Systemic Weaknesses Need to Be Addressed Before the On‑Line E‑File Application Is Released to the Public

 

June 2004

 

Reference Number:  2004-40-110

 

 

This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.

 

June 9, 2004

 

 

MEMORANDUM FOR COMMISSIONER, WAGE AND INVESTMENT DIVISION

                        CHIEF INFORMATION OFFICER

 

FROM:     Gordon C. Milbourn III /s/ Gordon C. Milbourn III

                 Acting Deputy Inspector General for Audit

 

SUBJECT:     Final Audit Report - Systemic Weaknesses Need to Be Addressed Before the On‑Line E‑File Application Is Released to the Public (Audit # 200340058)

 

This report presents the results of our review of the Internal Revenue Service’s (IRS) On‑Line Electronic Filing (e‑file) Application.  The overall objective of this review was to determine whether the On‑Line e‑file Application functioned as intended, including providing third-party users with the ability to easily navigate through the application.

In the IRS Restructuring and Reform Act of 1998, the Congress challenged the IRS to promote its e‑file programs to the point at which 80 percent of all tax returns would be filed electronically by the 2007 Filing Season.  To help meet the Congressional mandate, the IRS created the e‑Services project that, when completed, will provide a set of web‑based business products as incentives to third parties to increase e‑file.  One of the initial e‑Services products planned for release is the On‑Line e‑file Application, which will provide third parties with a faster, more accurate way to apply to become e‑file providers and make revisions to existing application information via the Internet. 

The planned release of the On‑Line e‑file Application prior to the start of the 2004 Filing Season did not occur.  As a result, neither the IRS nor third parties received the key benefits expected from the On‑Line e‑file Application.  Third parties were not provided with the ability to prepare and submit Applications to Participate in the IRS e‑file Program (Form 8633) or to make revisions to existing application information via the Internet. 

Although the On‑Line e‑file Application was not released for public use as planned, the IRS was successful in combining individual and business e‑file applications into one e‑file application.  This allows third parties to submit one application to e‑file both individual and business tax returns.  The IRS also combined six separate databases that previously housed applicant information into a single database, allowing IRS employees easier access to e‑file applicant information. 

However, systemic weaknesses need to be addressed before the On-Line e‑file Application is released for public use.  The current On‑Line e‑file Application does not have sufficient procedures and controls to ensure all information is protected and applications are processed effectively and timely.  In addition, the IRS has not ensured the system has sufficient capacity for future growth or developed procedures to address those third parties that choose to submit their applications on paper.  Finally, the system might not be sufficiently user-friendly to ensure third parties use the new On‑Line e‑file Application.

To address these issues, we recommended the Commissioner, Wage and Investment Division, ensure issues are effectively addressed before the On‑Line e‑file Application is made available for public use.  The Commissioner should also ensure guidelines are updated to include procedures for the new application process, including applications e‑filed and submitted on paper, and obtain feedback from internal users to identify issues that may affect the ease with which third parties can use the Application once it is released to the public.

Management’s Response:  IRS management agreed with our recommendations and has already initiated or completed corrective actions.  Specifically, a set of work lists were designed to assist employees in determining the status of e-file applications, and management reports are being developed.  Further, a draft Desk Guide was developed, which provides hands-on tutorials for using the system and guidance on how to use the work lists and other available reports to assist in ensuring the effective and timely processing of all e-file applications.

A risk assessment was conducted on the e-Services Project to assure that the e-file application information is adequately protected; the IRS will communicate the importance of providers updating their account information to ensure sensitive information is not subject to unauthorized access; and an analysis was conducted of capacity requirements and monitoring is in place to provide a warning in the event the system gets to 90 percent capacity.  In addition, the IRS is currently revising the Internal Revenue Manual to outline the policy and procedures related to the application process for electronic and paper returns, while the previously mentioned Desk Guide will provide employees with procedures for using the e-file application online via the Internet.

Also, employee insights and suggestions were encouraged during project development and throughout the startup.  Whenever technically feasible, these suggestions were adopted.  The IRS also received and reacted to input from external users during the initial testing phase prior to the release.  Management’s complete response to the draft report is included as Appendix V.

Copies of this report are also being sent to the IRS managers affected by the report recommendations.  Please contact me at (202) 622-6510 if you have questions or Michael R. Phillips, Assistant Inspector General for Audit (Wage & Investment Income Programs), at (202) 927-0597.

 

Table of Contents

Background

The On‑Line E-File Application Was Not Released to the Public in Time for the 2004 Filing Season

Systemic Weaknesses Need to Be Addressed Before Full Implementation

 

Recommendation 1:

Recommendations 2 and 3:

Appendix I – Detailed Objective, Scope, and Methodology

Appendix II – Major Contributors to This Report

Appendix III – Report Distribution List

Appendix IV – Outcome Measures

Appendix V – Management’s Response to the Draft Report

 

Background

In the Internal Revenue Service (IRS) Restructuring and Reform Act of 1998, the Congress challenged the IRS to promote its electronic filing (e‑file) programs to the point at which 80 percent of all tax returns would be filed electronically by the 2007 Filing Season.  Unfortunately, if the IRS’ current systems are not updated and refined, this goal will not be met.  Therefore, to help meet the Congressional mandate, the IRS created the e‑Services project. 

The e‑Services project will provide a set of web-based business products, accessed through the IRS web site, as incentives to third parties to increase electronic filing.  The project focuses on fostering easy‑to‑use electronic products and services, targeted at specific practitioner segments that inform, educate, and provide service to the taxpaying public. 

E‑Services products include agency‑wide registration, authorization, authentication, and application procedures for tax practitioners.  In addition, select Electronic Return Originators (ERO) will be provided with On‑Line Power of Attorney Application, verification of Taxpayer Identification Numbers, transcript delivery, and electronic account resolution.  Releases of the e‑Services project were initially scheduled to begin in June 2002 but were delayed until August 2003. 

One of the initial e‑Services products planned for release is the On‑Line e‑file Application, which will provide third parties with the ability to prepare, submit, and revise the Application to Participate in the IRS e‑file Program (Form 8633) via the Internet.  Form 8633 is the form third parties use to apply to the IRS to become e‑file providers.  Providing third parties the ability to apply electronically is part of the IRS’ effort to make the entire e‑file process electronic.  The On‑Line e‑file Application was originally scheduled for release in 2002.  However, as of the end of our testing, it had not been released for third party use.

For third parties, the new On‑Line e‑file Application will provide a faster, more accurate way to apply to become e‑file providers and make revisions to existing application information via the Internet.  For the IRS, it will provide resource savings since IRS employees will no longer have to manually input the information from paper applications into the system.  Instead, third parties will be entering application information via the Internet.

Once the IRS receives an application or updated information, it performs a series of checks to ensure the applicant meets the qualifications to participate in the e‑file Program.  If the applicant successfully passes these checks, a unique identification number is assigned to the applicant.  This unique number identifies the entity and location of the e‑file provider and is required on all e‑file tax returns sent to the IRS. 

This review was performed in the Electronic Tax Administration and Business Systems Modernization offices in the Modernization and Information Technology Services organization at IRS National Headquarters in Washington, D.C., and at the Electronic Filing Unit in the Andover Submission Processing Site during the period October 2003 through February 2004.  The audit was conducted in accordance with Government Auditing Standards.  We were unable to complete our audit tests to determine whether the On‑Line e‑file Application was functioning as intended, including providing third-party users with the ability to easily navigate through the application, because the On‑Line e‑file Application was not released for public use before the completion of our testing.  Detailed information on our audit objective, scope, and methodology is presented in Appendix I.  Major contributors to the report are listed in Appendix II.

The On‑Line E‑File Application Was Not Released to the Public in Time for the 2004 Filing Season

Neither the IRS nor third parties received the key benefits expected from the On‑Line e‑file Application since it was not released as planned at the start of the 2004 Filing Season.  Third parties were not provided with the ability to prepare and electronically submit Forms 8633 or make revisions to existing application information via the Internet.  In addition, the IRS was unable to save resources resulting from third parties rather than IRS employees entering application information.  Instead, as of December 30, 2003, the IRS had spent an additional 23,825 hours in labor, at a cost of approximately $377,000, because the On‑Line e‑file Application was only released for use internally.

Although the On‑Line e‑file Application was not released to the public as planned, the IRS was successful in:

·        Combining the individual and business e‑file applications into one application.  Previously, if third parties wanted to e‑file both individual and business tax returns, they would have to submit separate e‑file applications.  Third parties now have to submit only one application to e‑file both individual and business tax returns.

·        Combining six separate databases that previously housed applicant information into a single database referred to as the Third Party Data Store (TPDS).  This allows IRS employees easier access to e‑file applicant information.  The TPDS is an electronic database that houses all pertinent information on third parties that interact with the IRS through e‑Services.  For example, this database contains information on all registered users and e‑file providers, along with information on their e‑file activity.

During the 2003 IRS Tax Forums, the IRS Commissioner made a commitment to tax professionals that the On‑Line e‑file Application would be in operation for the 2004 Filing Season.  This required the IRS to release the On‑Line e‑file Application for third-party use by August 2003 to allow sufficient time to process Forms 8633 before the start of the 2004 Filing Season.  The IRS recommends applicants submit Forms 8633 at least 45 days before they wish to participate in the e‑file Program. 

The On‑Line e‑file Application was released for IRS employee use but did not work as expected

The IRS first implemented the On‑Line e‑file Application internally, shutting down the previous application process on September 12, 2003, and deploying the new On‑Line e‑file Application 12 days later.  However, IRS management immediately determined that the On‑Line e‑file Application was not working as expected.

The IRS tracked and documented 263 problems that surfaced from September to December 2003.  As of December 31, 2003, the IRS had been unable to resolve 22 of the 263 identified issues.  Unresolved problems included the:

·        Issuance of unique identification numbers to more than one e‑file provider.

·        Inability to change or add certain fields in the TPDS.  For example, IRS employees were unable to update certain company names in the database.

·        Inability to access the system, at times, due to connection problems.

Because the system did not work as expected, the IRS experienced a backlog of paper applications that at one time totaled approximately 10,000 new or revised applications.  To process these applications, the IRS spent approximately $377,000 in extra labor costs.  Applicants in the backlog were burdened when their applications were not timely processed.  Some of the backlogged applications took from 10 to 12 weeks to process, whereas applications processed using the prior system were completed within 7 weeks.  In addition, applicants did not know the status of their applications because the IRS was unable to issue letters confirming their receipt.  Some applicants submitted duplicate applications fearing the original ones had been lost in the mail, while others contacted the e‑file help desk.  

The increased costs and taxpayer burden caused by the backlog were a one-time occurrence caused by a number of factors.  For example: 

·        The IRS did not ensure the On‑Line e‑file Application was adequately tested prior to releasing it for use.  Although management followed the test plan, their plans did not include a “shakedown” period to allow them to identify and resolve problems once the system was in place. 

·        IRS employees did not have the required 30‑day period in which to learn the new process.  Plans required a 30‑day period for IRS employees that process e‑file applications to become familiar with the On‑Line e‑file Application prior to using the system to process live data.  This familiarity period never occurred.  Instead, IRS employees were instructed to immediately begin using the On‑Line e‑file Application. 

In spite of the numerous problems associated with the deployment of the On‑Line e‑file Application, IRS employees from various offices and functions worked diligently to ensure e‑file applications were input and processed in time for the 2004 Filing Season.  Because of their exemplary efforts, approximately 30,700 e‑file applications were processed, ensuring that applicants were able to e‑file tax returns for the 2004 Filing Season.  We commend these employees on their dedication and hard work.  The processing of these applications before the 2004 Filing Season was critical to the success of the IRS e‑file Program.

Specific recommendations are not being made as we have previously reported on testing deficiencies for e‑Services and other projects.

Systemic Weaknesses Need to Be Addressed Before Full Implementation

The current On‑Line e‑file Application process does not have sufficient procedures and controls to ensure all e‑file provider information is protected and applications are processed effectively and timely.  In addition, the IRS has not ensured the system has sufficient capacity for future growth and has not developed procedures to address those third parties that choose to submit their applications on paper.  Finally, the system might not be sufficiently user‑friendly to ensure third parties can easily use the new On‑Line e‑file Application.

These systemic weaknesses were not identified because the IRS did not ensure the On‑Line e‑file Application was adequately tested prior to releasing the Application for internal use.  IRS management advised us that IRS protocol did not provide for this specific testing.  Plans required a 30‑day period for IRS employees that process applications to become familiar with the On‑Line e‑file Application prior to using the Application to process live data.  However, as stated, this familiarity period never occurred.

Management controls should provide reasonable assurance that management’s objectives are being achieved and resources protected.  This includes effective management information system reports that ensure controls are working and provide information with which to gauge the success of the program.  System controls also include restrictions on users to allow access only to necessary system functions. 

There are no effective management information system reports to ensure all applications are processed effectively and timely 

The On‑Line e‑file Application process was designed to produce work lists and notify employees when manual intervention is needed to complete the application process.  Although the work lists were required to be available at the time the system was released for internal use, the function did not operate as intended.  Work lists were not automatically generated, so employees did not know there were e‑file applications needing manual intervention to complete the application process. 

In addition, the new system provided other management information reporting capabilities, but IRS management was not aware of these capabilities.  Documentation explaining the reporting capabilities of the new system had not been provided to management when the system was released.  At the beginning of January 2004, the developer of the system generated the first ad hoc report.  This was an aged report that identified all applications that had been in the system for 30 or more days without being completed.  This listing was 176 pages long and listed over 8,500 applicants.  To ensure these applicants would be able to e‑file, IRS employees manually worked this listing and issued the required unique identification numbers to the qualified applicants.

Once the work list feature is available, the IRS will need to develop procedures on how to use the work lists and other available reports to assist in ensuring the effective and timely processing of all e‑file applications.  

There is a risk of unauthorized access to e‑file providers’ information 

IRS procedures state that if an e‑file provider’s application information (such as the provider’s address or telephone number or the individuals listed on the provider’s application) changes, the e‑file provider must notify the IRS within 30 days of the change.  In the prior system, only IRS employees had access to the system, creating a minimal risk of unauthorized accesses to system information, including sensitive information such as Social Security Numbers.  When the new system is released for third-party use, third parties will be able to access their e‑file provider information via the Internet.  If the application information is not timely updated, the system will not prevent an e‑file provider who changes firms from accessing his or her former firm’s e‑file application information.  Access to the former firm’s information would allow the e‑file provider to access sensitive information and potentially make unauthorized changes to other application information.

IRS management did not ensure all e‑file provider information used in the new system was accurate and complete.  Although it is the firm’s responsibility to keep its e‑file application information current, this will be even more important when third parties are able to access this system. 

There is no assurance that the capacity of the TPDS will meet future expected growth of the system 

The original capacity requirement for the TPDS, when planned in 2001, was to support 200,000 third-party organizations (such as EROs.)  This capacity level was a performance requirement in the system specifications.  However, management was unable to provide documentation confirming that this initial capacity requirement was met. 

Because the original capacity specifications were developed several years earlier, management was not aware of whether subsequent revisions had been made to the system’s original requirements.  Ensuring the TPDS can adequately support the volume of third-party organizations will be of utmost importance as the growth in e‑file continues and other factors, such as states mandating e‑filing, result in more individuals becoming e‑file providers.   

There are no procedures for processing e‑file applications submitted on paper

Although the IRS prefers that third parties apply to become e‑file providers on‑line, once the On‑Line e‑file Application is released, the IRS will still allow e‑file applications (Form 8633) to be submitted on paper.  However, procedures have not been developed to address third parties that choose to submit their e‑file applications on paper.  For example, the prior system issued interim letters to the applicants to advise them that their applications had been received and were being processed.  The IRS has not developed procedures for the new system to issue interim letters to e‑file applicants because its primary focus has been on the On‑Line e‑file Application process and making third parties aware of the advantages of e‑filing Form 8633.

The On‑Line e‑file Application might not be sufficiently user-friendly to ensure third parties can easily use it

Although we were unable to completely test the application process to assess its usability, we observed employees using the system and conducted an anonymous survey of employees that used both the prior system and the new system.  Employee comments on the new system include:

·        It takes two to four times longer to input an e‑file application with the new system than it did using the prior system.

·        It requires more screens, clicks, and input than the prior system.

·        It is not user‑friendly and requires multiple re‑inputs of the same information.

·        The screens on the new system should be only two pages and look just like the Form 8633.  (Note:  The new system has 12‑13 screens.)

If the system is not user‑friendly or is cumbersome to use, third parties might choose not to use the system or revert to submitting Forms 8633 and updates on paper.  

Recommendations

The Commissioner, Wage and Investment Division, should work with the Chief Information Officer to:

1.      Ensure that, before the On‑Line e‑file Application is released to the public:

a.       The system has sufficient management information reports to process applications timely and the reports are being generated as intended, including developing procedures for generating and using work lists and management information reports.

Management’s Response:  On March 10, 2004, the PRIME released a set of work lists designed to assist the employees in determining the status of e-file applications.  In addition, the PRIME is currently developing management reports based on the criterion submitted by the IRS.  Lastly, in an effort to ensure that the employees are familiar with the various work lists and management information reports, a draft Desk Guide was developed.  This Guide provides hands-on tutorials for using the system, as well as guidance on how to use the work lists and other available reports to assist in ensuring the effective and timely processing of all e-file applications.

b.      A risk assessment is conducted to evaluate the access controls and determine what actions, if any, are necessary to ensure e‑file application information is adequately protected.  At a minimum, actions taken should include educating e‑file providers on the importance of updating their account information.

Management’s Response:  A risk assessment was conducted on the e-Services Project to assure that the e-file application information is adequately protected.  In addition, the Electronic Tax Administration Office will communicate the importance of providers updating their account information upon changes within their business to ensure sensitive information is not subject to unauthorized access.  This information will be disseminated through various channels, such as Quick Alerts, an e-file Article, and tax forums. 

c.       An analysis is completed to ensure the system meets minimum capacity requirements and has the capability to meet future capacity demands resulting from the expansion of the e‑file Program.

Management’s Response:  An analysis was conducted as part of the System Integration Testing and Performance testing.  The system is currently operating at 25 percent of its total capacity.  The IRS and PRIME monitor the disk allocation.  The team will provide a warning in the event the system gets to 90 percent disk space.

2.      Ensure guidelines are updated to include procedures for the new application process, including applications e‑filed and submitted on paper.

Management’s Response:  The Chief Information Officer and the Commissioner, Wage and Investment Division, are currently revising the Internal Revenue Manual (IRM) and developing the previously mentioned Desk Guide for use by the employees working IRS e-File Applications.  The updated IRM will outline the policy and procedures related to the application process for electronic and paper returns.  The Desk Guide will provide employees with procedures for using the e-File application online via the Internet.

3.      Identify and address employee concerns that may affect the ease with which third parties can use the application once it is released to the public.

Management’s Response:  Employee insights and suggestions were encouraged during project development and throughout the startup.  Whenever technically feasible, these suggestions were adopted.  The IRS also received and reacted to input from external users during the initial testing phase prior to the release.  Since the release of the product, the level of acceptance has been positive.  At this point in the life cycle of this software, it is not necessary to make a special effort to seek additional input from employees since external users will become the primary users.  This was completed April 26, 2004.

 

Appendix I

 

Detailed Objective, Scope, and Methodology

 

The overall objective of this review was to determine whether the Internal Revenue Service’s (IRS) On‑Line Electronic Filing (e‑file) Application was functioning as intended, including providing third-party users with the ability to easily navigate through the application.  To accomplish this objective, we:

I.                    Determined the goals and objectives of the On‑Line e‑file Application.

A.     Determined the goals and expectations the Office of Electronic Tax Administration has for the On‑Line e‑file Application.

B.     Reviewed and analyzed the documentation on the Functional Specification Package, project documentation, and implementation testing to determine what and how the program was designed, implemented, and expected to operate.

C.     Determined the impact to the IRS if expectations for the On‑Line e‑file Application are not met.

II.                 Determined if the On‑Line e‑file Application system was adequately tested prior to implementation and if results of testing were used to make changes/modifications prior to release.

A.     Determined if usability testing was performed and if results were used to improve the ability of third parties to use the application.

B.     Determined if acceptance testing was done and if all reported defects were corrected and/or explained.

III.               Determined if key issues were adequately addressed during the implementation process to ensure the application is functioning as intended.

A.     Determined if internal users were provided access to the system (familiarity venue) before the system was used for production. 

B.     Determined if parallel processing of the old and new systems was used until the new system was functioning as intended.

 

Appendix II

 

Major Contributors to This Report

 

Michael Phillips, Assistant Inspector General for Audit (Wage and Investment Income Programs)

Randee Cook, Director

Russell Martin, Audit Manager

Edith Lemire, Senior Auditor

Grace Terranova, Senior Auditor

Andrea McDuffie, Auditor

 

Appendix III

 

Report Distribution List

 

Commissioner  C

Office of the Commissioner – Attn:  Chief of Staff  C

Deputy Commissioner for Operations Support  OS

Deputy Commissioner for Services and Enforcement  SE

Deputy Commissioner, Wage and Investment Division  SE:W

Chief, Communication and Liaison Division CL

Chief, Information Technology Services  OS:CIO:I

Director, Customer Account Services  SE:W:CAS

Director, Customer Assistance, Relationships, and Education  SE:W:CAR

Director, Strategy and Finance  SE:W:S

Chief Business Architect and Business Strategist  SE:W:CAS:BSBA

Director, Electronic Tax Administration  OS:CIO:I:ET

Director, Stakeholder Partnerships, Education, and Communication  SE:W:CAR:SPEC

Director, Submission Processing  SE:W:CAS:SP

Director, Internet Development Services  OS:CIO:I:ET:D

Director, Strategic Services  OS:CIO:I:ET:S

Chief Counsel  CC

National Taxpayer Advocate  TA

Director, Office of Legislative Affairs  CL:LA

Director, Office of Program Evaluation and Risk Analysis  RAS:O

Office of Management Controls  OS:CFO:AR:M

Audit Liaisons: 

GAO/TIGTA Liaison, Wage and Investment Division  W:S:PA

Chief, Information Technology Services  OS:CIO:I

 

Appendix IV

 

Outcome Measures

 

This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration.  These benefits will be incorporated into our Semiannual Report to the Congress.

Type and Value of Outcome Measure:

Methodology Used to Measure the Reported Benefit:

Based on the Internal Revenue Service (IRS) Work Planning & Control Program Analysis Report (PCC 6240), the Andover Submission Processing Site expended an additional unscheduled 17,635 staff hours (including detailed employees) from September 13 through December 27, 2003, to process Applications to Participate in the IRS e‑file Program (Form 8633).

·        General Schedule (GS)-7 tax examiners – Calendar Year (CY) 2003 Boston pay rate for GS-7 Step 5 = $18.13 per staff hour x 3,991 hours over schedule = $72,356.83.

·        GS-5 clerks – CY 2003 Boston pay rate for GS-5 Step 5 = $14.64 x 1 hour under schedule = ($14.64).

·        Detailed GS-5 clerks – CY 2003 Boston pay rate for GS-5 Step 5 = $14.64 per staff hour x 13,645 hours over schedule = $199,762.80.

17,635 hours over schedule at a net cost of $272,104.99 ($72,356.83 - $14.64 + $199,762.80).

Based on the PCC 6240 for October 14 through December 27, 2003, the Austin Submission Processing Site expended an additional unscheduled 8,574 staff hours for technical support.

Based on the PCC 6240 for September 13 through December 27, 2003, the Andover Submission Processing Site expended 2,384 fewer staff hours than scheduled for technical support.

·        GS-7 tax examiners – 2003 Boston pay rate for GS-7 Step 5 = $18.13 per staff hours x 2,384 hours under schedule =  - $43,221.92.

6,190 hours over-scheduled hours at a net cost of $105,022.54 ($148,244.46 - $43,221.92).

Overall 23,825 hours at a net cost of $377,127.53 ($272,104.99 + $105,022.54).

There were approximately 30,700 e‑file applications processed using the new system that did not have an interim letter issued to acknowledge receipt of the application.  The applicants did not know the status of their applications, and processing took 10 to 12 weeks.

 

Appendix V

 

Management’s Response to the Draft Report

 

The response was removed due to its size.  To see the response, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.