For more than a decade, the Internal Revenue Service (IRS) has been attempting to modernize its outdated, paper-intensive tax processing system. After 10 years and over $3 billion spent with minimal improvement and intense scrutiny from the Congress, the IRS agreed to use a contractor to help develop modernized systems. The IRS is currently in the early phases of its new systems modernization effort. This multi-billion dollar effort is projected to last up to 15 years.

Audits of the previous computer systems modernization initiatives identified serious management and technical weaknesses. This audit is the first in a series of audits to evaluate the IRS’ oversight of the new systems modernization effort. The objectives were to determine the adequacy of 1) the organizational structure developed to oversee the systems modernization effort, 2) organizational staffing, 3) performance monitoring capabilities, and 4) risk management capabilities.

The IRS has made progress in correcting organizational weaknesses from past systems modernization efforts by ensuring that top level IRS executives are heavily involved in the systems modernization and by recognizing the need to develop program management capabilities, risk management processes, and quality assurance policies and procedures.

However, we found that the oversight of the systems modernization effort has been hampered by the lack of a stable program management organization. Program management staffing needs have not been determined, roles and responsibilities inside the IRS and between the IRS and the contractor are not yet clearly defined, and key processes such as risk management and performance monitoring need to be improved.

A recent IRS review of two key systems modernization initiatives found that a significant number of the work products required during the planning phases of these projects had not been completed. As a result, the IRS had to scale back or delay delivery of several modernization initiatives which were intended to provide improved service to taxpayers in the 2001 Filing Season. Examples of initiatives that have been delayed include: 1) a telephone application that would allow taxpayers to determine whether their individual tax returns have been received, 2) an Internet application that would allow taxpayers to determine the status of their refunds, and 3) an application that would provide for automated delivery of taxpayer account information. Had an effective performance monitoring process been in place, these problems could have been identified much sooner and corrective actions taken without the substantial delays the projects are now facing.

To address these and other problems, the IRS is revising its role and the role of the contractor to assign clear lines of accountability. The IRS now sees its primary role as defining what its business needs are, and the contractor is accountable for delivering the systems to meet those needs. The IRS has other initiatives underway which it believes will help address these concerns. We have incorporated these actions throughout the report.

There have been several changes to the IRS Program Management Office (PMO) developed to oversee the information systems modernization effort and, as of the end of our audit, the IRS did not have an approved organizational structure in place. Without a stable PMO, the IRS has encountered difficulties in timely requesting the release of modernization funds from the Congress, conducting complete quality assurance reviews, fully implementing risk management capabilities, defining architecture standards, and effectively monitoring contractor performance.

Since a stable PMO has not been formed, the IRS has not determined the roles and responsibilities needed to oversee the modernization contractor. Without defined roles and responsibilities, the IRS has not been able to create a staffing plan for the PMO. In addition, a staff skills analysis and training plan have not been developed. Without skills analyses, the IRS cannot ensure that needed skills and abilities to oversee the contractor are available to the PMO.

The IRS has not created policies and procedures to provide an adequate framework for overseeing systems modernization. The IRS was conducting reviews of the modernization contractor ineffectively and did not have an automated method for collecting and disseminating contractor performance data. In addition, no formal assessment had been made of the modernization contractor to ensure that information provided to the IRS was accurate and complete. Due to the lack of a stable PMO, contractor performance has not been closely monitored and modernization projects have approached the end of planning without completing all the required work products.

While the IRS has developed policies and procedures, risk management has not been fully implemented and training has not occurred. Since the PMO has been unstable, a central office responsible for risk management has not been approved. Without a fully implemented risk management framework, there is no assurance that PMO (program-wide) and project level risks are being identified, addressed, and monitored.

We recommend that IRS management stabilize the PMO designed to oversee the systems modernization effort and develop plans to ensure the adequacy of PMO staffing. We also recommend establishing offices responsible for developing and enhancing performance monitoring and risk management capabilities. This should result in improved service to taxpayers through the implementation of quality modernization projects.

Management’s Response: We issued a draft of this report to IRS management on May 2, 2000, with a June 1, 2000, response period. An extension was granted until June 16, 2000. However, management’s response was not available as of the date this report was released.