In 1999, the Internal Revenue Service (IRS) began providing taxpayers with the option of paying the balances due on their United States Individual Income Tax Returns (Forms 1040) by using credit cards or by authorizing direct payments from their bank accounts. To provide this service, the IRS contracted with several private vendors to process the electronic payments at no cost to the IRS.

The IRS received over 53,000 credit card payments totaling $183.8 million and over 76,000 direct debit payments totaling $141.9 million during the 1999 Filing Season. For the 2000 Filing Season, the IRS has contracted for program enhancements to process the 1.6 million credit card payments that it expects to receive. These enhancements include allowing credit card payments for estimated taxes and taxes related to Form 1040 filing extensions made through the Pay by Phone Program. They also include adding more service providers, while expanding payment acceptance, to additional types of credit cards through the File and Pay Program.

Our overall objective was to evaluate the IRS’ efforts to effectively implement the expanded services of these credit card programs for the 2000 Filing Season.

Although the IRS effectively communicated with its credit card program vendors through conference calls and reviews of their work schedules, at the onset of our review it had not exercised its contractual rights to independently verify the accuracy of their work. While we acknowledge that monitoring vendor performance is important for effective project management, it does not adequately ensure that the vendors’ reports and program tests are reliable and accurate. Without such verification, there is an inherent risk of negatively impacting taxpayer relations if potential problems are not identified and corrected prior to implementation.

The IRS subsequently advised us in November 1999 that it had arranged to have one vendor’s test results independently verified. However, the effectiveness of starting this review so near the start of the filing season raises the question as to whether sufficient time will be available to effectively complete the review. If not timely completed, the IRS is at risk of having to process the electronic payments before the vendor’s work is thoroughly evaluated and any problems are corrected.

The Office of Federal Procurement Policy (OFPP) has established best practice guidelines for contract administration in the federal government. These OFPP guidelines recommend a quality assurance process to evaluate the services and products that vendors are required to furnish. We believe that exercising the IRS’ contractual rights should be considered an integral part of its program verification process in addition to current monitoring efforts. Such verification, if routinely and timely performed, would help ensure that future program enhancements are effective.

The IRS has entered into several contracts with private vendors. These contracts allow vendors to provide a "service for fee" to a taxpayer that wishes to electronically file his/her tax return and pay his/her taxes by credit card. The vendors agree to provide the appropriate software and security provisions necessary to implement their programs at no cost to the IRS. The contracts also provide the IRS with the contractual right to inspect and verify the vendors’ work prior to implementation.

However, we found that the IRS does not normally exercise its right to inspection because it is not at risk monetarily. It also believes that it is in the vendor’s economic best interest to deliver a quality program to remain in partnership with the IRS.

The independent review the IRS contracted for in November 1999 included an analysis of the vendors’ security and privacy test plans. While we agree that requiring an independent review is a good business practice, the effectiveness of starting this review at such a late date could place the IRS at risk of having insufficient time to identify and correct potential problems.

Independent verification is important for the IRS to ensure that vendors have effectively tested their programs to help prevent significant processing problems that may adversely affect taxpayer relations. For example, if verification of changes to a vendor’s program had been performed during the 1999 Filing Season, the error that caused 13,700 (26 percent) credit card payments to be applied to the wrong tax year and 9,400 erroneous notices to be sent to taxpayers may have been prevented.

At the time of our review, a newly added private vendor reported that its program would not be ready for implementation until late February 2000, making an independent review prior to the filing season impossible. While we have since been informed that this vendor was unable to deliver the program and has asked to be released from its contract, it does illustrate another potential risk to IRS processing and taxpayer relations if vendor programs are not timely delivered.

To improve the IRS’ process for implementing credit card program enhancements, we recommend as a good business practice that the IRS exercise its contractual rights of inspection to ensure that vendor programs are accurately and timely developed. It should also ensure that program development includes sufficient time for independent review prior to implementation.

Management’s Response: IRS management agrees with the benefits of the recommendations and stated that future project plans would include independent reviews of vendor testing. These reviews will be built into filing season project plans and IRS management will allow sufficient time for evaluation and appropriate corrective actions prior to program implementation.

Management’s complete response to the draft report is included as Appendix VI.