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entitled 'Business Systems Modernization: IRS's Fiscal Year 2004 
Expenditure Plan' which was released on November 17, 2004.

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Report to Congressional Committees: 

November 2004: 

BUSINESS SYSTEMS MODERNIZATION: 

IRS's Fiscal Year 2004 Expenditure Plan: 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-46]: 

GAO Highlights: 

Highlights of GAO-05-46, a report to congressional committees

Why GAO Did This Study: 

The Internal Revenue Serviceís (IRS) Business Systems Modernization 
(BSM) program is a multibillion-dollar, high-risk, highly complex 
effort that involves the development and delivery of a number of 
modernized information systems that are intended to replace the 
agencyís aging business and tax processing systems. BSM funds are not 
available until IRS submits an expenditure plan that meets various 
conditions to congressional appropriations committees for approval. In 
January and July 2004, the Department of the Treasury submitted IRSís 
initial and revised fiscal year 2004 plans, respectively. 

As required by law, GAO reviewed the plans to (1) determine whether the 
plans satisfied the conditions specified in the law, (2) determine what 
progress IRS had made in implementing our prior recommendations, and 
(3) provide any other observations about the plans and IRSís BSM 
program.

What GAO Found: 

IRSís initial (January 2004) and revised (July 2004) fiscal year 2004 
expenditure plans, which requested about $388 million for the BSM 
program, satisfied the conditions specified in the law. These 
conditions include meeting the Office of Management and Budgetís 
capital planning and investment control review requirements and 
complying with federal systems acquisition requirements and management 
practices.

IRS has made progress in implementing our recommendations to improve 
its modernization management controls and capabilities and in 
completing BSM projects that have benefited taxpayers and the agency. 
For example, IRS has implemented our prior recommendation to promptly 
update its enterprise transition strategy to conform to changes in the 
agencyís enterprise architecture. In addition, IRS has deployed several 
modernized systems that provide benefits, including Modernized e-File 
Release 1, which provides electronic filing for large businesses and 
tax-exempt organizations.

Although progress has been made, GAOís previous recommendations on 
modernization management controls and capabilities related to 
configuration management, human capital management, cost and schedule 
estimating, and contract management have not yet been fully implemented 
or institutionalized. Weaknesses in these controls and capabilities 
have contributed, in part, to BSM project cost and schedule shortfalls. 

GAOís observations on IRSís expenditure plans and the BSM program 
include the following: 

* Projects continue to incur significant cost increases and schedule 
delays. In its revised fiscal year 2004 plan, IRS disclosed that key 
BSM projects have continued to experience cost and schedule shortfalls 
against prior commitments. For example, the total life cycle cost for 
full deployment of the initial release of IRSís new core accounting 
system has increased by almost $74 million, and project completion has 
been delayed by 15 months. Reasons cited for the increases and delays 
include an inability to resolve key system design, integration, and 
performance issues in a timely manner.

* In-depth internal and independent assessments of the BSM program 
conducted during 2003 identified significant weaknesses and risks, 
consistent with our prior reviews. IRS developed 48 action issues to 
address the concerns raised by these program reviews and has taken 
actions to resolve them; however, most of the issues remain open. 

* IRS has also performed post-implementation reviews on three deployed 
projects, but they were incomplete in that they did not include, for 
example, an analysis of actual versus planned benefits. Without such an 
analysis, IRS lacks important information about whether BSM projects 
are meeting expectations.

What GAO Recommends: 

GAO recommends that the Commissioner of Internal Revenue direct the 
Chief Information Officer to ensure that, after BSM projects are 
deployed, post-implementation reviews are performed that include an 
analysis of quantitative and qualitative investment data to determine, 
at a minimum, whether expected benefits were achieved. In commenting on 
a draft of this report, the Commissioner agreed with GAOís 
recommendation.

www.gao.gov/cgi-bin/getrpt?GAO-05-46.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact David A. Powner at (202) 
512-9286 or pownerd@gao.gov.

[End of section]

Contents: 

Letter: 

Recommendation for Executive Action: 

Agency Comments: 

Appendixes: 

Appendix I: Briefing Slides from the March 8, 2004, Briefing to the 
Senate and House Appropriations Subcommittee Staffs: 

Appendix II: Briefing Slides from the August 31, 2004, Briefing to the 
Senate and House Appropriations Subcommittee Staffs: 

Appendix III: Comments from the Internal Revenue Service: 

Appendix IV: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Staff Acknowledgments: 

BSM: Business Systems Modernization: 

CIO: Chief Information Officer: 

EA: Enterprise Architecture: 

IRS: Internal Revenue Service: 

OMB: Office of Management and Budget: 

Letter November 17, 2004: 

The Honorable Richard C. Shelby: 
Chairman: 
The Honorable Patty Murray: 
Ranking Member: 
Subcommittee on Transportation, Treasury and General Government: 
Committee on Appropriations: 
United States Senate: 

The Honorable Ernest J. Istook, Jr.: 
Chairman: 
The Honorable John W. Olver: 
Ranking Minority Member: 
Subcommittee on Transportation, Treasury and Independent Agencies: 
Committee on Appropriations: 
House of Representatives: 

As required by law, the Department of the Treasury submitted the 
Internal Revenue Service's (IRS) initial and revised fiscal year 2004 
expenditure plans in January and July 2004, respectively, to the 
congressional appropriations committees, requesting about $388 million 
from the Business Systems Modernization (BSM) account. Our objectives 
in reviewing the plans were to (1) determine whether the plans 
satisfied the conditions specified in the law,[Footnote 1] (2) 
determine what progress IRS had made in implementing our prior 
recommendations, and (3) provide any other observations about the 
initial and revised plans and IRS's BSM program.

On March 8 and August 31, 2004, we briefed your respective offices on 
the results of our reviews. This report transmits the materials used at 
those briefings and reiterates the recommendation that we made to the 
Commissioner of Internal Revenue in our August 2004 briefing. The full 
briefing materials, including our scope and methodology, are reprinted 
in appendixes I and II.

In summary, we made the following major points in our March 2004 
briefing on the results of our review of IRS's initial expenditure plan 
for fiscal year 2004: 

* IRS's initial expenditure plan satisfied each of the six legislative 
conditions.

* IRS had made progress in implementing our recommendations to improve 
its modernization management controls and capabilities and in 
completing some modernization projects during fiscal year 2003 that 
have benefited taxpayers and the agency. For example, IRS had (1) 
implemented our prior recommendation to promptly update its enterprise 
transition strategy to conform to changes in the agency's enterprise 
architecture;[Footnote 2] (2) reported the deployment of an application 
that provides refund status for the Advanced Child Tax Credit; and (3) 
reported the delivery of the first release of a new human resources 
system, HR Connect, to 73,000 IRS employees that allows them to access 
and manage their human resources information online. Although progress 
had been made, modernization management controls and capabilities 
related to configuration management,[Footnote 3] human capital 
management, cost and schedule estimating, and contract management had 
not yet been fully implemented or institutionalized. Weaknesses in 
these controls and capabilities had contributed, in part, to BSM 
project cost and schedule shortfalls.

* Projects continued to incur cost increases and schedule delays for 
several reasons, including inadequate definition of systems 
requirements, increases in project scope, and cost and schedule 
estimating deficiencies. Cost overruns and schedule delays impaired 
IRS's ability to make appropriate decisions about investing in new 
projects, delayed delivery of benefits to taxpayers, and postponed the 
resolution of material weaknesses affecting other program areas.

* In-depth and more comprehensive internal and independent assessments 
of the BSM program had identified significant weaknesses and risks that 
are consistent with our prior reviews. IRS was taking actions to 
address the issues identified in these BSM assessments.

In our August 2004 briefing on the results of our review of IRS's 
revised fiscal year 2004 expenditure plan, we reported that IRS had 
deployed several modernized systems to date that provide benefits, 
including (1) Modernized e-File Release 1, which provides electronic 
filing for large businesses and tax-exempt organizations; (2) e-
Services, which creates a Web portal and other e-Services to promote 
the goal of conducting most IRS transactions with taxpayers and tax 
practitioners electronically; and (3) Customer Account Data 
Engine[Footnote 4]--Individual Master File Release 1.1, which is 
expected to improve processing of all formats (telefile, electronic, or 
paper) of the 1040EZ return for single taxpayers with refund or even-
balance returns.

In addition, we made the following major points in the August 2004 
briefing: 

* IRS's revised plan satisfied the conditions specified in the 
appropriations law.

* Projects continued to incur significant cost increases and schedule 
delays. In its revised fiscal year 2004 plan, IRS disclosed that key 
BSM projects had continued to experience cost and schedule shortfalls 
against prior commitments. For example, the total estimated life cycle 
cost for full deployment of Release 1 of the Integrated Financial 
System had increased by almost $74 million, and project completion had 
been delayed by 15 months. IRS cited various reasons for cost increases 
and schedule delays related to this and other projects, including an 
inability to resolve key system design, integration, and performance 
issues in a timely manner.

* IRS had taken actions to address issues raised in independent BSM 
assessments. IRS developed 48 action issues to address concerns raised 
by various program reviews conducted during 2003 and, in a May 2004 
report, stated that almost all of them were closed based on completed 
actions. However, many of these action issues were prematurely closed 
because required activities were incomplete. Subsequent to the May 
report, the Associate Chief Information Officer (CIO) for Modernization 
Management began tracking the progress of the action issues, including 
those that had been previously closed (merging some of these issues so 
that 38 issues instead of 48 were being tracked). As of the end of 
August 2004, 10 of the 38 issues had been closed, leaving 28 issues 
open. IRS reported that some of the issues will take time to fully 
complete, while others will span the life of the program.

* IRS had performed post-implementation reviews on three deployed 
projects, but they were incomplete. Federal and IRS guidance calls for 
post-implementation reviews to be performed on completed projects to 
determine whether expected benefits have been achieved and to document 
lessons learned. IRS had performed three such reviews, but they did not 
include, for example, an analysis of actual versus planned benefits. 
Without such an analysis, IRS lacks important information about whether 
its BSM projects are meeting expectations.

Recommendation for Executive Action: 

We recommend that the Commissioner of Internal Revenue direct the CIO 
to ensure that, after BSM projects are deployed, post-implementation 
reviews are performed that include an analysis of quantitative and 
qualitative investment data to determine, at a minimum, whether 
expected benefits were achieved.

Agency Comments: 

In providing written comments on a draft of this report, the 
Commissioner of Internal Revenue agreed with our recommendation and 
commented on the actions IRS is taking to implement it. The 
Commissioner also provided additional information on various 
improvement efforts that IRS has undertaken. The Commissioner's written 
comments are reprinted in appendix III.

We are sending copies of this report to the Chairmen and Ranking 
Minority Members of other Senate and House committees and subcommittees 
that have appropriations, authorization, and oversight 
responsibilities for the Internal Revenue Service. We are also sending 
copies to the Commissioner of Internal Revenue, the Secretary of the 
Treasury, the Chairman of the IRS Oversight Board, and the Director of 
the Office of Management and Budget. Copies are also available at no 
charge on the GAO Web site at [Hyperlink, http://www.gao.gov].

Should you or your offices have questions on matters discussed in this 
report, please contact me at (202) 512-9286 or Linda Lambert, Assistant 
Director, at (202) 512-9556. We can also be reached by E-mail at 
[Hyperlink, pownerd@gao.gov] and [Hyperlink, lambertl@gao.gov], 
respectively. Key contributors to this report are listed in appendix 
IV.

Signed by: 

David A. Powner: 
Director, Information Technology Management Issues: 

[End of section]

Appendixes: 

Appendix I: Briefing Slides from the March 8, 2004, Briefing to the 
Senate and House Appropriations Subcommittee Staffs: 

[See PDF for images] 

[End of slide presentation] 

[End of section]

Appendix II: Briefing Slides from the August 31, 2004, Briefing to the 
Senate and House Appropriations Subcommittee Staffs: 

[See PDF for images] 

[End of slide presentation] 

[End of section]

Appendix III: Comments from the Internal Revenue Service: 

DEPARTMENT OF THE TREASURY: 
INTERNAL REVENUE SERVICE: 
WASHINGTON, D.C. 20224:

COMMISSIONER:

October 28, 2004:

Mr. David A. Powner:
Director, Information Technology Management Issues: 
United States Government Accountability Office: 
Washington, D.C. 20548:

Dear Mr. Powner:

We have reviewed the Government Accountability Office (GAO) draft 
report entitled "Business Systems Modernization: IRS's Fiscal Year 2004 
Expenditure Plan" (GAO-05-46, November 2004). We are pleased that the 
GAO:

* Validated that we satisfied the six x-legislative conditions as 
specified in Congressional appropriations;

* Acknowledged that we have shown marked improvement in implementing 
modernization management controls and capabilities;

* Noted that we are implementing GAO's past recommendations; and:

* Recognized that we are providing real benefits to American taxpayers 
and IRS employees as a result of delivering several modernized systems 
(e.g., Modernized e-File Release 1, e-Services, and the Customer 
Account Data Engine Release 1.1).

We would also like to comment on additional improvements we have made 
in two areas.

The first area pertains to program performance as it relates to cost 
estimating and scheduling. The report states that "projects continue to 
incur significant cost increases and schedule delays." In the Fall/
Winter of 2003 (during the annual program planning process), we re-
baselined the cost estimates and delivery schedules for each of the BSM 
program projects. Since then, our cost and scheduling performance have 
dramatically improved. With the exception of one (IFS), all projects 
were delivered on time (either early or within a few weeks of schedule) 
and within budget. This is a major accomplishment. It demonstrates that 
the steps we took in 2004 to improve program performance are having a 
positive impact. Thus, due to the successful implementation . of 
numerous program management improvements, 2004 did not follow the 
pattern of cost overruns that had occurred from 1999 through 2003.

The second area pertains to the action items we developed to improve 
the BSM program. The report discusses the list of 48 action items that 
we developed and the fact that many are still open. In that connection, 
we would note that many of these action items are ongoing and 
continuous. We would also emphasize the other program improvement goals 
that were met. For example, external studies conducted in 2003 
confirmed:

* The BSM portfolio of projects far exceeded the IRS and PRIME's 
management and technical capacity;

* The IRS Business United were not involved enough in project 
management; and:

* Contractor performance was not at an acceptable level.

We have made significant progress in addressing each of these major 
challenges.

First, the 2005 IRS budget to Congress reflects a portfolio reduction 
of 37% from the 2003 level, which more closely aligns the BSM workload 
with the IRS's and PRIME contractor's management capacity.

Second, a Business Unit leader is assigned to each project with 
responsibility for leading the related BSM Governance Committee, and 
sharing accountability for delivering the modernization project as 
stated in their annual performance commitments.

Third, we are making progress in improving the accountability of the 
PRIME contractor. I meet monthly with the Chief Operating Officer of 
the Computer Sciences Corporation to reinforce the accountability of 
the contractor to the IRS. Additionally, we have made significant 
progress in restructuring BSM project contracts with the PRME that 
shift an appropriate amount of financial risk to the contractor and tie 
costs to performance. These steps have resulted in improved contractor 
performance as demonstrated in the deliverables in 2004 and the general 
adherence to costs and schedules.

In addition, we have concluded that we did not have enough seasoned 
technology executives with a proven track record of managing and 
delivering large, complex IT projects. In response, we made great 
progress in hiring experienced executive and seasoned managers who have 
expertise in running large IT programs and projects. A little over a 
year ago the mix of leadership at the top of the BSM program consisted 
of one outside expert and six internal IRS executives. Today, that mix 
will soon be five outside experienced experts and three internal IRS 
executives. This mix is a much better balance of the technology talents 
and tax administration experience needed to successfully run BSM.

We recognize that there is still a lot of work ahead of us to continue 
to mature the BSM Program, and we appreciate your assistance in this 
effort. To that end, we will continue to provide GAO with monthly 
dashboard reports on our progress in maturing our management controls 
(as we have done over the past 30 months). We believe that in the 
future, however, some of our management controls will have matured 
enough to eliminate the need for monthly tracking of progress, and we 
will further discuss these issues with GAO.

I would like to briefly comment on the specific recommendation in the 
report:

RECOMMENDATION: After BSM projects are deployed, post-implementation 
reviews are performed that include an analysis of quantitative and 
qualitative investment data to determine, at a minimum, whether 
expected benefits were achieved.

We agree with this recommendation. As the report indicates, we 
concluded some time ago that the Post-Implementation Review (PIR) 
process we were following (as called for in the Enterprise Life-Cycle 
methodology) was inadequate. We have developed new procedures that not 
only extend the PIR process as recommended by the GAO, but that will 
take a look at lessons learned at the end of each project milestone and 
retain the results of these comprehensive reviews in a repository that 
is available to everyone on the BSM Program. We expect to conduct the 
first PIR's under the new process by the end of the calendar year and 
within 45 days of passing each subsequent project milestone. This 
repository will also contain all previous reviews.

We appreciate your continued support and the valuable assistance and 
guidance from your staff. If you have any questions, please contact W. 
Todd Grams, Chief Information Officer, at (202) 622-6800.

Sincerely,

Signed by: 

Mark W. Everson: 

[End of section]

Appendix IV: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

David A. Powner, (202) 512-9286: 
Linda J. Lambert, (202) 512-9556: 

Staff Acknowledgments: 

In addition to the individuals named above, other key contributors were 
Bernard R. Anderson and Timothy D. Hopkins.

(310477): 

FOOTNOTES

[1] BSM funds are unavailable until the IRS submits to congressional 
appropriations committees for approval a modernization expenditure plan 
that (1) meets the Office of Management and Budget's (OMB) capital 
planning and investment control review requirements; (2) complies with 
IRS's enterprise architecture; (3) conforms with IRS's enterprise life 
cycle methodology; (4) is approved by IRS, the Department of the 
Treasury, and OMB; (5) is reviewed by GAO; and (6) complies with 
federal acquisition rules, requirements, guidelines, and systems 
acquisition management practices. See P.L. 108-199, Div. F, Title II, 
Jan. 23, 2004, for fiscal year 2004 funding.

[2] An enterprise architecture (EA) is an institutional blueprint that 
defines how an organization operates today, in both business and 
technology terms, and intends to operate in the future. An EA also 
includes an enterprise transition strategy that describes how an 
organization will migrate from its current operating environment to its 
future operating environment.

[3] Configuration management is the means for ensuring the integrity 
and consistency of system modernization program and project products 
throughout their life cycles. Through effective configuration 
management, for example, integration among related projects and 
alignment between projects and the enterprise architecture can be 
achieved.

[4] The Customer Account Data Engine is to build the modernized 
database foundation to replace the current master files processing 
systems, which are the agency's repository for taxpayer information. 
There are master files for individuals, businesses, and employer 
retirement plans.

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