Progress in Meeting the Challenge of Modernizing IRS Tax Processing System

Published by the Government Accountability Office on 1990-03-22.

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

                  United States General Accounting Office

For Release        Progress in Meeting the Challenge of kdernizing
on Delivery        IRS Tax FWcessing System
Expected at
9:30 a.m. EST
March 22, 1990

                   Hcmrd G. Rhile, Director
                   Infomation Kmagement and Technology Division
                   Before the
                   Subxmnittee on Oversight
                   Cam-ittee on ways arid Wans
                   House of Representatives

                                                                GAO Form 100 (lzm~
Mr. Chairman           and Members of the Subcommittee:

We are pleased            to be here            to discuss          the     Internal          Revenue
Service's         (IRS)       progress        in modernizing               the     computer        systems
that      process      tax     returns.          As you requested,                  we will        discuss
the     challenges        IRS is        facing         in planning          its     overall        Tax

System Modernization                   (TSM) program              and describe            the progress
of two early           modernization             projects--the              electronic            filing
and On-Line          Entity       (OLE) systems.                  We will         also    comment on
the     recent      budget      cuts        IRS has sustained               in the        automated
data      processing          (ADPI     area.


IRS still         processes           tax    returns       using        design      concepts         from
the     19SOs, such as batch                  processing           and magnetic            tape
storage       on reels.           The system            relies      heavily         on paper-
driven,       labor-intensive                processes.            As shown in the chart
before      you (CHART I)              airplanes         and trucks              are used to move
information          across       the country            instead         of modern
telecommunications.                    As a result,              data     input     and retrieval
often      take     weeks,      making        service       to taxpayers                 slow and
sometimes         unreliable.

Tax System Modernization                            may well         be the        largest              and most
costly          civilian           modernization             the government                 has ever
undertaken.                 As shown in the                 chart      now before              you        (CHART
II)      it     is     intended           to move tax          return          information
electronically                    to where and to whom it                       is needed.                    Since
1986,          IRS has spent               about     $120 million               on its         Tax System
Modernization                    program,         a major      development               effort          that         is
estimated              to cost           several     billion         dollars        and take                  the
greater          part       of a decade             to complete.                As pointed               out         in our
recent          reportl,           this      is IRS'        third      major       modernization
attempt          since           1968.      These earlier              efforts           were unsuccessful
largely          because           of a lack         of stable           leadership,                   lack      of
accountability                    for     them,     and a lack          of technical                    and
managerial              expertise.

Although              considerable            progress         has been made with                        the
current          Tax System Modernization                           efforts,        it         is also          beset
with          some uncertainty.                    As discussed           in our report,                       IRS
still          needs to articulate                   what TSM is,               how it          will          benefit
the     taxpayer,                and the plans          and schedule               for      making             TSM a
reality.               Is   it     the beginning               of a new way of doing                           business
that          would     change dramatically                    how IRS services                    the
taxpayer?               Or,       is TSM merely             intended           to lower           the         costs        and

lTax System Modernization:                             IRS' Challenae                    for      the         21st
Century  (GAO/IMTEC-90-13,                           Feb. 8, 1990).

increase       the       efficiency             of current              OperatiOnS?                  Either        way,
when does IRS plan                       to complete          this           modernization?                  This
uncertainty            is      further        illustrated             by the              continual          changes
in the      number and scope of TSM projects                                          identified           in the
budget      from year             to year           which     make it               difficult         to
understand            just      what TSM is.                 Finally,               the    lack      of a master
plan     makes it            difficult          to know whether                       and how the
different        systems            will      fit     together               into      an integrated
whole.        For example,                 does TSM include                     a telecommunications
network?         If      so,      then       why isn't          such a network                      included
among the       budgeted                 projects?

To enhance            the prospects                 of its      success,               IRS must first                 have
a clear       vision          of its         business         goals           in terms            of improving
service       to the          taxpayers             and IRS'         operations,                  and how TSM
will     meet these             goals.          Once a clear                  vision            is established,
IRS must marshal1                   the best          technical               and managerial                 talent
available        to overcome                 the problems               it      continues            to
experience            in developing                 major     systems.                 The best           talent
must also       be brought                 to bear          on defining                the       technical
platform      --the          hardware,          software,            and information--needed                            to
achieve       TSM's goals                 and make the major                        decisions         impacting
the design            and development                 of the modernization.                               Key
leadership            and project             management             must be stable                   and
competent        so that            the modernization                        can be carried                out

without       the       continued             disruptions               that      IRS currently

Finally,          the    Congress             must be provided                    with     UnambigUOUS

information             on the modernization.                             It     is essential              that        IRS
clearly       lay       out      for      the     Congress             the business               goals      of TSM,
how the projects                   that       comprise           it     will      meet these              goals,        the
priority          of the projects,                     their          estimated          costs,         and how and
when the projects                      will     be completed.                    Until      IRS can do
this,       the     focus        of TSM will               continue             to be confusing.

I do want           to emphasize                that       the        Commissioner               and his         top
managers          have demonstrated                     a strong               commitment          to
establishing             the       foundation              to make modernization                          a reality
in IRS.           For example,                IRS has recently                    reorganized              its
technology           management               structure               to provide          a single,              top
management            focal        point --the             chief        information               officer--to
oversee       all       IRS'       technology              programs.              The Commissioner                     is
also       making       a concerted               effort         to involve              outside          talent        in
the     key modernization                     decisions.

We are hopeful                  that      these        efforts          will      help      to clarify             the
uncertainties               surrounding                TSM, but           they      remain         as of now.
Until       these       uncertainties                  are resolved,                it    will       be
extremely           difficult             to assess            the progress               of TSM.

The Electronic           Filing        SyStem       illustrates              the     uncertainties
surrounding          TSM.


The Electronic           Filing        System evolved                 from an interim                project
that   was first         deployed            in 1988 on a limited                    basis.          This
system      has since            been expanded            and is now operational
nationwide,          even though             fundamental           planning          is still         being
reviewed.        As we testified                 last      year,       the    system      did        not
work as intended                 in either      the       1988 or 1989 filing

Although       the     system       generally            seems to be working                  well     this
year     and over       3 million            taxpayers        have used the              system         as
of March 15,           1990,       we can't       tell      whether          the     system      is a
success       because       it     is unclear           how this        system        meets      IRS'
business       goals     for       TSM and how it             will      be integrated                into
TSM.      For example,             is electronic             filing        ultimately           intended
to be used by all                 taxpayers       or just          those      with      personal
computers?           What share         of the           "taxpayer         market"       is IRS after

21RS' Prooress           in Imolementins      Its               Electronic  Filinq                   and
Communications           Replacement    SVStems                 (GAO/T-IMTEC-89-2,                    Mar.
16, 1989).

and by when does it                        hope to get          it7      It     could      cost      the
taxpayer          $15 or more just                    to transmit             a return
electronically.                 That         amount could             discourage           some taxpayer
participation.                 Is     it     intended       to reduce             costs     for      IRS?
Until      IRS defines              the goals           of the        system       as they         relate         to
the     overall       goals         of TSM, it            is difficult              for    us to assess
whether      the progress                   of the Electronic                  Filing      System          is good
or not.

On-Line      Entitv

The other          project          you asked about,                  the      On-Line      Entity
system,       also       known as OLE, will                     allow         IRS to validate               a
taxpayer's           identity              before      sending        tax      return      information                to
the master           files       in Martinsburg,                 West Virginia.                   However,
because      OLE is           in the         early      stages        of a pilot           test,      it        has
not had a major                 impact         this     year.         Despite           some minor
problems,          the       system         seems to be working                   and providing                 some

IRS'       1990 ADP BUDGET

Mr.     Chairman,            you also          asked about            the      effect      of any 1990
budget      cuts      on the modernization                       program.               The 1990 IRS ADP
budget      sustained            cuts        of nearly          $100 million              because          of

sequestration        and increased      salary     costs.       These cuts            were
most visible        among projects      aimed at increasing               the    number
of computers        and terminals      available      for     responding         to
taxpayer     inquiries      and researching        problem      tax   returns.
Funds for       projects    that    IRS designated          as TSM were not cut
in 1990.

That   concludes       my statement,     Mr.     Chairman.       I will         be happy
to respond       to any questions       you or other         members of the
Subcommittee        may have.