Tax Systems Modernization: Results of Review of IRS' Initial Expenditure
Plan (Letter Report, 06/15/1999, GAO/AIMD/GGD-99-206).
Because of serious management and technical weaknesses, GAO has included
the Internal Revenue Service's (IRS) tax systems modernization effort on
its list of federal programs at high-risk for waste, fraud, abuse and
mismanagement. Congress limited IRS' ability to spend funds on
information technology until the agency submitted an expenditure plan.
GAO reviewed this plan. This report discusses (1) whether the plan
satisfies the conditions specified in IRS' fiscal year 1998 and 1999
appropriations act, (2) whether the plan is consistent with earlier GAO
recommendations on IRS' systems modernization, and (3) other GAO
observations on the modernization effort.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: AIMD/GGD-99-206
TITLE: Tax Systems Modernization: Results of Review of IRS'
Initial Expenditure Plan
DATE: 06/15/1999
SUBJECT: Tax administration systems
Accountability
Systems development life cycle
Systems conversions
Information resources management
Strategic information systems planning
ADP procurement
Private sector practices
Systems design
Financial management
IDENTIFIER: IRS Tax System Modernization Program
Software Capability Maturity Model
IRS System Life Cycle Management Program
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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, 1In 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. 2According to IRS, the
investment review board has been replaced by the Core Business
Systems Executive Steering Committee, which is chaired by IRS'
Commissioner. Letter Page 1
GAO/AIMD/GGD-99-206 IRS' Initial Expenditure Plan 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 policy5 endorse such an
incremental investment management approach. 3This program includes
the policies, processes, and products for managing information
technology investments from conception, development, and
deployment through maintenance and support. 4Public Law 104-106,
February 10, 1996. 5Evaluating 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." Letter Page 2
GAO/AIMD/GGD-99-206 IRS' Initial Expenditure Plan B-282877.1 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 Page 3 GAO/AIMD/GGD-99-206 IRS'
Initial Expenditure Plan B-282877.1 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 appropriations9 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,
6Tax Systems Modernization: Management and Technical Weaknesses
Must Be Corrected If Modernization Is To Succeed (GAO/AIMD-95-156,
July 26, 1995). 7High-Risk Series: An Overview (GAO/HR-95-1,
February 1995). 8Tax Systems Modernization: Actions Underway But
IRS Has Not Yet Corrected Management and Technical Weaknesses
(GAO/AIMD-96-106, June 7, 1996). 9Public Law 104-208, September
30, 1996. 10High-Risk Series: Information Management and
Technology (GAO/HR-97-9, February 1997). Page 4
GAO/AIMD/GGD-99-206 IRS' Initial Expenditure Plan B-282877.1 (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 11A 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. 13Tax Systems 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. Page 5
GAO/AIMD/GGD-99-206 IRS' Initial Expenditure Plan B-282877.1
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
Series of Expenditure Congress before obligating ITIA funds, IRS
has developed a strategy where, 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 Justify Modernization expenditure plan
strategy is a by-product of the Commissioner's overall Initiatives
approach to the modernization, which is to incrementally invest in
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). Page 6
GAO/AIMD/GGD-99-206 IRS' Initial Expenditure Plan B-282877.1 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 Plan Is an Appropriate systems modernization and, with
regard to the $35 million being requested 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 Legislative
the initiatives described in its initial expenditure plan and
fulfill its Requirements commitment to
incrementally request and expend future modernization funds. 17GAO
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). Page 7
GAO/AIMD/GGD-99-206 IRS' Initial Expenditure Plan B-282877.1
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. Page 8
GAO/AIMD/GGD-99-206 IRS' Initial Expenditure Plan B-282877.1 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 investment guidelines.21 These guidelines call
for agencies to adopt a data- 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 Cycle Program
modernization investments. In lieu of using the system life cycle
overview 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). Page 9
GAO/AIMD/GGD-99-206 IRS' Initial Expenditure Plan B-282877.1 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 Management Board, and
on April 20, 1999. Treasury's IRS Management Board and OMB
approved OMB and Reviewed by GAO the plan on June 9, 1999, and
June 10, 1999, respectively. On May 13, 1999, 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 Requirements, Guidelines,
modernized systems. If implemented effectively, these processes
should and Management Practices meet federal
acquisition rules and management practices. According to 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. Page 10
GAO/AIMD/GGD-99-206 IRS' Initial Expenditure Plan B-282877.1
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 Plan Is
Consistent With modernization management and technical
weaknesses. Since then, IRS has taken actions to address our
recommendations. We have monitored these GAO's Past
actions and have made follow-up recommendations that recognize
IRS' Recommendations progress and define the
residual steps that IRS needs to take to ensure that 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. Page 11
GAO/AIMD/GGD-99-206 IRS' Initial Expenditure Plan B-282877.1
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' IRS' Modernization management
of the modernization. First, IRS has established a 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, Ongoing
Modernization direct and frequent visibility into and
control over all initiatives/projects. Initiatives
This organizational structure is headed by the Core Business
Systems 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 Page 12
GAO/AIMD/GGD-99-206 IRS' Initial Expenditure Plan B-282877.1
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 "Partnership" Roles and management team and the
contractors supporting the agency. In the case Responsibilities
of IRS and its tax systems modernization program, this is
particularly 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 Subsequent Expenditure and monitor
whether each increment is producing promised benefits and Plans
meeting cost and schedule baselines, and report this information
to 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 [email protected]. 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
Appendix I 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 1Public 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--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 ServiceAppendix II Page 20 GAO/AIMD/GGD-99-
206 IRS' Initial Expenditure Plan Appendix III GAO Contact and
Staff Acknowledgements
Append Iix II 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) Letter Page
21 GAO/AIMD/GGD-99-206 IRS' Initial
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