaling the knowledge, skills, and abilities of
                     employees (i.e., human capital) and (2) developing and effectively using
                     information systems to achieve program results. As discussed in the next
                     two sections, results-oriented management of its resources, both human
                     capital and information systems, poses significant challenges for IRS.

                     New business processes, organizational structure, and technology-alone
Managing for         or together-will not significantly improve service to taxpayers without
Performance Poses    corresponding improvements in how IRS manages and develops its human
Significant Human    capital. A results-oriented approach to managing human capital-an
Capital Challenges   approach -thataligns employee performance management and training with
                     IRS' new mission statement, strategic goals, and performance measures-
                     has the potential to deliver such improvements. However, to realize the
                     potential, :[RS needs to overcome three challenges. First, a key
                     organizational performance measure, the rate of taxpayer compliance with
                     the tax laws, has not been developed. Second, a new employee appraisal

                     3Numerous reports in recent years have discussed results-oriented management principles and
                     implementation of the Government Performance and Results Act (P.L. 103-62) by federal agencies. A
                     major report addressing these issues was Effectively Implementing the Government Performance and
                     Results Act (CAO/GGD-96-11S, June 1996).

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                       IRS MANAGEMENT: Formidable Challenges Confront IRS as It Attempts to Modernize

                       system aligned with the organizational measures is years away from
                       complete implementation. And third, training that addresses the needs of
                       different employee groups, such as middle managers, has not been

Performance Measures   Performance measures can create powerful incentives to achieve the
                       cultural and behavioral changes that will be needed for IRS to effectively
                       perform its new mission. IRS has begun implementing a new set of
                       organizational performance measures that are to balance customer
                       satisfaction, employee satisfaction, and business results. However, some
                       measures have yet to be developed.

                       Developing a business results measure of taxpayer compliance 4 that can be
                       balanced with customer satisfaction will be particularly important. As IRS
                       has stated, in the absence of such compliance measures, "informed
                       decisions on strategies to encourage voluntary compliance.. . will be
                       impossible, and the historic tendency to fall back on enforcement revenue
                       as a measure of performance may reoccur."5 In a hearing held by this
                       Subcommittee almost 2 years ago, we highlighted our concerns about
                       overreliance on enforcement revenue as a measure of performancef We
                       concluded that such overreliance could create undesirable incentives for
                       IRS auditors to recommend taxes that would be unlikely to withstand a
                       taxpayer challenge, imposing an unfair and unnecessary burden on some

                       In the past, IRS measured compliance through its Taxpayer Compliance
                       Measurement Program (TCMP). Studies done under that program involved
                       detailed audits of a statistically valid sample of tax returns. IRS
                       discontinued these studies because of concerns about the additional
                       burden placed on the taxpayers who were the subjects of the detailed
                       audits. Since then, IRS has not identified a viable substitute for TCMP
                       studies to assess overall compliance.

                       Without a measure of taxpayer compliance, IRS cannot balance business
                       results with customer satisfaction. Further, taxpayer compliance studies
                       have been used to help IRS target audits on the most noncompliant
                       taxpayers. Consequently, the lack of current compliance data could
                       'Taxpayer compliance is the extent to which taxpayers file required returns, correctly determine their
                       tax liability, and pay the taxes they owe.

                       'Modernizing America's Tax Agency (IRS Publication 3349, Feb. 1999, pp.44-45).

                       'Tax Administration: Taxpaver Rights and Burdens During Audits of Their Tax Returns (GAO/T-GGD-
                        97-186, Sept. 26, 1997').

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                      IRS MANAGEMENT: Formidable Challenges Confront IRS as It Attempts to Modernize

                      actually decrease service to taxpayers. IRS is concerned that increasingly
                      out-of-date information on compliance will result in more and more
                      compliant taxpayers being hit with unnecessary audits. For both these
                      reasons, we believe that IRS needs a strategy for ensuring the availability
                      of statistically valid compliance data, while limiting the burden that
                      collecting such data imposes on taxpayers.

Employee Evaluation   Because IRS' current employee evaluation process is not aligned with its
                      new mission and does not support the culture that IRS hopes to create, it
                      must be revised. Last year, we reported that 75 percent of IRS' revenue
                      agents, tax auditors, and revenue officers believed that tax enforcement
                      results affected their evaluations-despite an IRS policy prohibiting the
                      use of such results in evaluating employee performance. Our ongoing
                      review of the two most recent evaluations received by these employees
                      bears out such perceptions. In examining a random sample of their
                      evaluations, we found a strong emphasis on compliance compared to
                      customer service. Moreover, when supervisors made comments on
                      customer service, they sometimes seemed to equate good customer
                      relations with success in obtaining full payment in every case. To illustrate,
                      when discussing customer relations skills, one manager wrote in an
                      employee's evaluation
                      "Over the last year, the Service is emphasizing that payments be obtained at the conclusion
                      of the examination. It can truly be said that the agent has kept to this philosophy. The agent
                      always seeks to obtain full payment of the deficiency, penalties, and interest. This shows a
                      strong commi.tment to the Service programs."

                      IRS says that it recognizes the problems with the current evaluation
                      process and the important role that employees will have in modernizing
                      the agency. IRS expects to change the evaluation process when it revamps
                      its entire performance management system.

                      Although IRS is on the right track, it will be years before a new evaluation
                      process is fully operational. IRS cannot afford to wait that long. It is
                      frontline employees-not their supervisors or other IRS managers-who
                      have the most direct and potentially confrontational interactions with
                      taxpayers. Continued reliance on an evaluation process that fails to
                      adequately balance service to taxpayers with compliance potentially could
                      undermine the success of the entire modernization effort. Although
                      organizational structure and systems are important, it is the attitudes and
                      behaviors of employees that will ultimately affect taxpayers.
                      7IRS Personnel Administration: Use of Enforcement Statistics in Employee Evaluations (GAO/GGD-99-
                      11, Nov. 30, 1998).

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           IRS MANAGEMENT: Formidable Challenges Confront IRS as It Attempts to Modernize

           Fortunately, there are opportunities for reinforcing the importance of
           serving taxpayers within the current evaluation process. During our
           ongoing review of the existing evaluation process, we identified several
           features, such as narrative comments and field visits, that supervisors do
           not use systematically when evaluating their employees. These features
           could be used to greater advantage to reinforce the importance of
           customer service among enforcement employees. For example, the
           narrative portion of an employee's written evaluation provides supervisors
           with an opportunity to focus on employees' customer service skills and
           contributions. Also, field visits that are to be conducted as part of the
           employee evaluation process could provide excellent vehicles for
           supervisors to directly observe employee-taxpayer interactions and to
           provide coaching and feedback to employees.

Training   Training has proven to be an important tool for agencies that want to
           change their cultures. To have this kind of impact, IRS' training will have
           to be comprehensive both in its subject matter and in who receives it.
           Training will need to (1) cover the new organizational structure, new
           business processes, and new information systems; (2) cover performance
           measures and the use of such measures to manage IRS; (3) be provided to
           all employees from frontline staff to senior managers; and (4) be aligned
           with the performance management system and new mission. For training
           to have real impact, it will have to be continuously reinforced in the day-to-
           day work environment. IRS is still defining its modernization-related
           training requirements and assessing its ability to deliver those
           requirements, but the plans we've seen thus far address all four of the
           issues outlined above. However, implementing all of this will be neither
           cheap nor easy.

           After reorganization, most frontline employees and their immediate
           supervisors are to be in the same or similarjobs. Job-specific training will
           be important, however, because IRS is beginning to implement significant
           changes to its organization, processes, and information systems. For
           example, in lieu of hiring a large number of seasonal employees to handle
           the return processing workload during the annual filing season, IRS plans
           to increase the number of permanent employees and expand their job
           responsibilities to include compliance work that they can do after the filing
           season. Those employees will have to be cross-trained so that they can
           handle both their return processing and compliance responsibilities. Other
           employees who will have to be cross-trained to handle the responsibilities
           envisioned by IRS' plans include (1) managers who are to supervise groups
           that include persons doing audit work and persons doing collection work
           and (2) employees, referred to as "tax resolution representatives," who are

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to provide an array of services, including certain audit and collection
services, to taxpayers visiting IRS walk-in sites. This kind of cross-
functional expertise is consistent with IRS' efforts to provide top-quality
customer service. It remains to be seen whether employees can effectively
fill these kinds of cross-functional roles, but it is clear that training will be
a critical factor in their success. Another factor will be the way training is
reinforced outside the classroom, for example, by supervisors acting as
role models.

As I mentioned earlier, the changes envisioned at IRS are so
comprehensive that the agency's top leadership cannot work below a very
strategic level. Fundamentally changing the way IRS interacts with
taxpayers depends on the capacity of lower-level managers, from frontline
supervisors up through the senior executive service, to do the detailed
planning, leading, and managing necessary for successful IRS
modernization. These lower level managers must be skilled in planning,
performance measurement, and the use of performance information in
decision-making. Our work has shown that ensuring that IRS has the
capacity it needs in this area will be a challenge.

For example, in January 1998, IRS established a central Taxpayer Service
and Treatment Improvement Program to oversee implementation of
numerous customer service improvement initiatives that were on the
books at that time. By January 1999, IRS had set priorities and assigned
accountability for their completion to specific executives. However, when
we reviewed 19 of the initiatives that had progressed past the planning and
design phase, we found that many were missing basic management
information such as completion dates and performance measures.8 Such
basic management information should allow IRS to track progress toward
goals and provide a better basis for organizational and management

To their credit, IRS executives have been responsive to our findings and
now have draft guidance for implementing our recommendations. Our
point today is that such guidance should not have been necessary.
Generating and using basic management information needs to become
routine for all levels of IRS management.

8IRS Customer Service: Management Strategy Shows Promise But Could be Improved (GAO/GGD-99-
88, May 5, 1999).

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                     IRS MANAGEMENT: Formidable Challenges Confront IRS as It Attempts to Modernize

                     The challenges that IRS faces in modernizing its tax systems are
                     significant, and the stakes are high. IRS' well-publicized, failed prior
Formidable Systems   attempts to leverage information technology in administering our nation's
Modernization        tax laws serve as an alert to the significant challenges that lie ahead. The
Challenges           key to effectively addressing these challenges is to ensure that long-
                     standing modernization management and technical weaknesses are
                     rectified before IRS begins investing large sums of money.

                     In 1995, we reported on the weaknesses that were the root causes of IRS'
                     past modernization problems, recommended ways to correct them, 9 and
                     designated the modernization as a high-risk or "challenged" federal
                     program. ' ° Since then, we have reviewed IRS' actions to address our
                     recommendations and strengthen its modernization capability, such as the
                     development of a modernization blueprint in May 1997, and we have made
                     additional recommendations in light of IRS' actions."

                     The good news is that IRS' executive team, under the direction of the
                     Commissioner and Chief Information Officer, have initiated appropriate
                     first steps to begin addressing system modernization management and
                     technical weaknesses. Last month, we reported on IRS' initial
                     modernization expenditure plan.'2 We concluded that the initiatives
                     defined in the plan were consistent with our past recommendations for
                     establishing effective modernization management and engineering
                     capabilities and incrementally acquiring architecturally sound system
                     solutions to satisfy validated business needs. Additionally, we found that
                     the plan satisfied legislated conditions for systems modernization.

                     The initial expenditure plan defines modernization initiatives for a 5-month
                     period ending in October 1999 and thus represents the first incremental
                     step in a long-term, multi-increment modernization process. Once
                     implemented, this initial expenditure plan alone will neither fully
                     implement our past recommendations nor eliminate the systems
                     modernization weaknesses and challenges that our recommendations are

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

                     10   High-Risk Series: An Overview (GAO/HR-95-1, Feb. 1995).

                     "For example, see Tax Systems Modernization: Actions Underway But IRS Has Not Yet Corrected
                     Management and Technical Weaknesses (GAO/AIMD-96-106, June 7, 1996) and Tax Systems
                     Modernization: Blueprint Is a Good Start But Not Yet Sufficientlv Complete to Build or Acquire
                     Systems (GAO/AIMD/GGD-98-54, Feb. 24, 1998).

                     12Tax Systems Modernization: Results of IRS' Initial Expenditure Plan (GAO/AIMD/GGD-99-206, June
                     15, 1999).

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                              IRS MANAGEMENT: Formidable Challenges Confront IRS as It Attempts to Modernize

                              intended to effectively mitigate. IRS leadership says that it understands
                              this and is committed to fully implementing our recommendations and
                              effectively addressing the many challenges that lie ahead.

                              Our recommendations and the challenges still confronting IRS fall into the
                              following three groups, each of which is discussed below: (1) completing
                              the modernization blueprint; (2) establishing project management and
                              system/software engineering capability; and (3) investing in small, low-
                              risk, cost-effective modernization increments. Until our recommendations
                              are fully implemented, we will continue to designate IRS' tax systems
                              modernization as a high-risk and "challenged" federal program.

Completing the                In response to our 1995 recommendations,1 3 IRS issued, in May 1997, its
                              modernization blueprint, including about 3,600 high-level business
                             requirements, a target enterprise systems architecture that described in
                             general terms the future systems environment needed to satisfy the
                             business requirements, and a general sequencing plan for transitioning
                             from IRS' current systems environment to its future systems environment.
                             In September 1997 congressional briefings and in a subsequent report,' 4 we
                             concluded that the blueprint provided a solid foundation from which to
                             define the level of detail and precision needed to effectively and efficiently
                             build a modernized system of interrelated systems. At the same time, we
                             noted that the blueprint was not yet complete and did not provide enough
                             detail for building or acquiring architecturally compliant systems.
                             Additionally, because the blueprint was developed before the
                             Restructuring Act and the Commissioner's organizational modernization,
                             we reported in January 1999 that the blueprint needed to be validated in
                             light of these organizational and business process changes.

                              IRS has acknowledged these limitations and plans to complete the
                              blueprint. In fact, its initial expenditure plan defines initiatives intended to
                              validate business requirements and provide missing architecture precision
                              and detail for ongoing system initiatives. Additionally, the initial
                              expenditure plan provides for a revised modernization sequencing plan as
                              well as the selection of enterprise architectural standards in such areas as
                              data base management, security, communications, user interface, and
                              client and server platforms.

                               = GAO/AIMD-95-156, July 26, 1995.

                              " GAO/AIMD/GGD-9S-54, Feb. 24, 1998.

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IRS MANAGEMENT: Formidable Challenges Confront IRS as It Attempts to Modernize

Completing the modernization blueprint poses a formidable challenge for
several reasons.

First, IRS' organizational and business restructuring is ongoing, meaning
that both completion of IRS' enterprise systems architecture and revision
of its sequencing plan must be closely coupled with and validated against
these restructuring efforts. Doing so will not be easy and will require an
unprecedented integration of IRS' business and systems organizational
cultures. To do less presents the risk that modernized systems will not
effectively and efficiently support IRS' core mission needs.

Second, IRS has a series of enterprise architectural decisions that need to
be made before investing in modernized systems, beginning with
architectural principles (e.g., Will users be supported regardless of
geographic location? Will IRS' existing investment in mainframe
technology be preserved?), followed by logical architectural
characteristics (e.g., What data structure will facilitate business process
reengineering efforts? Should a geographic or a business process "tiered"
architecture be adopted?), and culminating in how technology will be
physically implemented (e.g., What operating system, hardware platforms,
and database management system standard should be used?). The long-
term implications of these interrelated enterprise architectural decisions
are enormous. If properly made and effectively implemented, these
decisions can guide and constrain the architectural makeup of a secure,
interoperable, scalable, and maintainable future systems environment. If
not, IRS will likely remain mired in its currently inefficient and ineffective
stovepiped systems environment.

Third, IRS must minimize the number of new system development and
acquisition projects that it undertakes until it addresses the above key
architectural decisions. Otherwise, IRS will be forced to align certain
system-unique architectures with its "to-be-completed" enterprise
architecture. A case in point is IRS' ongoing Integrated Personnel System
project, which is part of a Treasury-wide effort that will use an Oracle
database management system running on a UNIX platform."s Once IRS'
enterprise architectural decisions have been made, IRS will have to
integrate this personnel system with its systems developed or acquired
according to its enterprise architecture. Depending on the extent of
compatibility, this could mean that IRS will have to incur the cost of

'5A UNIX platform consists of UNIX operating system software (originally developed at AT&T's Bell
Laboratories and commercially available from various companies) and compatible hardware, which
together support the operation of application software.

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                         IRS MANAGEMENT: Formidable Challenges Confront IRS as It Attempts to Modernize

                         additional hardware and software associated with integrating the different

Developing Project       IRS has historically lacked disciplined and structured processes for
                         managing information technology (Ir) projects and internally developing
    Management and       software-intensive systems. In 1995, we made recommendations to correct
System/Software          these weaknesses,'6 and, in response, IRS defined (as part of its 1997
Engineering Capability   blueprint) a systems life cycle framework that described the "cradle-to-
                         grave" processes for managing IT projects and building systems. At the
                         same time, IRS stated its intention to rely more on contractors to build
                         modernized systems, and thus become a system/software acquirer rather
                         than an in-house system/software developer as it had been in the past. To
                         this end, IRS also stated that it planned to "partner with" a Prime Systems
                         Integration Services (PRIME) contractor in the acquisition and integration
                         of modernized systems.

                         In February 1998, we reported that although the systems life cycle
                         overview provided a reasonable framework, it was not yet complete and
                         did not provide the needed specificity to adequately build modernized
                         systems.'7 For example, IRS did not have detailed process definitions for
                         any of the systems life cycle phases. In addition, organizational roles and
                         authorities had not been adequately specified, making it unclear who does
                         what in each systems life cycle process and phase. We also reported that
                         IRS had not yet defined and implemented the mature software processes,
                         including software acquisition processes, that would be essential for IRS to
                         effectively manage contractors under its strategy for acquiring, rather than
                         developing, software-intensive systems.

                         IRS has since hired a PRIME contractor, and in association with the
                         PRIME, has initiatives under way that are intended to establish the
                         requisite management and engineering capability needed to effectively
                         modernize its systems. In particular, IRS' initial expenditure plan provides
                         for establishing "enterprise life cycle" or ELC management and engineering
                         processes. ELC is to be an adaptation of the PRIME contractor's
                         commercially available systems life cycle management approach and
                         associated tools, incorporating needs that are unique to IRS, such as key
                         life cycle decision points. IRS concluded that adapting the PRIME
                         contractor's commercially available methodology to meet IRS' needs
                         would be less costly and faster than completing the systems life cycle

                         16   GAO/AIMD-95-156, July 26, 1995.

                         '7 GAO/AIMD/(;GD-9-54,     Feb. 24, 199S.

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 contained in its 1997 blueprint. We reviewed the PRIME contractor's
 commercially available methodology and found that it meets the
 requirements specified in the blueprint's systems life cycle overview and is
 consistent with the approaches that successful private and public sector
 organizations use to manage large IT projects.

In addition, IRS' initial expenditure plan provides for institutionalizing
mature software/system acquisition processes. That is, as part of the ELC,
IRS intends to define and implement software development and acquisition
processes in accordance with Software Engineering Institute capability
maturity model requirements. s Among this maturity model's requirements
are disciplined and rigorous processes, procedures, and practices for
effectively acquiring software-intensive systems through the use of
contractors, including processes concerning requirements development
and management, contractor solicitation and selection, contractor tracking
and oversight, and evaluation of contractor delivered products.

Significant challenges still confront IRS in institutionalizing project
management and software/system engineering rigor and discipline and
thus putting in place the capability needed to effectively modernize. For
example, the ELC processes, procedures, practices, handbooks, models,
methods, and tools need to be established, which means that the
contractor's commercially available methodology must first be tailored to
meet IRS' needs. Next, IRS has to implement the ELC on its IT projects,
which requires training IRS personnel on how to use and apply the ELC.
Further, IRS will need to establish structures and processes to ensure that
IT projects comply with the ELC.

Compounding these challenges is IRS' simultaneous need to ensure that it
effectively manages the PRIME and other contractors involved in each of
the ongoing modernization projects, pending completion and
institutionalization of the ELC. For example, we reported in June 1999'9
that IRS had not yet defined the respective roles of the Service and its
modernization contractors. Consequently, IRS undertook an effort to
develop a Concept of Operations document that defines the roles,
responsibilities, authorities, structure, and rules of engagement for the
PRIME, IRS, and other IRS support contractors. To ensure that this
important task is completed before modernization begins, we

'sThis model was developed by the Software Engineering Institute at Carnegie Mellon University to
evaluate an organization's software development or acquisition capability.

'9GAO/AIMD/GGD-99-206, June 15, 1999.

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                             IRS MANAGEMENT: Formidable Challenges Confront IRS as It Attempts to Modernize

                             recommended in our June report that IRS report on its progress in
                             completing this task in its next modernization expenditure plan.

Incrementally Investing in   To minimize the risk of IRS investing in systems before our
                             recommendations were fully implemented, we have recommended every
Modernized Systems           year since June 1996 that Congress limit IRS' IT spending to certain cost-
                             effective categories, such as small, low-risk, and cost-effective efforts that
                             can be delivered in a relatively short time frame."' In IRS' fiscal year 1997,
                             1998, and 1999 appropriations, Congress limited IRS' IT spending to efforts
                             consistent with these categories.2" Such an incremental approach to
                             investing in modernized systems is used by leading public and private
                             sector organizations. In addition, the Clinger-Cohen Act` and Office of
                             Management and Budget (OMB) policy3 endorse this approach to funding
                             large system development investments. Using this approach, organizations
                             take large, complex modernization efforts and break them into projects
                             and subprojects that are narrow in scope and brief in duration." This
                             enables organizations to determine whether a project delivers promised
                             benefits within cost and risk limitations and allows them to correct
                             problems before significant dollars are expended, which in turn mitigates
                             the risk of program failure. 5'

                             Consistent with our recommendation for incremental investment, IRS has
                             adopted a modernization investment strategy under which it is to first
                             develop and implement the management and engineering capability to
                             build modernized systems and then incrementally invest in manageable,
                             discrete system initiatives that are to be specified in its revised sequencing
                             plan. IRS' commitment to incremental investment management is the
                             initial step. The real challenge is translating commitment into everyday
                             practice. To do so, IRS must define structures and processes for project
                             selection, control, and evaluation that specify, among other things, who is
                             responsible and accountable for making investment decisions, the criteria

                             D   GAO/AIMD-96-106, June 7, 1996.

                             2 P.L. 104-208, Sept. 30, 1996; P.L. 105-61, Oct. 10, 1997; and P.L 105-277, Oct. 21, 1998.

                             -P.L. 104-106, Feb. 10, 1996.

                             " Evaluating Information Technology Investments, A Practical Guide (Executive Office of the
                             President, OMB, Nov. 1995) and OMB Memorandum M-97-02, Funding Information Systems
                             Investments (Oct. 1996), referred to as the "Raines Rules."

                             " GAO Executive Guide: Improving Mission Performance Through Strategic Information Management
                             and Technolovgy Learning From Leading Organizations (GAO/AIMD-94-115, May 1994).

                             = Assessing Risks and Returns: A Guide for Evaluating Federal Agencies' IT Investment Decision-
                             making (GAO/IAIMD-10.1.13, Feb. 1997).

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IRS MANAGEMENT: Formidable Challenges Confront IRS as It Attempts to Modernize

that will be used to make decisions, the analysis and information upon
which to base decisions, and the tools and methods to be used in
performing the analysis and generating the information. IRS will also need
to ensure that these structures and processes are institutionalized through
training and enforcement.

Central to IRS' incremental investment management strategy will be the
need to break large system projects into a sequence of incremental builds
that is economically justified on the basis of a compelling business case.
Additionally, IRS will need to track and monitor whether each increment is
producing promised benefits and meeting cost and schedule baselines and
ensure that this information is reliably reported to executive
decisionmakers. By doing so, organizations can address variances from
expectations incrementally, before significant dollars are expended. To
this end, we recommended in our June 1999 report26 on IRS' initial
expenditure plan that IRS fully disclose in future expenditure plans its
progress against incremental goals, deliverables, and benefit expectations.
As it has with each of our recommendations aimed at mitigating the
systems modernization challenges that it faces, IRS has agreed to do so.

In summary, the modernization effort under way at IRS has the potential to
deliver improved service to taxpayers. IRS' agenda, though, is both
ambitious and high-risk. We have been impressed by the Commissioner's
leadership and commitment to change as well as IRS' efforts to date.
However, sustainable improvement in service to taxpayers will depend on
IRS' managers successfully marshaling the agency's resources, both human
and systems, to deal with that challenging agenda.

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

Contact and Acknowledgments

For future contacts regarding this testimony, please contact James R.
White at (202) 512-9110. Individuals making key contributions to this
testimony included Randolph Hite, David Attianese, Deborah Junod, Gary
Mountjoy, Agnes Spruill, and Lorne Dold.

"GAO/AIMD/GGD-99-206, June 15, 1999.

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