Government Systems: The Mess At IRS

Arthur Gross, the agency's new CIO, must save a massive systems modernization program now that Congress is threatening to cut off funds

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By Edward Cone
Issue date: April 15, 1996

For Arthur Gross, the new CIO at the Internal Revenue Service, this will be a tax season to remember. In the job only since the beginning of this month, Gross needs to save a massive, decade-old computerization project that's in serious trouble.

Congress, which allocates funding for the IRS' Tax Systems Modernization (TS M) computer effort, recently reviewed the project's status and was so upset by the findings that it threatened to take away management of the project from the IRS. Congressional paymasters already have withheld $100 million of the project's nearly $700 million budget for this fiscal year. Now the $850 million requested for next year is in jeopardy, too.

To understand just how strained relations between the IRS and Congress have become over the project, consider the March 14 meeting of the House Appropriations Subcommittee on the Treasury, Postal Service, and General Government. As the meeting headed for a recess, chairman Jim Lightfoot, a former IBM customer-service representative, held up a piece of paper. On it, the Iowa Republican had defined the funding future of the IRS' massive TSM program. "On one side, I'd written 'priorities, plus schedules, plus blueprints equals TSM money,'" says Lightfoot. "On the other side, there was just a zero. I don't know how much plainer we can be. "

Blueprint For Trouble
It's not just bad relations between the IRS and Congress that CIO Gross has inherited-it's also a project in trouble. The IRS desperately needs a blueprint to bring the sprawling collection of planned and existing systems into a coherent, agencywide architecture, one that follows an overarching business strategy and methodology. In fact, after a December 1995 deadline for the plan came and went without any such specifications from the IRS, Congress was compelled by the 1996 Budget Act to lock up the last $100 million of the modernization program's 1996 funding. No plans arrived in time for the March subcommittee hearing, either, so the money remains in limbo.

Similarly, the IRS in late March suspended a test of Cyberfile, a program that would allow taxpayers to transmit their returns via the Internet. The IRS put the program on hold after the General Accounting Office (GAO), the auditing arm of Congress, raised concerns about the system's security and pa ce of development.

Among the most serious criticisms of the systems modernization project, drawn from GAO, Congressional, and National Research Council (NRC) reports:

• Strategies for electronic filing are restricted to professional tax preparers, making the goal of 80 million electronic returns by early next century impossible.
• Even effective systems won't be integrated into a single, coherent database.
• The IRS is unwilling to outsource tasks for which it lacks expertise, including software development.
• An overall plan for TSM is still lacking.

The IRS launched its modernization project in 1986 to upgrade information systems that still rely on labor-intensive practices implemented in the 1950s. Under the plan, online data will replace paper documents, comprehensive customer information will be available on PCs, and a unified system will replace disparate parts. All these changes will be driven by, and in turn facilitate, changes in the way the IRS goes about its basic bu siness.

Gross declined to speak for this article, saying any comments would be "premature." Yet getting a TSM plan together must be one of his highest priorities. "The government's investment of what could be more than $8 billion and IRS' efforts to modernize tax processing are at serious risk due to remaining pervasive management and technical weaknesses," said a July 1995 report by the GAO.

Another report, issued by the NRC in late 1995, warns of dire consequences if the IRS does not ground the modernization project with realistic goals. "TSM will degenerate into a collection of individual projects that are poorly integrated, with inadequate privacy and security safeguards, and that may or may not be able to cope with increased tax return processing," the report predicted.

The executive branch is weighing in with its own concerns. In January, Alice Rivlin, then director of the Office of Management and Budget, formed a Presidential Technology Team to f ocus on the modernization project. The team was formed because the project is clearly in trouble, and because the IRS is part of the Treasury, which is an executive branch department.

At the Treasury Department, mention the project and the tone turns grim. "The modernization effort has been sobering," deputy treasury secretary Lawrence Summers told Lightfoot's subcommittee.

Critics of the IRS wonder if the job could have been better handled by a commercial systems integrator. "The IRS likes to argue that the federal tax laws are unique, but how you keep track of things isn't unique," says Lightfoot. "There's a whole list of companies that could do this in a reasonable length of time and at a reasonable cost."

In fact, some of the work-though not enough to satisfy Lightfoot-has been parceled out. Systems integrator TRW has more than 500 people working on the IRS project. TRW officials refused several requests to comment on the work.

Officials fr om the IRS and Treasury Department point out that the modernization effort has had successes, including important advances in communications infrastructure and customer service. Even some critics agree. "IRS has changed in some big ways," says Marjory Blumenthal, staff director for the NRC report committee.

Call the IRS for customer service these days, and chances are you'll notice a change for the better. Just a few years ago, the IRS' antiquated communications network and scattered computer centers made it impossible for service representatives in one geographical area to access information in another part of the country. That meant delays that could stretch into weeks on simple requests. Now many such requests can be answered with a single phone call. "We have spent heavily on a new telecommunications infrastructure," says Bob Aldicker, director of the IRS Business Transition Office.

The communications network also enables the Telefile program, which allows taxpayers t o file 1040-EZ forms over a Touch-Tone telephone. Last year, Telefile handled nearly 700,000 returns; this year, that number should be well over 3 million, the IRS predicts. Telefile will continue to be expanded to handle other forms in the future.

Consolidating the IRS' dozen computer centers into three locations, a migration that should be completed next year, is another concrete achievement under the modernization effort. These centers house the IRS' master file, which is updated once a week on a tape-based system. Michael Dolan, IRS deputy commissioner, says the three systems will eventually be converted into a consolidated database, answering a key criticism of TSM.

The appointment of a new CIO is raising hopes, too. The position had been vacant since July 1995. Gross came to the IRS from the State of New York's Department of Taxation and Finance, where he led a systems modernization effort similar to the one under way at the IRS.

Finding a new CIO frustrated the IRS, due to li mits on the amount it can pay employees. "We consulted with a group of CIOs from private industry, and they told us that a reasonable compensation package for this position on the open market would be in the neighborhood of $1 million a year," Dolan says. "We're allowed to pay $120,000 per year plus benefits." Senior IRS brass insist that Gross' appointment will be followed by more good news. "We have retrofitted this project to the point of getting in front of the curve," says Dolan. He adds that long-delayed blueprints for the modernization project should be available later this spring.

Yet Congress is running out of patience. "I haven't seen anything that indicates that they've turned things around," says Rep. Lightfoot. "I prefer to keep this on a cooperative basis, but if necessary we will look for some other way to get this done."

Flattery?
Nobody disputes that the systems modernization needs to get done. Even the imposition of a flat tax wouldn't eliminate the IRS' data-management needs. "We'd still maintain taxpayer accounts and some type of compliance activity," says Wally Hutton, the IRS' former acting CIO. "Our functions would continue."

The IRS processes a lot of paper-some 2 billion pieces annually. If stacked in a single pile, it would reach 200 miles high, according to the Treasury Department. Somewhere in that stack would be more than 200 million tax returns, and 1 billion or so information documents such as W2s and 1099s. At any given time, the IRS stores more than 1.2 billion tax returns.

Systems redesign has been a goal at the IRS since the late '60s, but initiatives failed to get off the ground. That left IRS employees opening envelopes, stamping papers, and keying data into creaky, unintegrated systems.

This stagnation began to lift when the modernization effort was conceived. By 1991, under the energetic leadership of then-IRS commissioner Fred Goldberg, the project had gotten under way. Big numbers were bandied about, including an $8 billion budget over the life of the project, and a goal of 80 million electronically filed returns by 2001.

Seeds Of Discontent
Hopes were high, yet hidden in those happy memories lay some of the seeds of today's discontent. Funding for the IRS isn't done on a capital basis, but must be passed each year in Congress. That's made budgeting difficult for some long-range projects.

Also, Goldberg and other champions of the project within the IRS have left the agency. Goldberg now works in the Washington office of New York law firm Skadden Arps Slate Meagher & Flom. The current IRS commissioner, Margaret Milner Richardson, is the third person to hold the job in the last five years, including a four-month interim stint by a deputy commissioner while Richardson was waiting to be confirmed. Henry Philcox, the IRS' former CIO and a co-champion with Goldberg of the modernization project, left the agency last July. He's now CIO of Dynecorp, an IT services company in Reston, Va.

Ironically, Philcox says job-hopping throughout the government makes it hard for the IRS to succeed. "You get new people in Congress, the White House, OMB, and GAO, and you're explaining everything all over again," he says.

Lightfoot points to another culprit in the IRS' glacial planning pace: internal political pressure to keep modernization from happening. "It's a jobs issue with their union," he alleges. "People who sit there all day long, doing nothing but hand-stamping returns as they come in, fear their jobs will be eliminated."

But deputy commissioner Dolan calls the jobs angle "vastly overstated." He adds: "If you could take the temperature of our work force, you'd find a lot of people think they'll be retrained for other work."

Former CIO Philcox goes further, calling Lightfoot's charge "baloney" and pointing out that modernization already has tri mmed 4,500 person-years from the IRS payroll. Dolan and team point to other improvements.

Last year the IRS handled about 14 million electronically filed returns, says Dolan. Electronic filing reduces the error rate on a typical 1040 form to about 1%, versus 18% on a manually compiled and processed return.

What about that target of 80 million electronic returns? Well, the IRS no longer makes such bold claims. "We'll move incrementally to 25, 30, 50 million returns," says Dolan. With improved security and the implementation of tools Dolan describes as "on the advanced stage of the workbench," the IRS says more home filers will be able to go electronic soon.

The downsized target for online filing is meant to be offset by a more general paper-reduction strategy, based on all sorts of electronic information transfer, including information documents from employers and financial institutions. For example, the IRS received $232 billion worth of corporate tax deposits e lectronically from 41,000 companies last year, replacing an inefficient coupon-based system.

But one project-tax filing over the Internet-won't be up and running anytime soon. The IRS' Cyberfile program, a $30 million effort originally scheduled to run last January, was halted after the GAO warned of problems. Cyberfile, an alternative method of electronic filing, is supposed to let taxpayers file electronically directly to the IRS using the Internet or a toll-free number. The GAO, in testimony before the Senate Government Affairs Committee, said the IRS, in its rush to implement Cyberfile, had overlooked significant security risks to both the system's data and physical surroundings.

Specifically, the GAO found nearly 50 security breeches, including missing locks and hinges, combustible materials near and inside the data center, outdated fire extinguishers, and a lack of backup capabilities. GAO inspectors also found a note written on a whiteboard in the Cyberfile data center that instructed employees to hand off passwords to employees on the next shift-a clear violation of standard security practices.

Unlike tax-filing systems offered by commercial online services, Cyberfile would be free. Yet Sen. Ted Stevens (R-Alaska), chairman of the Senate committee, noted that the indirect cost to taxpayers would be huge, even if the IRS were able to get its projected response of 10,000 to 25,000 users. Because Cyberfile has cost $30 million to date, it could cost as much as $3,000 per user, he says.

While all the critiques of the modernization effort are rebutted or accepted as lessons learned by the IRS officials interviewed for this story, the fact remains: No planning document has materialized. "We are in the process of completing a re-scoping effort," says the IRS' Aldicker. "We are scaling back some facets of the original TSM to deliver core critical functionality."

Lightfoot has heard those promises before. Still, he says he's optimistic that moderniza tion will come to fruition eventually: "There are bureaucrats at IRS who see the need to make this happen, and they're the cream that will rise to the top." Even if Lightfoot has to give them a hard push along the way.

See related stories " Following The IRS Money Trail " and " On The Web, Outsiders Helped "

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