Executive Summary

Objective and Scope

Background

Results

Conclusion

Appendix I - Detailed Objective, Scope, and Methodology

Appendix II - Major Contributors to This Report

Appendix III - Report Distribution List

Appendix IV - Abbreviations Used in This Report

Appendix V - Memorandum #1 - Outstanding Risks Related to Service Center Mainframe Consolidation

Appendix VI - Management’s Response to Memorandum #1 - Outstanding Risks Related to Service Center Mainframe Consolidation

Appendix VII -Memorandum #2 - Follow-up to Contracting Issues

Executive Summary

The Internal Revenue Service (IRS) is in the process of consolidating the mainframe computer operations used to process tax return data. The consolidation involves moving mainframe processing, currently done at the IRS’ 10 service centers, to new mainframe computers located in 2 facilities referred to as computing centers—the Tennessee Computing Center (TCC) and the Martinsburg Computing Center (MCC).

This is our second audit of the Service Center Mainframe Consolidation (SCMC) Project. The first audit, Readiness for Service Center Mainframe Consolidation (Reference Number 085812, dated September 21, 1998) reported that: (1) testing plans were not adequate, (2) Project Office controls over critical tasks and communications to the field needed improvement, (3) controls over technical aspects of contract administration needed improvement, and (4) critical staffing shortages still existed at the computing centers.

The overall objective of this review was to determine whether SCMC project management controls were adequate to ensure that: (1) problems identified during the Kansas City Service Center (KCSC) consolidation were corrected before additional consolidations occurred, (2) consolidation minimized the impact on taxpayer rights, and (3) budget postings and reports to the Congress on the costs of this initiative were accurate. We also evaluated corrective actions taken as a result of the prior audit, and immediately raised significant issues to the attention of IRS Management and Finance (M&F) and Information Systems (IS) Division management.

When the KCSC mainframe operations were consolidated to the TCC on September 19, 1998, significant problems were encountered. For example, the methods used to transfer data were not efficient, some programming changes were not effective, and detailed standard operating procedures had not been developed for the consolidated environment.

In a November 1998 memorandum, we reported the results of our assessment of the impact of mainframe consolidation on KCSC operations and taxpayers (see Appendix V). We also advised IRS IS management that several risks relating to testing, preparation for consolidation, and staffing were still present prior to the Brookhaven Service Center (BSC) consolidation.

BSC mainframe computer operations were consolidated to the MCC on December 4, 1998, and the results were very encouraging for the SCMC Project. Several problem areas were improved by addressing lessons learned from the KCSC consolidation. As a result, the IRS was able to return to normal processing times at the BSC much faster than it did during the KCSC consolidation. Other reasons for the successful BSC consolidation included the continuous cooperation and communication between the MCC and the BSC, and the fact that the BSC provided on-site support to the MCC during the initial weeks of consolidation.

However, the IRS did experience some problems during the BSC consolidation. For example, some programs did not work, some telecommunication hardware failed, and automated scheduling was cumbersome.

There are still several issues that should be addressed before the remaining service center consolidations.

• Management of Print Operations – Standard operating procedures and training need improvement.
• Workload Management – Controls should be automated or improved for ensuring that complete and accurate input is received by the mainframes and complete and accurate output is produced by the mainframes.
• Preparation for Consolidation – Prior to consolidation, the service centers need to ensure their media storage method is compatible with the newer technology used in the computing centers.
• Staffing Shortages – Critical staffing shortages at the computing centers need to be addressed.

In the prior review, we recommended that IRS management provide additional resources to adequately define and validate SCMC contract requirements, and that the SCMC Project Office coordinate with the Procurement Division during price negotiations. IRS management agreed with the recommendations and established an August 1998 completion date for corrective actions. The IRS had not adequately corrected these conditions by October 1998. As a result, the IRS’ negotiating position has diminished.

The Project Office was not verifying all invoices for the vendor’s services and travel due to a lack of staffing. This could lead to the IRS paying for services not received or for unauthorized travel. In addition, inadequate contract administration has resulted in the contractor performing an estimated $7 million of work without following the proper procurement procedures.

Improvements are needed to ensure that the IRS accurately budgets, captures and reports all SCMC staffing costs to the Congress. Some service center employees who were working on the SCMC Project were not charging their time to the correct project. Without complete and accurate information on the costs of the SCMC, IRS management cannot accurately report to the Congress or estimate the future costs of consolidation. While we could not determine the actual amount unreported, we estimate that for the three sites tested (TCC, KCSC, BSC), there were approximately $1.07 million in unreported labor costs for Fiscal Year (FY) 1998.

The following summarizes the specific recommendations contained in the report:

1. Ensure all critical operational and technical aspects of consolidation at computing centers and service centers are standardized, thoroughly tested, appropriately documented, and included in employee training. Also, ensure that computing centers are adequately staffed.
2. Ensure contract requirements are defined by June 1999 and that proper procurement procedures are followed to obtain goods and services.
3. Ensure that all consolidation costs are accurately budgeted, captured, and reported. Also, review the reasonableness of the FY 1999 and FY 2000 SCMC budget estimates and make adjustments, as appropriate.

Management’s Response: IRS management provided an adequate, detailed response to our first memorandum which addressed the first recommendation (see Appendix VI). Management’s response to the remainder of the issues in this report was not available at the time this final report was issued. We provided the IRS with a draft of this report on June 30, 1999, with a 30-day calendar comment period.

Objective and Scope

This review was initiated as a continuation of the initial Service Center Mainframe Consolidation (SCMC) review (Readiness for Service Center Mainframe Consolidation, Reference Number 085812, dated September 21, 1998).

The overall objective of the review was to determine whether SCMC project management controls were adequate to ensure that: (1) problems identified during the Kansas City Service Center (KCSC) consolidation were addressed before any additional consolidations occurred; (2) the Internal Revenue Service (IRS) minimized the impact on taxpayer rights; and (3) budget postings for work on this Century Date Change (CDC) initiative were accurate. We also evaluated corrective actions taken as a result of the prior audit.

We conducted the current review between September 1998 and January 1999 according to Government Auditing Standards. We interviewed key personnel and obtained and reviewed documentation at the following sites.

• The SCMC Project Office in McLean, Virginia.
• The Tennessee Computing Center (TCC) in Memphis, Tennessee.
• The KCSC in Kansas City, Missouri.
• The Martinsburg Computing Center (MCC) in Martinsburg, West Virginia.
• The Brookhaven Service Center (BSC) in Brookhaven, New York.

We issued two memoranda and held discussions with IRS Management and Finance (M&F) and Information Systems (IS) Division management to advise them of the most significant issues identified. The memoranda and the IRS’ response to the first memorandum are included as Appendices V, VI, and VII. We issued the second memorandum near the completion of fieldwork, and did not ask for an IRS management response.

Details of our audit objective, scope, and methodology are presented in Appendix I. Major contributors to this report are listed in Appendix II. Abbreviations used in this report are listed in Appendix IV.

Background

The SCMC Project is one of four critical projects monitored monthly by the IRS Commissioner’s Combined Management Program for CDC and Filing Season Executive Steering Committee. The CDC initiative addresses computer problems regarding Year 2000 (Y2K).

In September 1997, the IRS formed the SCMC Project Office within the IS Division, with an objective to consolidate mainframe operations from 10 service centers to mainframes at the 2 computing centers. In June 1998, the Memphis Service Center (MSC) became the first service center to consolidate its mainframe operations into a computing center. During this audit, two other service centers’ mainframe operations were consolidated— the KCSC on September 19, 1998, and the BSC on December 4, 1998. The IRS is currently reassessing the project schedule for consolidating the remaining seven service centers.

The IRS plans to spend approximately $360 million on the SCMC during Fiscal Years (FY) 1997 through 1999. For FY 1998, the Congress set limitations on how the IRS spent funds appropriated for the SCMC, and directed the IRS to provide quarterly reports tracking its progress in meeting this CDC initiative.

The consolidation process involves moving applications that currently reside on mainframe computers in IRS service centers (facilities currently used to process tax returns) to mainframe computers at facilities referred to as computing centers. After consolidation, data input by the service centers will be transmitted to the computing centers for further processing, and the resulting data output will be sent back to the service centers.

The applications residing on four mainframe systems are being consolidated as part of the SCMC project.

• Service Center Replacement System (SCRS) - This system prepares tax return information for input to the IRS’ main computer system, the IRS Master File, and provides on-line access to taxpayer information.
• Integrated Collection System (ICS)/Automated Collection System (ACS) - These systems support the tax collection process.
• Printer Replacement to Integrate New Tools (PRINT) - This system supports high-volume printing of tax correspondence and IRS management reports.
• Communications Replacement System (CRS) - This system is the front-end processor (routes data) for the SCRS, and provides security functions. Once consolidated, the new system is referred to as the Security and Communications System.

Results

The IRS is investing a significant amount of resources on the SCMC’s goal of ensuring that the consolidated service centers and computing centers timely and accurately complete the processing of tax data. The consolidation is a very complex task and requires extensive coordination and effort by several contractors and IRS functions. While the SCMC Project is making significant progress toward this goal, there are several risks that IRS management must continue to address.

The KCSC consolidation resulted in negative impact on taxpayers and IRS operations. IRS management has worked hard to minimize taxpayer impact and implement additional actions based on lessons learned from that consolidation.

As a result, the SCMC project achieved some success with the subsequent BSC consolidation and minimized the impact on taxpayers. However, there is still a need to improve future consolidations. During our review, we reported the following issues to IRS M&F and IS management.

• Critical risks related to the Service Center Mainframe Consolidation remain unresolved.
• Controls over technical aspects of contract administration remain inadequate.
• Staffing costs of consolidation are not accurately budgeted, captured, and reported.

As a result, IRS IS management has initiated several corrective actions based on our recommendations (see Appendix VI).

During the audit, we provided IRS M&F and IS management with detailed information on the issues that follow.

Critical Risks Related to Service Center Mainframe Consolidation Remain Unresolved

We issued a memorandum on November 10, 1998, advising IRS IS management that several risks relating to testing, preparation for consolidation (automation readiness), and staffing were still present prior to the BSC consolidation. These issues were originally reported to IRS management during the prior review.

We believe these risks contributed, in part, to problems experienced by the KCSC and the TCC after consolidation.

When the KCSC mainframe operations were consolidated to the TCC on September 19, 1998, significant problems were encountered. For example, the methods used to transfer data from site to site were not efficient, some programming changes were not effectively implemented, and detailed standard operating procedures had not been developed for the consolidated environment.

In our November 10, 1998, memorandum we reported our assessment of the impact of mainframe consolidation on KCSC operations and taxpayers (see Appendix V). We also assisted IRS management in identifying affected taxpayers.

Systemic and procedural problems were experienced during the KCSC consolidation. Systemic problems included:

• The methods used to transfer data from site to site had not proven to be satisfactory, e.g., data transmission times were longer than expected. As a result, the IRS became concerned that it would not be able to timely process tax return information during peak periods.
• Executive Control Language (ECL) programming changes were not effectively implemented prior to the KCSC consolidation. Consequently, unscheduled ECL changes had to be made during initial processing at the TCC. These manual changes resulted in processing backlogs.

Procedural problems included:

• Personnel from the service center were not initially on-site at the computing center to assist in stabilizing the consolidated environment.
• Detailed standard operating procedures had not been developed for operations in a consolidated environment. This problem was evident when the KCSC and the TCC began to experience significant print processing problems.

In the November 10, 1998, memorandum we also reported that the TCC and the MCC continued to report staffing shortages with few options remaining to correct the problem, including directed reassignments which must be negotiated with the National Treasury Employees Union (NTEU).

Furthermore, we determined that if the causes of the processing and staffing problems were not corrected before the 1999 filing season, there would be a very high risk of adverse impact on a significant number of taxpayers (see Appendix V).

We recommended that before consolidating any additional service centers to computing centers, IS management should:

1. Ensure all critical operational and technical aspects of consolidation at computing centers and service centers (including the KCSC) are:

1. Standardized (e.g., procedures, methodologies, naming conventions, etc.).
2. Thoroughly tested (end-to-end).
3. Documented appropriately.
4. Included in employee training.

1. Ensure that critical staffing risks are reduced.

Management’s Response: IRS IS management agreed to initiate the following corrective actions.

• A task force was chartered in November 1998 to identify: (1) application and transmittal configuration management issues, (2) data exchange and print issues, (3) Executive Control Language/Job Control Language (ECL/JCL) standardization, and (4) operational issues (including documentation).
• A print task force provided 60 action items in November 1998. Twenty-six items were to be addressed prior to the BSC consolidation, with the remainder to be addressed prior to any further consolidations.
• Standards will be incorporated into the SCMC Concept of Operations.
• Testing was modified to include several iterations of daily, weekly, and post-weekly processing prior to the BSC consolidation using converted ECL.
• Additional training was provided to BSC/MCC personnel prior to the BSC consolidation. Additional training needs were identified and a schedule is being developed.
• A plan is being developed to address TCC staffing shortages. Remote support vacancies were announced. An agreement was made with the NTEU to seek supplemental staffing using third party sources.
• Retention bonuses are being considered for existing TCC personnel.
• An intern training program is being developed to address key IS staffing shortages.

The BSC mainframe operations were consolidated to the MCC on December 4, 1998. While this consolidation was more successful than the KCSC consolidation, the IRS did experience some problems during the BSC consolidation. We reviewed both the preparation for consolidation and the actual transfer of processing from the BSC to the MCC (known as cutover).

Review of Preparation for Consolidation

We evaluated the implementation of lessons learned from the KCSC consolidation at both the BSC and the MCC and, in November 1998, we met separately with IRS IS management for both locations to discuss the results of those reviews.

BSC staff was working on several issues, including the following. These items were timely completed before the BSC consolidation to the MCC.

• Identifying expected data inputs and outputs, and file transfers needed.
• Training print operators.

The MCC staff was also working on several issues. We identified the following problems during the review of their preparations.

• File Tracking – The KCSC consolidation showed that the IRS needed to be able to better track files which were being transferred back and forth between the KCSC and the TCC. At the MCC, only about 800 of the 2,400 files identified for transfer on one system (UNISYS–SCRS) were being tracked. No file tracking system had been established for the other system (IBM–ICS/ACS/PRINT).
• Staffing – A lesson learned from the KCSC consolidation was that certain service center staff were needed at a computing center during consolidation. We provided a listing of the necessary service center positions to the MCC. No formal request had been made for the level of staffing at the MCC during consolidation.
• Balancing – Prior to the KCSC consolidation, run-to-run balancing controls was identified by IRS IS management as a high priority risk to be reduced. A request (called a Request for Information Services, or RIS) was made to automate this balancing process. However, the majority of runs listed in the RIS were not scheduled for implementation prior to the BSC consolidation (December 1998). The majority of the RIS implementation dates ranged from January 1999 through March 2000.

In addition to reviewing the IRS’ progress on addressing issues identified in the KCSC consolidation, we identified these additional risks, which we recommended be addressed before the BSC consolidation.

• Certain critical computer systems did not have backup systems.

• Several operating differences (e.g., differing libraries, software versions, etc.) were noted between the MCC and the TCC that create uncertainty as to their ability to back up each other in case of failure at either location (disaster recovery).

Management’s Actions: After we verbally reported these issues, IRS IS management took the following actions prior to the BSC consolidation.

• According to IRS IS staff, all UNISYS outgoing files were entered for file tracking purposes prior to consolidation.
• MCC IS management prepared a memorandum requesting formal staffing commitments for the BSC consolidation at the MCC.
• A critical system backup (DEPCON server) was installed on the consolidation weekend.

With the exception of another critical system backup (SPO server), the remaining items are being addressed by the SCMC Project Office, and were not considered crucial for resolution prior to the BSC consolidation (see Appendix VI).

The BSC consolidation was encouraging for the SCMC Project, and the return to normal processing times occurred twice as fast for this consolidation as it did for the KCSC consolidation. Some of the areas improved by addressing lessons learned from the KCSC consolidation include:

1. Expanded Testing – More testing was conducted for the BSC consolidation. Including actual daily work as test data appears to have had a positive impact by reducing the number of initial problems at the MCC.
2. Programming (ECL/JCL) Changes – Programming changes were made and tested before the consolidation, leading to fewer problems (caused by incorrect or missing ECL/JCL statements).
3. Expected inputs/outputs and file transfers identified – Checklists for file tracking purposes were prepared. This allowed the MCC and the BSC to determine whether all files had been received and processed. Additional file tracking improvements are mentioned in the next section.
4. Print operator training – Print operator training was provided by the MCC to the BSC, resulting in fewer print operation problems. Additional print management improvements are mentioned in the next section.

A significant contributing factor to the successful BSC consolidation was the amount of cooperation and communication between the MCC and the BSC. Also, the BSC provided on-site support to the MCC during the initial weeks of consolidation. This also appears to have had a positive impact on initial consolidated operations at the MCC.

Some problems occurred during initial processing after the BSC consolidation, including some programs that did not work and telecommunication hardware failures. IRS management took actions to alleviate some problems, such as using manual deposit procedures to ensure timely deposits. The IRS also temporarily suspended taxpayer notices for one week to minimize the impact on taxpayers. IRS management did not quantify taxpayer impact in its documentation detailing initial problems experienced after consolidation.

Start-up problems included server failures, unexpected system drop-off of some user sessions, and automated scheduling.

While the BSC consolidation was very encouraging for the SCMC Project, there are still some lessons learned that can be taken forward for the remaining service center consolidations.

1. Management of Print Processing – Both the KCSC and the BSC experienced problems with print operations. Print operation standard operating procedures and training need to be improved. An IRS task force identified these issues and has issued recommendations for improvement.
2. Workload Management – Current manual balancing controls should be replaced with automated controls. Also, the MCC implemented controls to track data and print file output needed by the service centers from the computing centers. This process needs to be refined and is listed as an open action item by IRS IS management.
3. Preparation for Consolidation – Prior to consolidation, the service centers need to improve some processes to take advantage of and ensure compatibility with newer technology in the computing centers. For example, the service centers need to make programming changes to ensure compatibility with newer storage media technology in the computing centers.

4. Staffing – The BSC did not have adequate liaison staff trained and in place prior to consolidation.

Management’s Actions: The SCMC Project Office has begun discussing actions that need to be taken prior to consolidating another service center. We concur with management’s proposed actions.

Controls Over Technical Aspects of Contract Administration Remain Inadequate

In the prior review, we recommended that IRS management provide additional resources to adequately define and validate SCMC contract requirements, and that the Project Office coordinate with the Procurement Division during price negotiations. In its response, IRS management agreed with the recommendations and established an August 1998 completion date.

We followed up on the implementation of corrective actions and issued a memorandum on January 13, 1999, advising IRS M&F and IS management of the following concerns. As of October 1998, the IRS had not completed the corrective actions, and inadequate controls over the technical aspects of contract administration continue to be a problem for the SCMC project.

The Project Office is not coordinating with the Procurement Division to ensure effective contract administration. As a result, delivery orders (goods and services contracted for) were not adequately defined, and goods and services were provided by the contractor without authorization from the appropriate IRS official—the Contracting Officer (CO). Lack of defined contract requirements has diminished the IRS’ negotiating position. Inadequate contract administration has resulted in the contractor performing an estimated $7 million of work without authorization from the CO. In addition, the invoices for services and travel are not being adequately verified due to lack of resources.

Contract requirements for the SCMC Project have not been adequately defined, which could result in additional contract costs. As of October 1998, 32 of 44 delivery orders (for about $175 million of $215 million) remained undefinitized.

Undefinitized delivery orders are those in which the contractor has been authorized to begin work, but the cost of the work has only been proposed and not formally negotiated. Although the funds for these tasks have been obligated, the Procurement Division cannot timely and effectively negotiate final prices with the contractor because of undefined requirements and incomplete technical evaluations by the Project Office.

This issue was initially reported in a May 1998 memorandum. The Project Office responded that by August 1, 1998, additional resources would be assigned to adequately define and validate delivery order requirements, and to coordinate with the Procurement Division until all requirements could be defined for negotiations. This has not occurred. A lack of resources in the Project Office and late proposals from the contractor were among the reasons cited. The SCMC Project Manager explained that, in many cases, by the time the proposal was complete, the IRS’ requirements had changed so the proposal was of no use.

The contract used to fund the SCMC is a Firm Fixed Price (FFP) Level of Effort contract. The hardware and software are FFP - the price is not subject to adjustment based on the contractor’s costs. The services are level of effort - the contractor is required to provide a specified level of effort, over a stated period of time, on work that can only be stated in general terms. When using a FFP contract, requirements need to be well defined to allow fair and reasonable prices to be negotiated.

Undefinitized delivery orders provide the IRS the flexibility to issue delivery orders quickly but, in a FFP environment, expose the IRS to possible liability for additional costs if the pricing elements are not quickly finalized. The IRS’ aggressive implementation schedule for consolidation adds a great deal of pressure to the Project Office and the contractor to complete the project timely. The schedule did not allow time for well thought out requirements, which resulted in the Procurement Division issuing undefinitized delivery orders to get the project started. The pressure to stay on schedule has further hindered defining requirements, thus preventing delivery orders from being timely definitized.

In response to the Project Office’s inability to define and validate the requirements, Procurement management has developed a plan to definitize the delivery orders by June 1999. The plan will be carried out in three steps which involve:

• Obtaining information from the contractor regarding goods and services ordered.
• Validating the information for pricing accuracy.
• Validating the information for accuracy, quantity, and delivery schedule and sites.

Since the requirements have not been defined and validated, the IRS is paying the contractor for its actual costs until the prices are negotiated. The earlier the prices are negotiated, the better chance the IRS has of negotiating a lower price. However, since the implementation is already under way, the IRS has lost significant leverage in negotiating lower prices.

The Project Office has not provided the resources needed to verify invoices for services and travel, which could result in IRS paying for goods or services not received. On large, complex contracts, there should be IRS staff on-site, called Government Task Managers (GTMs), who report to the CO’s Technical Representative (COTR) in the SCMC Project Office. The GTMs verify invoiced items, such as travel and labor hours worked, and report acceptance of those items to the COTR.

No GTMs have been assigned on-site due to pressure to stay on schedule. However, the Project Office is currently working on assigning GTMs on-site. Without the information GTMs provide, the COTRs cannot adequately verify items invoiced. This could potentially lead to the IRS paying for services not received or for unauthorized travel.

Currently, the COTRs sign Surveillance Reports to verify the hours worked and travel taken by the contractor. These reports state that, to the best of the COTRs’ knowledge, the contractor worked the hours invoiced; however these hours are unverified and the Surveillance Reports do not provide for any visual inspection of goods or services.

The SCMC Project Office made decisions to order goods and services without obtaining approval by the CO due to an immediate need for the items. This resulted in several procurements, estimated at $7 million, which were made without following proper procedures.

According to the Federal Acquisition Regulations, only the CO has the authority to authorize work that binds the government. An unauthorized procurement is a procurement for which someone other than the CO instructs the contractor to perform work. In cases of unauthorized procurements, the CO then has to decide whether to ratify the procurement, i.e., approve the procurement and agree to pay for the actions.

Although the funds were available and the items were needed, the Project Office did not follow the proper procurement process. They did not submit a delivery order request to the CO for processing, approval, and issuance to the contractor authorizing work to begin. For the delivery orders in question, it appears a Project Office employee authorized the contractor to begin work without the issuance of a delivery order by the CO.

In September 1998, the CO and COTR became aware of the Project Office’s actions, ratified the procurement and issued undefined delivery orders and/or modifications to fund the procurements. However, the IRS will pay the contractor for only 50 percent of these procurements until the required proposals for the work are submitted and approved.

3. IRS management should ensure that all delivery orders are definitized by June 1999.
1. The SCMC Project Office should validate the inventory of goods and services ordered (including validating accuracy, quantity, and delivery schedule and sites).
2. The Procurement Division should validate the goods and services ordered for pricing accuracy.
4. IRS management should ensure that proper procedures are followed.
1. The SCMC Project Office should establish full-time GTMs and support staff on-site to monitor and verify deliveries, hours worked by the contractor, and travel taken by the contractor.
2. The Procurement Division should ensure that the SCMC Project Office and contractor are made aware of who is authorized to direct the contractor to perform work.

Management’s Action and Resulting Cost Savings: IRS IS management stated that delivery orders were definitized, resulting in $19 million in savings from prior requisitions.

Management’s Response: Management’s response was not available for inclusion in the report at the time this final report was issued. We provided the IRS with a draft of this report on June 30, 1999, with a 30-day calendar comment period.

Staffing Costs of Consolidation Are Not Accurately Budgeted, Captured, and Reported

Staffing costs of consolidation are not being accurately budgeted, captured, and reported to the Congress by the SCMC Project Office. As a result, we estimate that there was approximately $1.07 million in unreported staffing costs in FY 1998 for the three sites tested (TCC, KCSC, BSC). Without complete and accurate information on the staffing costs of SCMC, IRS management cannot accurately report to the Congress, as required, or estimate the future costs of consolidation. As a result, both the FY 1999 budget and the projected FY 2000 budget could be significantly understated.

A factor which affected the Project Office's ability to accurately budget, capture, and report staffing costs is the funding of staff by two different IRS functions in FY 1998. The IS Division, including the Project Office, is funded by the Chief Information Officer; IS personnel in service centers are funded by the Chief Operations Officer.

Public Law Requirement: Public Law 105-61 provided for the IRS’ 1998 appropriations. The related FY 1998 Conference Report stated, in part, "The conferees are concerned that the Century Date Change requirements are not yet finalized and projects and activities considered as part of the program may frequently change. The conferees direct the IRS to provide quarterly reports tracking its progress in meeting this strategy. The report should include expenditure of funds, application of full-time equivalents (FTEs)…."

An FTE is the equivalent of one person working eight hours per work day (including holidays and paid leave) for one year. SCMC staffing costs are estimated and budgeted in FTEs through individual office budgets. Actual expenses are then recorded using the Project Cost Accounting System (PCAS) code to allow for tracking of budget and actual expenditures by project on the Automated Financial System (AFS). The PCAS is the official source for reporting IS project costs, and the SCMC Project has been assigned a specific PCAS code.

Because IRS IS management did not issue comprehensive directions for budgeting and charging staffing costs, offices were not consistent in how they did so. The SCMC Project Office budgeted $3.7 million for its immediate staff. Other offices, such as the service centers and district offices, estimated and

budgeted their staffing needs through their individual budgets. AFS reports show that:

• Some service centers did not budget or charge any basic salary costs for SCMC work; however, they did charge costs such as overtime, travel, and training related to the SCMC project.
• Eighty percent of 218 employees working on the SCMC project at the TCC, the KCSC, and the BSC had no time charges to the project.

To confirm the time charges on the AFS report, we attempted to contact 146 of the 218 employees working on the SCMC at the three locations. Of the 78 employees who responded, 55 (71 percent) stated they worked on the SCMC during FY 1998. However, not all of the time charges for these individuals were reflected under the SCMC PCAS code on AFS. Additionally, other field personnel informed us that staffing costs associated with the SCMC were charged to a general PCAS code and not the SCMC PCAS code.

Because IRS IS management did not issue comprehensive directions regarding budgeting and charging staffing costs, SCMC staffing budgets were inaccurate. Also, the FY 1999 and projected FY 2000 budgets do not include FTEs and labor for the service centers and computing centers.

In February 1997, the Deputy Commissioner had issued a memorandum emphasizing the importance of using PCAS codes for IS expenditures. The SCMC Project Office documented the problem of improper usage of PCAS codes in April 1998. However, IRS management did not take timely action to identify all the offices incurring staffing charges, and did not ensure that all costs were reported.

The Quarterly Congressional Report on IRS’ Y2K Conversion Program (which includes SCMC) does not reflect information on expenditure of funds or FTE budgeting, as required by congressional mandate in the FY 1998 Conference Report. Further, the Project Office is not maintaining sufficient documentation to support the information reported to the Congress.

We identified the following report discrepancies.

• During FY 1998, the IRS obligated $161.7 million and expended approximately $104.7 million on consolidation efforts. The IS Budget Office provided a format for reporting information on obligations. As a result, the four quarterly reports issued during the fiscal year reported obligations, not expenditures.
• The Project Office budgeted for 14 FTEs and expended 53 FTEs for FY 1998. This expenditure was not reported.

Without a coordinated and comprehensive disclosure of the use of SCMC funds in the quarterly congressional reports showing obligations and expenditures, the IRS cannot ensure an effective accounting and control of appropriated funds, or meet congressional requirements.

5. The Chief Information Officer should ensure that all consolidation costs, whether incurred at the Project Office or field levels, are accurately budgeted, captured, and reported by:
1. Developing a comprehensive IRS policy for preparing budgets for automation projects.
2. Ensuring the SCMC Project Office implements a process to ensure that all employees conducting SCMC related tasks use the SCMC PCAS code to properly account for costs.
3. Ensuring that information in the quarterly congressional report complies with the requirements of the congressional mandate to report expenditures and FTEs.
6. The Chief Information Officer should review the reasonableness of the FY 1999 and FY 2000 SCMC budget estimates and make adjustments, as appropriate.

Management’s Response: Management’s response was not available for inclusion in the report at the time this final report was issued. We provided the IRS with a draft of this report on June 30, 1999, with a 30-day calendar comment period.

Follow-up on IRS Management’s Corrective Actions for Previously Reported Deficiencies

In addition to the follow-up work on consolidation and contracting risks (see pages 5 and 14), we also followed up on four corrective actions related to the previous review that were scheduled for completion during the current audit period. Three of the four corrective actions were effectively implemented, but the fourth corrective action was only partially completed. Due to changes currently being considered by the IRS that may considerably reduce the staffing resources required of the service centers during consolidation (see Appendix VI), we are not currently recommending that this corrective action be fully completed. Our analysis follows.

We recommended that the Project Office obtain resources to provide accountability for the identification, documentation, assignment, and monitoring of all short and long-term actions required from the field offices and the national office to successfully implement the consolidation plan. Project management should also update its communications plan to include the necessary weekly meetings, conference calls, etc., and require participation of field offices, as appropriate, to monitor and communicate the status of critical tasks.

Proposed Corrective Actions: The SCMC Project Office will develop a "SCMC Web Page" and work with National Office Communications to have SCMC project information included in workforce transition issues and other appropriate communication channels. In addition, the SCMC Project Office will incorporate the "end user" in the Integrated Process Team process by appointing an "end user" representative to the Integrated Process Team Steering Committee.

Audit Work Performed: We verified that a SCMC Web Page was established. We also reviewed minutes of the Risk Oversight Committee (ROC) meetings and Executive Steering Committee minutes and noted that IRS Executives were present for oversight purposes.

We recommended that IRS management raise fall-back as a risk through the SCMC ROC and ensure that sub-risks, such as lack of a tested fall-back plan and effects on service level agreements, are considered by the ROC for elimination.

Proposed Corrective Actions: The SCMC Project Office stated that a plan would be created to provide for a three-day window for a service center fall-back to its former environment with minimal data loss. Problems occurring subsequent to this three-day period would be resolved by the IRS and vendor technicians in the new environment.

Audit Work Performed: We determined that fall-back was addressed by the ROC, and BSC’s network consolidation procedures included provisions for fall-back.

We recommended that the Project Office request written assurances from Service Center and National Office Directors that the necessary resources would be committed to accomplish near-term SCMC objectives.

Proposed Corrective Action: The SCMC Project Office stated they would obtain the formal assurance for resources from Service Center Directors.

Audit Work Performed: We determined that three service center directors had responded that they would provide adequate staffing for the upcoming consolidations. One service center director responded that she would not be able to provide staffing for the upcoming consolidations. After further review, we determined that changes forthcoming in the consolidation method may lead to less staffing needed from the service centers for the upcoming consolidation (see Appendix VI). Therefore, until the IRS determines the amount of service center support needed for the upcoming consolidations, we are not recommending that this action be completed.

We recommended that the Project Office assign a full-time COTR for the contract, thus separating the COTR’s and Program Manager's duties.

Proposed Corrective Action: The SCMC Project Office will assign a new COTR.

Audit Work Performed: We determined that a new full-time COTR had been assigned.

Conclusion

The SCMC Project goal of consolidating the mainframe processing at 10 service centers into 2 computing centers is a very complex task and requires extensive coordination and effort by several contractors and IRS functions. While the project is making significant progress towards its goal, the IRS needs to ensure that future service center consolidations, technical contract administration, and budget accounting are improved.

Detailed Objective, Scope, and Methodology

The overall objective of this review was to determine whether the Internal Revenue Service’s (IRS) Service Center Mainframe Consolidation (SCMC) project management controls were adequate to ensure that: (1) problems identified during the Kansas City Service Center (KCSC) consolidation were corrected before additional consolidations occurred, (2) consolidation minimized the impact on taxpayer rights, and (3) budget postings were accurate. We also evaluated corrective actions taken as a result of the prior review, Readiness for Service Center Mainframe Consolidation, Reference Number 085812, September 21, 1998.

Major Contributors to This Report

Scott Wilson, Associate Inspector General for Audit (Information Systems Programs)

Susan Boehmer, Director

Danny Verneuille, Audit Manager

Joseph Wabnitz, Audit Manager

Vann Coe, Senior Auditor

Troy Paterson, Senior Auditor

Van Warmke, Senior Auditor

Catherine Cloudt, Auditor

Roy Evans, Auditor

Perrin Gleaton, Auditor

Report Distribution List

Commissioner C

Deputy Commissioner Modernization C:DM

Deputy Commissioner Operations C:DO

Chief Information Officer IS

Deputy Chief Information Officer, Operations IS

Assistant Commissioner, National Operations IS:O

Director, Martinsburg Computing Center IS:O:M

Acting Director, Tennessee Computing Center IS:O:T

Deputy Chief Information Officer, Systems IS

Assistant Commissioner, Systems Development IS:S

Project Director, Mainframe Consolidation IS:S:MC

Assistant Commissioner, Service Center Operations IS:SC

Office of Information Resources Management IS:IR

Chief Management and Finance M

Assistant Commissioner (Program Evaluation and Risk Analysis) M:OP

Chief Financial Officer M:CFO

National Director for Budget M:CFO:B

Office of Management Controls M:CFO:A:M

Assistant Commissioner, Procurement M:P

Chief Operations Officer OP

Executive Officer for Service Center Operations OP:SC

Director, Kansas City Service Center D

Director, Brookhaven Service Center D

National Director for Legislative Affairs CL:LA

Audit Liaisons:

Abbreviations Used in This Report

ACS – Automated Collection System

AFS – Automated Financial System

BSC – Brookhaven Service Center

CDC – Century Date Change

CO – Contracting Officer

COTR – Contracting Officer’s Technical Representative

CRS – Communications Replacement System

DEPCON – Distributed Enterprise Print Controller

ECL – Executive Control Language

FFP – Firm Fixed Price

FTE – Full-Time Equivalents

FY – Fiscal Year

GTM – Government Task Managers

ICS – Integrated Collection System

IRM – Internal Revenue Manual

IRS – Internal Revenue Service

IS – Information Systems

JCL – Job Control Language

KCSC – Kansas City Service Center

M&F – Management and Finance

MCC – Martinsburg Computing Center

MSC – Memphis Service Center

NTEU – National Treasury Employees Union

PCAS – Project Cost Accounting System

PRINT – Printer Replacement to Integrate New Tools

ROC – Risk Oversight Committee

RIS – Request for Information Services

SCMC – Service Center Mainframe Consolidation

SCRS – Service Center Replacement System

SPO – Single Point of Operation

TCC – Tennessee Computing Center

TEBB – Taxpayer Service Electronic Bulletin Board

Y2K – Year 2000

Memorandum #1: Outstanding Risks Related to Service Center Mainframe Consolidation

SUBJECT: Internal Audit Memorandum – Outstanding Risks Related to Service Center Mainframe Consolidation

CHIEF INFORMATION OFFICER - Attachment

Management's Response to Memorandum #1

Memorandum #2: Follow-up to Contracting Issues

(for) /s/ Nancy A. Nakamura