The Internal Revenue Service (IRS) is currently in the early phases of its latest effort to modernize its outdated, paper-intensive tax processing system. This multi-billion dollar effort, known as Business Systems Modernization, is projected to last up to 15 years. The IRS has set up the Business Systems Modernization Office (BSMO) to oversee this modernization effort.

Our audit objectives included determining the adequacy of the IRS’ 1) short-range planning efforts, 2) the systems modernization Program Management Plan, 3) significant controls to guide projects from initiation through post-implementation, 4) independent assurance process, and 5) performance monitoring capabilities.

The IRS is making solid progress in building program management capabilities. Many of the actions being taken by the IRS and the modernization contractor are significant undertakings and, if implemented correctly, should lead to future success for the systems modernization effort. We believe that improvements in short-range planning, funding, post-implementation review, independent assurance, and performance monitoring processes would increase the chances for success in the long-term systems modernization efforts.

We found that the IRS does not have a systems modernization short-range plan in the form of a single unique document, although most elements of a short-range plan exist or are being developed separately. Without a comprehensive short-range plan, the IRS may not achieve coordinated short-range goals such as timely implementing business process changes, modernized systems, and program management capabilities. However, the IRS’ draft Program Management Plan could be enhanced to create a short-range plan to guide systems modernization efforts.

The modernization contractor had to suspend work on 10 projects while the IRS waited for additional funding to be approved by the Congress. Work on the projects was delayed for almost 2 months, and the contractor had to replace several employees when the funding was restored. The BSMO has not documented its procedural controls over funding. Until this occurs, the funding process remains loosely defined and may continue to result in funding gaps, denial of funds, and projects that are over- or under-funded.

Under the current funding strategy, funding intervals may become even more frequent as more projects are initiated. As the systems modernization effort matures and management capacity increases, the current funding strategy will also need to mature by employing processes that will reduce the chances of future funding gaps.

Current systems modernization Quality Assurance documentation does not include a requirement to perform a post-implementation review of projects. Without this type of review, the IRS may not identify program management strengths and weaknesses. The BSMO is currently evaluating who would be responsible for these reviews.

The IRS has made strides to ensure that organizations are in place to provide independent assurance concerning the IRS’ and the modernization contractor’s compliance with security, legal, and effectiveness requirements. However, not all organizations have formal agreements documenting their commitment to the Business Systems Modernization program. In addition, the BSMO has not documented processes and procedures for conducting independent reviews.

In a previous audit, we recommended that the IRS develop an adequate framework for monitoring the performance of the modernization contractor. The BSMO has made strides in implementing this framework, including the execution of performance-based task orders. However, we found that positive and negative contractor incentives in the task orders were generally weak and had not been consistently implemented. For example, several task orders were written such that the IRS only withholds payment until the modernization contractor delivers, rather than reducing the payment to the modernization contractor to compensate for the delay in implementing systems that will benefit taxpayers.

The IRS is currently building program management capabilities. We recommend that, during this period of growth, the BSMO create a short-range plan to guide the new systems modernization effort. We also recommend that the BSMO create policies and procedures for ensuring consistent funding, conducting post-implementation reviews, obtaining independent viewpoints, and improving performance-based contracting processes. With a single document guiding short-range systems modernization efforts and improved policies and procedures, the IRS should have a greater chance for success in delivering quality modernization projects that result in improved service to taxpayers.

Management’s Response: Management’s response was due on January 11, 2001. As of January 18, 2001, management had not responded to the draft report.