oversight

Tax Systems Modernization: Results of Review of IRS' Initial Expenditure Plan

Published by the Government Accountability Office on 1999-06-15.

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

                      United States General Accounting Office

GAO                   Report to Congressional Requesters




June 1999
                      TAX SYSTEMS
                      MODERNIZATION

                      Results of Review of
                      IRS’ Initial
                      Expenditure Plan




GAO/AIMD/GGD-99-206
United States General Accounting Office                                                            Accounting and Information
Washington, D.C. 20548                                                                                  Management Division



                                    B-282877.1                                                                                      Letter

                                    June 15, 1999

                                    The Honorable Ben Nighthorse Campbell
                                    Chairman
                                    The Honorable Byron L. Dorgan
                                    Ranking Minority Member
                                    Subcommittee on Treasury and
                                     General Government
                                    Committee on Appropriations
                                    United States Senate

                                    The Honorable Jim Kolbe
                                    Chairman
                                    The Honorable Steny H. Hoyer
                                    Ranking Minority Member
                                    Subcommittee on Treasury,
                                     Postal Service, and General Government
                                    Committee on Appropriations
                                    House of Representatives

                                    This report provides the results of our review of the Internal Revenue
                                    Service’s (IRS) initial Information Technology Investments Account (ITIA)
                                    expenditure plan pursuant to the fiscal year 1998 Treasury and General
                                    Government Appropriations Act (Public Law 105-61) and the fiscal year
                                    1999 Omnibus Consolidated and Emergency Supplemental Appropriations
                                    Act (Public Law 105-277). In these acts, the Congress limited IRS’ ability to
                                    obligate ITIA funds until the service and the Department of the Treasury
                                    submit to the Congress for approval an expenditure plan that as stated in
                                    the acts, (1) implements the IRS Modernization Blueprint,1 (2) meets Office
                                    of Management and Budget (OMB) investment guidelines for information
                                    systems, (3) is reviewed and approved by IRS’ Investment Review Board,2
                                    OMB, and Treasury’s IRS Management Board and is reviewed by GAO,



                                    1
                                      In the conference report accompanying the fiscal year 1997 Omnibus Appropriations Act (Public Law
                                    104-208), the Congress directed Treasury to, among other things, develop a blueprint to define, direct,
                                    and control future tax systems modernization efforts. Treasury submitted the IRS Modernization
                                    Blueprint to the Congress on May 15, 1997.

                                    2 Accordingto IRS, the investment review board has been replaced by the Core Business Systems
                                    Executive Steering Committee, which is chaired by IRS’ Commissioner.




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                      B-282877.1




                      (4) meets the requirements of IRS system life cycle management program,3
                      and (5) is in compliance with acquisition rules, requirements, guidelines,
                      and system acquisition management practices of the federal government.
                      These conditions are consistent with recommendations on IRS’ tax systems
                      modernization that we have made over the past 5 years.

                      IRS provided us a copy of the expenditure plan that it submitted to the
                      Congress. As agreed with your offices, we reviewed this plan to determine
                      whether (1) the plan satisfies the conditions specified in IRS’ fiscal year
                      1998 and 1999 appropriations acts, (2) the plan is consistent with our past
                      recommendations on IRS’ systems modernization, and (3) we have any
                      other observations on the modernization efforts. The results of this review
                      are based on our ongoing monitoring of IRS’ modernization efforts that is
                      being performed at the request of your offices. Our work was performed
                      from January 1999 through May 1999 in accordance with generally
                      accepted government auditing standards. (See appendix I for details on
                      our scope and methodology.) The Commissioner provided us with written
                      comments, which are discussed in the “Agency Comments” section of this
                      report and are reprinted in appendix II.



Results in Brief      IRS’ initial expenditure plan is the first in a series of incremental
                      expenditure plans that IRS plans to prepare over the life of the
                      modernization. As such, the initial plan specifies IRS’ modernization
                      initiatives through October 31, 1999, or about the next 5 months, and it
                      seeks approval to obligate about $35 million to complete these initiatives.
                      Such an incremental approach to investing in systems modernization
                      efforts is a recognized “best practice” that leading public and private sector
                      organizations use to mitigate the risk of program failure on large, complex,
                      multiyear modernization programs. Further, both the Clinger-Cohen Act of
                      19964 and OMB policy 5 endorse such an incremental investment
                      management approach.




                      3 This program includes the policies, processes, and products for managing information technology
                      investments from conception, development, and deployment through maintenance and support.

                      4
                          Public Law 104-106, February 10, 1996.

                      5 Evaluating Information Technology Investments, A Practical Guide, Version 1.0 (Executive Office of
                      the President, OMB, November 1995) and OMB Memorandum M-97-02, Funding Information Systems
                      Investments (October 1996), informally referred to as the “Raines Rules.”




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IRS’ initial expenditure plan is an appropriate first step toward successful
systems modernization and, with regard to the $35 million being requested
for this increment, satisfies the conditions that the Congress placed on the
use of ITIA funds. Moreover, the plan is consistent with our past
recommendations. To illustrate, the initial expenditure plan provides for,
among other things, additional blueprint precision and specificity, such as
validation of selected business requirements, definition of selected systems
design specifications, and development of selected system business case
justifications. Additionally, it provides for definition of system
infrastructure specifications and a revised plan for sequencing the
introduction of the new technology needed to achieve the target systems
architecture over the next 3 to 5 years. These initiatives are consistent with
our past recommendations for completing the blueprint and collectively
they represent the first steps needed to satisfy the legislative condition to
implement the blueprint.

To further illustrate, the initial expenditure plan provides for definition and
targeted implementation of an “Enterprise Life Cycle,” which is consistent
with our past recommendations for instituting project management rigor,
software process maturity, and investment management discipline. If
implemented properly, this effort should satisfy the legislative condition for
an IRS system life cycle and investment management program that meets
OMB guidelines.

Building on its initial expenditure plan, IRS plans to define in subsequent
expenditure plans the follow-on efforts and funding requirements needed
(1) to continue to incrementally add needed architectural precision and
project-specific management discipline and (2) to incrementally
implement, in accordance with its revised sequencing plan, its Enterprise
Life Cycle, and its target systems architecture. If IRS effectively
implements the initiatives described in its initial expenditure plan and
fulfills its commitment to incrementally request and expend future
modernization funds, IRS would be acting in a manner that is consistent
with the legislative conditions and our past modernization
recommendations.

IRS could strengthen its approach to incrementally investing in modernized
information technology by including in subsequent expenditure plans its
progress against the previous expenditure plan’s goals and deliverables and
the benefits realized to date from the funds expended. Measuring and
tracking on these items are critical to successful implementation of




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             incremental investment management, and thus should be disclosed to the
             Congress to facilitate its deliberations on future expenditure plans.



Background   In 1995, we reported on management and technical weaknesses with IRS’
             tax systems modernization that jeopardized its successful completion and
             made over a dozen recommendations to correct the weaknesses. 6
             Because of the seriousness of the weaknesses, we placed the
             modernization on our 1995 list of high-risk federal programs. 7 In June
             1996, we reported that IRS had made progress in implementing our
             recommendations.8 However, to minimize the risk of IRS investing in
             systems before the recommendations were fully implemented, we
             suggested that the Congress limit IRS’ information technology (IT)
             spending to certain cost-effective categories. These spending categories
             were those that (1) support ongoing operations and maintenance,
             (2) correct pervasive management and technical weaknesses, such as a
             lack of requisite systems life cycle discipline, (3) are small, represent low
             technical risk, and can be delivered in a relatively short time frame, or
             (4) involve deploying already developed systems that have been fully
             tested, are not premature given the lack of a complete systems
             architecture, and produce a proven, verifiable business value. The act
             providing IRS’ fiscal year 1997 appropriations 9 limited IRS’ IT spending to
             efforts consistent with these categories.

             In 1997, we again included the modernization on our high-risk list because
             IRS had not yet implemented our recommendations.10 However, we also
             reported that IRS had made progress on the recommendations. For
             example, in May 1997, IRS issued its modernization blueprint. This
             blueprint consisted of four principal components: (1) a systems life cycle,




             6
             Tax Systems Modernization: Management and Technical Weaknesses Must Be Corrected If
             Modernization Is To Succeed (GAO/AIMD-95-156, July 26, 1995).

             7
                 High-Risk Series: An Overview (GAO/HR-95-1, February 1995).

             8 Tax SystemsModernization: Actions Underway But IRS Has Not Yet Corrected Management and
             Technical Weaknesses (GAO/AIMD-96-106, June 7, 1996).

             9
                 Public Law 104-208, September 30, 1996.

             10High-Risk   Series: Information Management and Technology (GAO/HR-97-9, February 1997).




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(2) business requirements, (3) functional and technical architectures,11 and
(4) a sequencing plan.12 We briefed IRS appropriations and authorizing
committees on the results of our assessment of IRS’ Modernization
Blueprint in September 1997. In those briefings and in a subsequent
report,13 we concluded that the Modernization Blueprint was a good first
step that 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. However, we also noted that
the blueprint was not yet complete and did not provide enough detail for
building and acquiring new systems. As a result, IRS’ fiscal year 1998
appropriations act again limited IRS’ fiscal year spending to efforts that
were consistent with the aforementioned spending categories. The act
providing IRS’ fiscal year 1999 appropriations continued these spending
limitations.14

In its fiscal year 1998 and 1999 budget requests, IRS requested over
$1 billion for its ITIA account, and the Congress provided $506 million for
the account. Specifically, it appropriated $325 million in fiscal year 1998,
$30 million of which was rescinded in May 1998 for urgent Year 2000
requirements. The Congress also provided $211 million in fiscal year 1999.
In providing these sums, the Congress limited IRS’ ability to obligate them
until IRS and the Treasury submitted to the Congress for approval an
expenditure plan that, as stated in the law, (1) implements the IRS
Modernization Blueprint, (2) meets OMB investment guidelines, (3) is
reviewed and approved by IRS’ Investment Review Board, OMB, and
Treasury’s IRS Management Board and is reviewed by GAO, (4) meets
requirements of IRS’ life cycle program, and (5) is in compliance with
acquisition rules, requirements, guidelines, and systems acquisition
management practices of the federal government. IRS is not requesting any
ITIA funds for fiscal year 2000 but is asking for $325 million for fiscal year
2001. In our April 1999 testimony, we reported this request was not




11
   A system architecture defines the critical attributes of an agency’s collection of information systems
in both business/functional and technical/physical terms.

12A sequencing plan defines the actions that must be taken, and their schedules along with costs, to cost
effectively evolve from the current to the future systems operating environment.

13TaxSystems Modernization: Blueprint Is a Good Start But Not Yet Sufficiently Complete to Build or
Acquire Systems (GAO/AIMD/GGD-98-54, February 24, 1998).

14Public   Law 105-277, October 21, 1998.




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                         adequately justified and suggested that the Congress not provide the funds
                         until IRS provided the support.15

                         In December 1998, IRS awarded its Prime Systems Integration Services
                         (PRIME) contract for systems modernization. According to IRS, it planned
                         to “partner” with the PRIME contractor, among other things, to
                         (1) complete the modernization blueprint, as we recommended, and
                         (2) account for changes in systems requirements and priorities caused by
                         IRS’ organizational restructuring, new technology, and IRS Restructuring
                         and Reform Act of 1998 requirements. In addition, IRS stated that it
                         planned to establish disciplined life cycle management processes and
                         structures and mature software development and acquisition capabilities
                         before it begins building modernized systems. Because of the
                         modernization’s high cost and importance, we continued in 1999 to
                         categorize it as a high-risk federal program.16



IRS Plans to Submit a    To comply with its statutory mandate to submit an expenditure plan to the
                         Congress before obligating ITIA funds, IRS has developed a strategy where,
Series of Expenditure    in lieu of a single plan, it intends to develop and provide to the Congress a
Plans to Incrementally   series of expenditure plans over the life of the modernization. This
                         expenditure plan strategy is a by-product of the Commissioner’s overall
Justify Modernization    approach to the modernization, which is to incrementally invest in
Initiatives              modernized systems in accordance with (1) rigorous systems and software
                         life cycle management processes and (2) a revised sequencing plan for
                         migrating from IRS’ legacy systems and master file environment to the
                         target systems and relational database environment specified in the
                         blueprint.

                         The initial plan requests $35 million for IRS modernization initiatives to be
                         delivered by October 31, 1999. This plan proposes three categories of
                         modernization investments that IRS calls (1) supporting business goals,
                         (2) building management capability, and (3) planning a modern
                         infrastructure, and is requesting for each category $17 million,
                         $11.6 million, and $6.5 million, respectively. The supporting business goals
                         initiatives include the early phases of selected systems development efforts


                         15Tax
                             Administration: IRS’ Fiscal Year 2000 Budget Request and 1999 Tax Filing Season (GAO/T-GGD/
                         AIMD-99-140, April 13, 1999).

                         16High-Risk   Series: An Update (GAO/HR-99-1, January 1999).




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                         that are intended to improve taxpayer service by the year 2001 tax filing
                         season. The building management capability initiatives provide for
                         defining and beginning the institutionalization of mature modernization
                         management and systems engineering processes that are to permit
                         effective blueprint implementation. The planning modern infrastructure
                         initiatives refer to the first steps in establishing the technology foundation
                         (e.g., networks, operating platforms, system security, etc.) upon which to
                         build, interconnect, and operate modernized system applications.

                         IRS’ stated intention is to submit to the Congress a series of expenditure
                         plans in the future, the next being in October 1999. According to IRS, the
                         October 1999 plan will define follow-on modernization initiatives,
                         deliverables, and funding requirements into the year 2000.

                         Leading public and private sector organizations use an incremental
                         approach to investing in systems modernization efforts. In addition, the
                         Clinger-Cohen Act and OMB policy endorse this approach to funding large
                         system development investments. Using this approach, organizations take
                         large, complex modernization efforts and break them into projects that are
                         narrow in scope and brief in duration.17 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. 18



Initial Expenditure      IRS’ initial expenditure plan is an appropriate first step to successful
                         systems modernization and, with regard to the $35 million being requested
Plan Is an Appropriate   for this increment, satisfies the conditions that the Congress placed on the
First Step and Meets     use of ITIA funds. The key to IRS’ success is now to effectively implement
                         the initiatives described in its initial expenditure plan and fulfill its
Legislative              commitment to incrementally request and expend future modernization
Requirements             funds.




                         17
                           GAO Executive Guide: Improving Mission Performance Through Strategic Information Management
                         and Technology, Learning From Leading Organizations (GAO/AIMD-94-115, May 1994).

                         18Assessing
                                   Risks and Returns: A Guide for Evaluating Federal Agencies’ IT Investment Decision-
                         making (GAO/AIMD-10.1.13, February 1997).




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Condition 1: Implements       IRS’ initial expenditure plan lays the foundation for blueprint
the Modernization Blueprint   implementation on an incremental basis and begins the implementation
                              process for selected modernization initiatives. For example, the
                              expenditure plan only requests funds to establish and selectively
                              implement an Enterprise Life Cycle (ELC). This ELC is to provide IRS with
                              a disciplined and institutional approach for managing its IT investments
                              throughout their life cycle--from conception, development, and deployment
                              through maintenance and operation. This ELC is to be an adaptation of the
                              PRIME contractor’s commercially available and proven systems life cycle
                              management approach and associated automated tools, incorporating IRS-
                              unique needs such as key investment decision points.19 Once in place at
                              IRS, the service plans to begin implementing the ELC on its ongoing
                              modernization initiatives. According to IRS, future expenditure plans will
                              provide for ELC implementation on all future project initiatives.

                              As another example, the initial expenditure plan requests funds to add
                              missing system architecture precision and detail to selected system
                              initiatives. In our February 1998 report,20 we concluded that while the
                              architecture in IRS’ May 15, 1997, blueprint provided a solid foundation
                              from which to build a complete architecture, it did not provide sufficient
                              detail and precision for building or acquiring new systems. For example,
                              the architecture did not allocate business requirements to specific
                              configuration items (i.e., actual hardware and software components). As
                              part of its initial expenditure plan, however, IRS plans to validate existing
                              business requirements and develop preliminary hardware and software
                              design specifications for IRS’ ongoing projects. Additionally, IRS intends
                              for future expenditure plans to incrementally provide for architectural
                              specificity for future system initiatives.

                              The initial expenditure plan also requests funds for IRS to perform business
                              system planning, which is to result in a revised modernization sequencing
                              plan by October 31, 1999. This initiative is necessary because the May 15,
                              1997, blueprint sequencing plan does not recognize, for example, the need
                              to introduce electronic tax administration technologies and capabilities
                              early in the modernization to respond to the electronic filing requirements
                              in the IRS Restructuring and Reform Act of 1998. This revised sequencing


                              19The key decision milestones are referred to by IRS as project definition, preliminary business case,
                              and final business case.

                              20GAO/AIMD/GGD-98-54,     February 24, 1998.




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                            plan is to define the general timing, costs, and benefits of future
                            modernization projects, and is to be incrementally updated in future
                            expenditure plans with more specific cost and benefit information as
                            projects are initiated and business case justifications are developed.


Condition 2: Meets OMB      If properly implemented, the ELC that IRS’ initial expenditure plan is to
Information Systems         establish and selectively implement, should meet OMB information system
                            investment guidelines.21 These guidelines call for agencies to adopt a data-
Investment Guidelines       driven, analytically based approach to selecting, controlling, and evaluating
                            investments in information technology. The overriding objective is to
                            ensure that investment decisions are made in a disciplined and rigorous
                            manner on the basis of established criteria, such as return-on-investment
                            and architectural compliance, and that system investments be broken into
                            a series of increments. Consistent with these guidelines, IRS’ ELC is to
                            include processes for identifying alternative solutions, calculating their
                            projected returns-on-investment, and requiring that selected solutions be
                            architecturally compliant. Through its ELC, IRS also plans to require that
                            systems be acquired and implemented in phased segments that are narrow
                            in scope and brief in duration. According to IRS, system initiatives in
                            future expenditure plans will be conducted in accordance with the ELC.


Condition 3: Meets the      IRS’ blueprint included a high-level system life cycle framework that could
Requirements of IRS’ Life   be used to define a disciplined set of processes for managing
                            modernization investments. In lieu of using the system life cycle overview
Cycle Program
                            contained in the blueprint as the framework for developing life cycle
                            management processes, IRS’ initial expenditure plan provides for
                            establishing the aforementioned ELC. IRS decided to do this because it
                            concluded that adapting the PRIME contractor’s commercially available
                            methodology to meet its needs would be less costly and faster than
                            completing its own unique system life cycle contained in its May 15, 1997,
                            blueprint. IRS officials also stated that the PRIME contractor’s
                            methodology offered more capability than the blueprint system life cycle
                            overview, such as processes for managing business process reengineering.




                            21Evaluating Information Technology Investments, A Practical Guide, Version 1.0 (Executive Office of
                            the President, OMB, November 1995) and OMB Memorandum M-97-02, Funding Information Systems
                            Investments (October 1996).




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                             We reviewed the PRIME contractor’s commercially available methodology,
                             and found that it both meets the requirements specified in the blueprint’s
                             system life cycle overview and is consistent with the approaches that
                             successful private and public sector organizations use to manage large IT
                             investments. If implemented correctly, it should provide IRS with effective
                             processes and tools for, among other things, planning, controlling,
                             developing, and deploying information systems based on defined activities,
                             events, milestones, reviews, and products. As described above, the initial
                             expenditure plan provides for implementing the ELC on ongoing projects,
                             and, according to IRS officials, future expenditure plans will provide for
                             implementing it on follow-on projects.


Condition 4: Approved by     IRS’ Core Business Systems Executive Steering Committee, which replaced
IRS, Treasury’s IRS          IRS’ Investment Review Board, approved the $35 million expenditure plan
                             on April 20, 1999. Treasury’s IRS Management Board and OMB approved
Management Board, and
                             the plan on June 9, 1999, and June 10, 1999, respectively. On May 13, 1999,
OMB and Reviewed by GAO      IRS provided us with a copy of its initial expenditure plan it submitted to
                             the Congress, and the results of our review are contained in this report.


Condition 5: Complies With   As described in its expenditure plan, IRS plans to establish, through its
Federal Acquisition Rules,   ELC, the life cycle management processes and practices for acquiring
                             modernized systems. If implemented effectively, these processes should
Requirements, Guidelines,    meet federal acquisition rules and management practices. According to
and Management Practices     federal acquisition laws, rules, and regulations,22 agencies should, among
                             other things, use disciplined, decision-making processes for planning,
                             managing, and controlling the acquisition of IT. By doing so, agencies
                             mitigate the risks of acquiring systems that are not delivered on time and
                             on budget and do not work as intended. IRS’ expenditure plan requests
                             funds to continue IRS’ efforts to strengthen its capability to effectively
                             manage its contractors. For example, as part of its building management
                             capability initiatives, IRS plans to implement mature software/systems
                             acquisition management practices within the IRS organization responsible
                             for managing the PRIME contractor and other modernization contractors.
                             IRS intends to build the capability in accordance with the Software
                             Engineering Institute’s (SEI) software/system acquisition capability
                             maturity model requirements, and plans to have this capability in place by


                             22For example, see the Clinger-Cohen Act of 1996, OMB Circular A-109, and the Federal Acquisition
                             Regulation.




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                          October 31, 1999. 23 Among these maturity models’ requirements are
                          disciplined and rigorous processes and approaches for measuring and
                          tracking progress of contracts and acting to correct problems quickly,
                          which will be a key to IRS’ ability to effectively manage the PRIME
                          contractor and successfully modernize.



Initial Expenditure       In 1995, we first made recommendations to correct serious and pervasive
                          modernization management and technical weaknesses. Since then, IRS has
Plan Is Consistent With   taken actions to address our recommendations. We have monitored these
GAO’s Past                actions and have made follow-up recommendations that recognize IRS’
                          progress and define the residual steps that IRS needs to take to ensure that
Recommendations           it is ready and capable to effectively modernize its systems. Currently, our
                          open recommendations fall into three categories: (1) completing the
                          modernization blueprint, (2) developing the management and engineering
                          capability to effectively modernize systems, and (3) until the first two
                          recommendations are implemented, limiting modernization spending to
                          certain small, cost-effective, low-risk efforts.

                          IRS’ initial expenditure plan is consistent with these recommendations.
                          Specifically, of the $35.1 million being requested, IRS plans to use
                          approximately $14.6 million for initiatives relating to completing the
                          blueprint. For example, IRS plans to develop a 5-year “core business
                          systems” modernization strategy that leverages new IT and recognizes IRS’
                          recent organizational restructuring and business process reengineering
                          efforts prompted by the IRS Restructuring and Reform Act of 1998. 24 The
                          result is intended to be a revised, business risk-based sequencing plan that
                          defines the general timing, cost, and benefits of new modernization
                          projects over the next 3 to 5 years.

                          In addition, IRS plans to spend about $11.6 million to develop the
                          management and engineering capability to build and implement
                          modernized systems. Specifically, IRS has designated about $2.2 million for
                          PRIME and other contractor support to help IRS implement mature
                          program management practices that are to (1) strengthen IRS’ ability to
                          manage and control modernization initiatives and (2) ready IRS for an


                          23A model developed by the SEI at Carnegie Mellon University to evaluate an organization’s software
                          development or acquisition capability.

                          24Public   Law 105-206, July 22, 1998.




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                          evaluation by SEI against relevant software/system acquisition capability
                          maturity model requirements. IRS has earmarked $9.4 million for defining,
                          documenting, and implementing its ELC, including training staff in its use,
                          on ongoing modernization projects.

                          Last, IRS plans to spend the remaining $8.9 million on selected relatively
                          small, low-risk efforts. For example, IRS is seeking $5.1 million to, among
                          other things, validate system requirements and update cost-effectiveness
                          (i.e., business case) justifications for two ongoing projects intended to
                          provide near-term customer service improvements via better routing of
                          taxpayers telephone inquiries. In addition, IRS seeks to spend $3.2 million
                          on defining the network and platform technology infrastructure needed to
                          support the above two customer service initiatives and to provide the
                          foundation for secure future electronic commerce between employees, tax
                          practitioners, and taxpayers.



Other Observations on     Our review disclosed several additional relevant items concerning IRS’
                          management of the modernization. First, IRS has established a
IRS’ Modernization        modernization “governance” structure that provides for extensive
Efforts                   involvement by IRS’ top executives, including the Commissioner. This
                          structure is an effective way to mitigate the risks associated with the
                          various modernization initiatives that IRS has underway and planned.
                          Second, although IRS plans to do so by July 1999, it has yet to adequately
                          define respective systems modernization roles and responsibilities for
                          itself, the PRIME contractor, and other support contractors. Given that
                          IRS’ modernization approach provides for an unprecedented “partnership”
                          with its contractors, ensuring that these roles and responsibilities are
                          defined, understood, and enforced is of particular importance. Last, IRS
                          can strengthen its incremental approach to investing in modernized
                          systems by regularly disclosing to the Congress in its planned future
                          expenditure plans IRS’ progress against the modernization expectations
                          that it defined in the preceding expenditure plan.


IRS’ Top Executives Are   IRS has established a governance structure for managing its modernization
Directly Engaged in       initiatives and providing its top executives, including the Commissioner,
                          direct and frequent visibility into and control over all initiatives/projects.
Ongoing Modernization
                          This organizational structure is headed by the Core Business Systems
Initiatives               Executive Steering Committee, which is chaired by IRS’ Commissioner and
                          includes Treasury’s Assistant Secretary for Management and Chief
                          Financial Officer, IRS’ Chief Information Officer, the Chief Operating



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                            Officer, key operating division heads, the PRIME contractor, and other key
                            business officials. The Executive Steering Committee meets at least
                            monthly to review modernization progress and direct future work. Under
                            this process, projects are not initiated and do not progress to the next
                            phase without the Steering Committee’s approval, thus mitigating the risk
                            of modernization missteps and failures.



IRS Has Yet to Adequately   Effective program/project and contract management requires a clear
Define Modernization        delineation of the respective roles and responsibilities of the agency
                            management team and the contractors supporting the agency. In the case
“Partnership” Roles and     of IRS and its tax systems modernization program, this is particularly
Responsibilities            important because IRS’ stated intention in its solicitation and award
                            documentation is to “partner” with the PRIME contractor and the
                            supporting contractors. However, the nature of such a “partnership” is not
                            defined in federal acquisition regulations, and thus is an ambiguous
                            concept to implement and requires clear definition by IRS.

                            In its efforts to date, however, IRS has yet to adequately define the
                            respective roles of the service and its contractors. In January 1999, IRS
                            tasked the PRIME contractor with (1) defining the roles and
                            responsibilities of IRS, itself, and the other contractors and (2) explaining
                            the structure and processes for managing the “partnership” between the
                            service and itself. This task was to be completed by April 30, 1999.
                            According to IRS officials, this task was not adequately completed for
                            several reasons. First, the PRIME contractor’s tasking was not adequately
                            defined and thus resulted in a deliverable that was too narrow in scope.
                            Second, IRS subsequently became concerned that the PRIME contractor
                            was not sufficiently independent enough to be defining roles and
                            responsibilities for itself and IRS. Last, funding for the PRIME contractor
                            began to run low. Consequently, IRS recently tasked one of its other
                            support contractors to develop a “Concept of Operations document by July
                            1999 that defines the roles, responsibilities, authorities, structure, and rules
                            of engagement for the PRIME contractor, IRS, and other IRS support
                            contractors.”


IRS Should Disclose         When employing an incremental approach to investing in systems
Progress and Results in     modernization efforts, leading public and private sector organizations track
                            and monitor whether each increment is producing promised benefits and
Subsequent Expenditure      meeting cost and schedule baselines, and report this information to
Plans                       executive decisionmakers. By doing so, these organizations can address



                            Page 13                          GAO/AIMD/GGD-99-206 IRS’ Initial Expenditure Plan
                  B-282877.1




                  variances from expectations incrementally, before significant dollars are
                  expended. This is a proven way to effectively manage investment risks.

                  To effectively employ incremental investment management on its
                  modernization, IRS recognizes that it needs to incrementally measure and
                  track progress and results. Accordingly, its governance structure and its
                  ELC provide for doing so. In particular, its ELC is to incorporate SEI
                  process maturity model requirements that, among other things, define key
                  processes and approaches for measurement, analysis, and verification of
                  activities. However, IRS has yet to define whether its planned future
                  expenditure plans will provide for disclosure of this information. Such
                  disclosure would provide the Congress with the kind of regular and
                  valuable information that is needed to effectively oversee IRS’
                  modernization efforts.



Conclusions       IRS’ initial expenditure plan lays the foundation for successful systems
                  modernization; satisfies, for this $35 million increment, the conditions that
                  the Congress placed on the use of ITIA funds; and is consistent with our
                  past recommendations. IRS’ stated intention is to fully implement this
                  expenditure plan and to submit to the Congress for approval future
                  expenditure plans that incrementally build on this modernization
                  foundation. Such an incremental approach to investing in modernized
                  systems is an effective way to minimize the inherent risk in large, complex,
                  multiyear modernization programs. The next step for IRS is to effectively
                  implement the plan and fulfill its commitment to incrementally request and
                  expend future modernization funds. A key factor in implementing its plans
                  will be IRS’ success in establishing mature and disciplined measurement
                  and tracking capabilities so that it can effectively analyze progress against
                  incremental goals, deliverables, and benefit expectations and reliably
                  report this information to congressional decisionmakers. By including this
                  information in future expenditure plans submitted to the Congress, IRS can
                  strengthen modernization management and oversight.



Recommendations   Accordingly, we recommend that the Commissioner of Internal Revenue
                  ensure that future expenditure plans fully disclose IRS’ progress against
                  incremental goals, deliverables, and benefit expectations and that the
                  expenditure plan that IRS plans to submit in October 1999 fully explain the
                  nature and functioning of IRS’ “partnership” with its contractors, including
                  the respective roles and responsibilities of IRS and its contractors.



                  Page 14                         GAO/AIMD/GGD-99-206 IRS’ Initial Expenditure Plan
                  B-282877.1




Agency Comments   In commenting on a draft of this report, IRS agreed with our findings and
                  recommendations and stated that it would ensure that future expenditure
                  plans would address progress against expectations established in previous
                  requests. IRS also commented on the effectiveness of our evaluation
                  efforts and stated that our timely observations and comments have allowed
                  IRS to move quickly to implement our recommendations.


                  We are sending copies of this report to Senator Ted Stevens, Senator
                  Robert C. Byrd, Senator William V. Roth, Jr., Senator Daniel Patrick
                  Moynihan, Senator Orrin G. Hatch, Senator Max Baucus, Senator Fred
                  Thompson, Senator Joseph I. Lieberman, Representative C.W. Bill Young,
                  Representative David R. Obey, Representative Bill Archer, Representative
                  Charles B. Rangel, Representative Amo Houghton, Representative
                  William J. Coyne, Representative Dan Burton, Representative Henry A.
                  Waxman, Representative Stephen Horn, and Representative Jim Turner in
                  their capacities as Chairmen or Ranking Minority Members of Senate and
                  House Committees and Subcommittees. We are also sending copies to
                  Honorable Charles O. Rossotti, Commissioner of Internal Revenue,
                  Honorable Robert E. Rubin, Secretary of the Treasury, Honorable
                  Lawrence H. Summers, Deputy Secretary of the Treasury, and the
                  Honorable Jacob J. Lew, Director of the Office of Management and Budget.
                  Copies will also be made available to others upon request.

                  If you or your staff have any questions about this report please contact me
                  at (202) 512-6240 or by e-mail at hiter.aimd@gao.gov. Other key
                  contributors to this report are listed in appendix III.




                  Randolph C. Hite
                  Associate Director
                  Governmentwide and Defense
                    Information Systems




                  Page 15                        GAO/AIMD/GGD-99-206 IRS’ Initial Expenditure Plan
Contents



Letter                                                                                              1


Appendix I                                                                                         18
Objectives, Scope, and
Methodology

Appendix II                                                                                        20
Comments From the
Internal Revenue
Service

Appendix III                                                                                       21
GAO Contact and Staff
Acknowledgements




                         Abbreviations

                         ELC       Enterprise Life Cycle
                         IRS       Internal Revenue Service
                         IT        information technology
                         ITIA      Information Technology Investments Account
                         OMB       Office of Management and Budget
                         PRIME     Prime Systems Integration Services
                         SEI       Software Engineering Institute



                         Page 16                     GAO/AIMD/GGD-99-206 IRS’ Initial Expenditure Plan
Page 17   GAO/AIMD/GGD-99-206 IRS’ Initial Expenditure Plan
Appendix I

Objectives, Scope, and Methodology                                                                               ApIenxdi




              Pursuant to the Department of the Treasury’s fiscal year 1998 and 1999
              appropriations acts, the Congress limited IRS’ ability to obligate ITIA funds
              until the service and Treasury submitted to the Congress for approval an
              expenditure plan that per the acts, (1) implements the IRS Modernization
              Blueprint, (2) meets OMB’s investment guidelines for information systems,
              (3) is reviewed and approved by IRS’ Investment Review Board, OMB, and
              Treasury’s IRS Management Board and is reviewed by GAO, (4) meets the
              requirements of IRS system life cycle management program, and (5) is in
              compliance with acquisition rules, requirements, guidelines, and system
              acquisition management practices of the federal government. Accordingly,
              IRS provided us with the expenditure plan that it submitted to the Congress
              (i.e., the Senate on May 25, 1999, and the House on June 2, 1999). We
              reviewed the plan to determine whether (1) the plan satisfied the
              conditions specified in the acts, (2) the plan was consistent with our past
              modernization recommendations, and (3) we had any other observations
              on IRS’ systems modernization efforts.

              To determine whether IRS’ expenditure plan satisfied the conditions
              specified in appropriations acts, 1 we first identified and reviewed the
              relevant IRS and federal documents referenced in the statutory conditions,
              such as the Modernization Blueprint, OMB information systems investment
              guidelines (e.g., Raines Rules), and the Federal Acquisition Regulation. We
              then documented IRS’ completed, ongoing, and planned modernization
              initiatives. To do this, we reviewed IRS’ ITIA Expenditure Plan; Initial
              Request for Funds; and other supporting documentation, such as the
              individual initiatives’ project plans and descriptions, briefing presentations
              (e.g., expenditure plan briefing to IRS Management Board), the PRIME
              contract and associated task orders, and Executive Steering Committee
              agendas and decision papers proposing courses of action. We also
              interviewed IRS’ Chief Information Officer and other service officials
              working on the modernization program to gain an understanding of what
              IRS is doing to satisfy the legislative conditions. This included receiving
              weekly briefings and reports on how IRS and contractor teams were
              progressing on ongoing initiatives, such as efforts to improve customer
              service, build capability to effectively acquire systems, establish a new
              system development life cycle methodology (i.e., ELC), and define IRS and
              contractor roles and responsibilities. We also reviewed the business and
              systems development life cycle methodology that IRS is modifying to


              1 Public
                     Law 105-61, Treasury and General Government Appropriations Act, 1998, and Public Law 105-
              277, Omnibus Consolidated and Emergency Supplemental Appropriations Act, 1999.




              Page 18                                 GAO/AIMD/GGD-99-206 IRS’ Initial Expenditure Plan
Appendix I
Objectives, Scope, and Methodology




develop its ELC and were briefed by IRS and its contractors involved in this
effort. We also attended IRS’ Executive Steering Committee meetings to
observe how IRS top management was directing and controlling the
modernization program and to understand IRS’ strategic modernization
approach and progress. Last, we analyzed each of IRS’ modernization
initiatives vis-à-vis the statutory conditions to identify any variances or
inconsistencies.

To determine whether IRS’ expenditure plan is consistent with our past
recommendations on the tax systems modernization, we extracted from
our inventory of open recommendations those pertaining to IRS’
modernization and grouped them into the following three categories:
(1) completing the Modernization Blueprint, (2) developing the
management and engineering capability to effectively modernize systems,
and (3) limiting modernization spending to certain small, cost-effective,
low-risk efforts until the first two recommendations are implemented. We
then compared IRS’ efforts on its completed, ongoing, and planned
initiatives with the intent of our open recommendations to identify any
variances or inconsistencies.

To develop other observations on IRS’ systems modernization efforts, we
analyzed IRS’ overall modernization governance structure to determine
whether it provided for top management involvement and analyzed
contractor deliverables against task order requirements and the
December 9, 1998, contract awarded to the PRIME contractor. We also
attended Executive Steering Committee meetings to observe how the
Commissioner and committee members functioned with respect to
established structures and processes, and to understand IRS’ plans for
submitting future expenditure plans. In addition, we met with and
interviewed the Chief Information Officer and IRS officials responsible for
the day-to-day management and control of the program and the PRIME
contractor, for development of the expenditure plan, and for definition of
IRS and contractor roles and responsibilities.

We performed our work at IRS headquarters in Washington, D.C., and its
facility in Lanham, Maryland, from January 1999 through May 1999 in
accordance with generally accepted government auditing standards.




Page 19                              GAO/AIMD/GGD-99-206 IRS’ Initial Expenditure Plan
Appendix II

Comments From the Internal Revenue Service                               ApIpx
                                                                             Ien
                                                                               di




              Page 20    GAO/AIMD/GGD-99-206 IRS’ Initial Expenditure Plan
Appendix III

GAO Contact and Staff Acknowledgements                                                              AIpIenxdi




GAO Contact            Gary Mountjoy, 512-6367




Acknowledgments        In addition to the above contact, Keith Rhodes, Agnes Spruill, Karen
                       Richey, Lorne Dold, Sherrie Russ, Charles Roney, and Frank Maguire made
                       key contributions to this report.




(511158)       Leetr   Page 21                      GAO/AIMD/GGD-99-206 IRS’ Initial Expenditure Plan
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