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Fiscal Year 2007 Expenditure Plan' which was released on February 15, 
2007. 

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Report to Congressional Committees: 

February 2007: 

Business Systems Modernization: 

Internal Revenue Service's Fiscal Year 2007 Expenditure Plan: 

GAO-07-247: 

GAO Highlights: 

Highlights of GAO-07-247, 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. As required by law, 
IRS submitted its fiscal year 2007 expenditure plan, in September 2006, 
to congressional appropriations committees, requesting $167.3 million 
from the BSM account. 

GAOís objectives in reviewing the plan were to (1) determine whether it 
satisfied the conditions specified in the law, (2) determine IRSís 
progress in implementing prior GAO recommendations, and (3) provide any 
other observations about the plan and IRSís BSM program. To address 
these objectives, GAO analyzed the plan, reviewed related 
documentation, and interviewed IRS officials. 

What GAO Found: 

IRSís fiscal year 2007 expenditure plan satisfies 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 significant progress in implementing GAOís recommendations 
and improving its modernization management controls and capabilities. 
However, controls and capabilities related to requirements development 
and management and post-implementation reviews have not yet been fully 
implemented. In addition, more work remains to be done to fully develop 
a long-term vision and strategy for completing the BSM program. 

GAO has the following four observations on the expenditure plan and the 
BSM program: 

* During 2006, IRS made additional progress in implementing BSM 
projects and in meeting cost and schedule commitments, but two key 
projects experienced significant cost overruns. IRS deployed additional 
releases of the following modernized systems: the Customer Account Data 
Engine (the new taxpayer information database), Modernized e-File (a 
new electronic filing system), and Filing and Payment Compliance (a tax 
collection case analysis support system). While each of the five 
associated project segments delivered during 2006 were completed within 
the targeted 10 percent schedule variance threshold, two project 
segments associated with Modernized e-File and the Customer Account 
Data Engine experienced cost increases of 36 percent and 15 percent, 
respectively. 

* IRS could improve its reporting of progress in meeting project scope 
expectations. Although IRSís expenditure plan provides descriptive 
information on changes in project releasesí scope (i.e., 
functionality), it does not provide a quantitative measure of whether 
project releases delivered planned functionality. Such a measure would 
be helpful in providing the Congress with more complete information on 
IRSís performance in implementing BSM project releases. 

* Future BSM project releases continue to face significant risks and 
issues. The agency, however, recognizes the potential impact of these 
project risks and issues on its ability to deliver planned 
functionality within cost and schedule estimates, and has developed 
mitigation strategies to address them. 

* IRS has made further progress in addressing high-priority BSM program 
improvement initiatives. Its high-priority improvement initiatives 
continue to be an effective means of assessing, prioritizing, and 
incrementally addressing BSM issues and challenges. IRS is currently 
focusing on 13 high-priority initiatives, which it plans to complete by 
the end of March 2007. 

What GAO Recommends: 

GAO recommends that the Commissioner of Internal Revenue direct the 
Chief Information Officer to ensure that future expenditure plans 
include a quantitative measure of progress in meeting project scope 
expectations. In providing comments on a draft of this report, the 
Commissioner agreed with the recommendation and outlined the actions 
that IRS is planning to take to address it. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-247]. 

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 at pownerd@gao.gov. 

[End of section] 

Contents: 

Letter: 

Recommendation for Executive Action: 

Agency Comments: 

Appendixes: 

Appendix I: Briefing Slides from the November 14, 2006, Briefing to the 
Senate and House Appropriations Subcommittee Staffs: 

Appendix II: Comments from the Internal Revenue Service: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Abbreviations: 

AMS: Accounts Management Services: 

BSM: Business Systems Modernization: 

CADE: Customer Account Data Engine: 

IRS: Internal Revenue Service: 

OMB: Office of Management and Budget: 

February 15, 2007: 

The Honorable Richard J. Durbin: 
Chairman: 
The Honorable Sam Brownback: 
Ranking Minority Member: 
Subcommittee on Financial Services and General Government: 
Committee on Appropriations: 
United States Senate: 

The Honorable Josť E. Serrano: 
Chairman: 
The Honorable Ralph Regula: 
Ranking Minority Member: 
Subcommittee on Financial Services and General Government: 
Committee on Appropriations: 
House of Representatives: 

As required by law, the Internal Revenue Service (IRS) submitted its 
fiscal year 2007 expenditure plan in September 2006 to the 
congressional appropriations committees, requesting $167.3 million from 
the Business Systems Modernization (BSM) account. Our objectives in 
reviewing the plan were to (1) determine whether the plan satisfied the 
conditions specified in the law,[Footnote 1] (2) determine IRS's 
progress in implementing our prior recommendations, and (3) provide any 
other observations about the plan and IRS's BSM program. 

On November 14, 2006, we briefed the cognizant congressional 
appropriations subcommittee staffs on the results of our review. This 
report transmits the materials we used at the briefing and provides the 
recommendation that we made to the Commissioner of Internal Revenue. 
The full briefing materials, including our scope and methodology, are 
reprinted as appendix I. 

In summary, we made the following major points: 

* IRS's fiscal year 2007 plan satisfies each of the six legislative 
conditions. 

* IRS has made significant progress in implementing our recommendations 
and improving its modernization management controls and capabilities, 
including efforts to institutionalize configuration management 
procedures, develop an updated modernization vision and strategy, and 
improve the quality of the program status information provided in the 
expenditure plan. However, controls and capabilities related to 
requirements development and management and post-implementation reviews 
have not yet been fully implemented. In addition, more work remains to 
be done by the agency to fully develop a long-term vision and strategy 
for completing the BSM program, including establishing time frames for 
consolidating and retiring legacy systems. IRS recognizes this and 
intends to conduct further analyses and update its vision and strategy 
to address the full scope of tax administration functions and provide 
additional details and refinements regarding the agency's plans for 
legacy system dispositions. 

* IRS has made additional progress in implementing BSM projects and in 
meeting cost and schedule commitments, but two key projects experienced 
significant cost overruns. During 2006, IRS deployed additional 
releases of the following modernized systems: the Customer Account Data 
Engine (the new taxpayer information database), Modernized e-File (a 
new electronic filing system), and Filing and Payment Compliance (a tax 
collection case analysis support system). Each of the five associated 
project segments that were delivered during 2006 were completed on time 
or within the targeted 10 percent schedule variance threshold, and two 
of them were also completed within the targeted 10 percent variance 
threshold for cost. However, two project segments--Modernized e-File 
Release 3.2, Milestone 4/5 and Customer Account Data Engine Release 
2.1, Milestone 4--experienced cost increases of 36 percent and 15 
percent, respectively. 

* IRS could improve its reporting of progress in meeting project scope 
expectations. Although IRS's expenditure plan provides descriptive 
information on changes in project releases' scope (i.e., 
functionality), it does not provide a quantitative measure of whether 
project releases delivered planned functionality. Such a measure would 
be helpful in providing the Congress with more complete information on 
IRS's performance in implementing BSM project releases. IRS recognizes 
the value of having such a measure and, to its credit, recently held a 
meeting to address ways to develop it. Several BSM projects use earned 
value management,[Footnote 2] a proven technique required by the 
administration[Footnote 3] for measuring cost, schedule, and functional 
performance. However, earned value management data are not reported in 
IRS's expenditure plan. 

* Future BSM project releases continue to face significant risks and 
issues, which IRS is addressing. IRS has identified significant risks 
and issues with its future planned system deliveries. For example, IRS 
has reported that there is no slack in the schedule for Release 2.2 of 
the Customer Account Data Engine, and that late-breaking tax law 
legislation or other mandatory filing season changes will have an 
adverse effect on the development and testing schedules. Maintaining 
alignment between the Customer Account Data Engine and Accounts 
Management Services[Footnote 4] projects is also a key area of concern. 
The agency, however, recognizes the potential impact of these project 
risks and issues on its ability to deliver planned functionality within 
cost and schedule estimates, and has developed mitigation strategies to 
address them. 

* IRS has made further progress in addressing high-priority BSM program 
improvement initiatives. Its high-priority improvement initiatives 
continue to be an effective means of assessing, prioritizing, and 
incrementally addressing BSM issues and challenges. IRS is currently 
focusing on 13 high-priority initiatives, which it plans to complete by 
the end of March 2007. These initiatives include establishing 
requirements development/management processes and guidance as well as 
defining governance structures and processes across all projects. 

Recommendation for Executive Action: 

To allow for more effective congressional oversight of the BSM program, 
we recommend that the Commissioner of Internal Revenue direct the Chief 
Information Officer to take the following action: 

* Ensure that future expenditure plans include a quantitative measure 
of progress in meeting project scope expectations. In developing this 
measure, IRS should consider using earned value management, since this 
is a proven technique required by the administration for measuring 
cost, schedule, and functional performance against plans. 

Agency Comments: 

In providing written comments on a draft of this report, the 
Commissioner of Internal Revenue agreed with our recommendation. In 
responding to the recommendation, the Commissioner outlined the actions 
that IRS is planning to take to address it, including evaluating 
available options and working with GAO and the Treasury Inspector 
General for Tax Administration to define quantitative measures of 
project scope. The Commissioner's written comments are reprinted in 
appendix II. 

We are sending copies of this report to the Chairmen and Ranking 
Minority Members of other Senate and House committees and subcommittees 
that have appropriation, 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 at pownerd@gao.gov. 
Contact points for our Offices of Congressional Relations and Public 
Affairs may be found on the last page of this report. GAO staff who 
made key contributions to this report are listed in appendix III. 

Signed by: 

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

[End of section] 

Appendix I: Briefing Slides from the November 14, 2006, Briefing to the 
Senate and House Appropriations Subcommittee Staffs: 

Review of IRS's Fiscal Year 2007 Business Systems Modernization 
Expenditure Plan: 

Briefing for the Staffs of the Subcommittee on Transportation, 
Treasury, the Judiciary, Housing and Urban Development, and Related 
Agencies Senate Committee on Appropriations and Subcommittee on the 
Departments of Transportation, Treasury, and Housing and Urban 
Development, the Judiciary, District of Columbia, and Independent 
Agencies House Committee on Appropriations: 

November 14, 2006: 

This briefing has been modified to incorporate editorial changes and 
updated information on pages 5, 32, and 38. 

Briefing Contents: 

Introduction and Objectives: 

Results in Brief: 

Background: 

Scope and Methodology: 

Results: 

Conclusions: 

Recommendation for Executive Action: 

Agency Comments: 

Appendixes: 

* I - Description of Business Systems Modernization (BSM) Projects and 
Program-Level Initiatives: 

* II -Additional Detail on IRS's Fiscal Year 2007 BSM Expenditure Plan: 

* III - IRS Reported Project Cost/Schedule Changes: 

Introduction and Objectives: 

The Internal Revenue Service (IRS) has long relied on obsolete 
automated systems for key operational and financial management 
functions, and its attempts to modernize these computer systems span 
several decades. IRS's multibillion-dollar Business Systems 
Modernization (BSM) program, initiated in fiscal year 1999, is the 
agency's latest attempt to modernize its systems. IRS contracted with 
Computer Sciences Corporation (CSC) as the prime systems integration 
support (PRIME) contractor to assist with designing, developing, and 
integrating a new set of information systems that are intended to 
replace IRS's aging business and tax processing systems. BSM is a high- 
risk, highly complex program that involves the development and delivery 
of a number of modernized tax administration, internal management, and 
core infrastructure projects that are intended to provide improved and 
expanded service to taxpayers as well as IRS internal business 
efficiencies. 

As mandated by IRS's fiscal year 2006 appropriations act,[Footnote 5] 
BSM funds are not available until IRS submits a modernization 
expenditure plan for approval to the congressional appropriations 
committees. This plan must: 

* meet the capital planning and investment control review requirements 
established by the Office of Management and Budget (OMB); 

* comply with IRS's enterprise architecture ;[Footnote 6] 

* conform with IRS's enterprise life cycle methodology;[Footnote 7] 

* comply with federal acquisition rules, requirements, guidelines, and 
systems acquisition management practices; 

* be approved by IRS, the Department of the Treasury, and OMB; and * be 
reviewed by GAO. 

Since mid-1999, IRS has submitted a series of expenditure or "spending" 
plans requesting release of BSM appropriated funds. To date, about $2.1 
billion has been appropriated and released for BSM. 

On September 5, 2006, IRS submitted its fiscal year 2007 expenditure 
plan to the relevant House and Senate appropriations subcommittees, 
seeking release of $167.3 million from the BSM account. 

As agreed with IRS's appropriations subcommittees, our objectives were 
to: 

determine whether IRS's fiscal year 2007 expenditure plan satisfies the 
legislative conditions specified in IRS's appropriations act, 

determine IRS's progress in implementing our prior recommendations, 
and: 

provide any other observations about the plan and IRS's BSM program. 

Results in Brief: 

IRS's fiscal year 2007 plan satisfies each of the six legislative 
conditions. 

IRS has made significant progress in implementing our recommendations 
and improving its modernization management controls and capabilities, 
including efforts to institutionalize configuration management 
procedures, develop an updated modernization vision and strategy, and 
improve the quality of the program status information provided in the 
expenditure plan. However, controls and capabilities related to 
requirements development and management and post-implementation reviews 
have not yet been fully implemented. In addition, more work remains to 
be done by the agency to fully develop a long-term vision and strategy 
for completing the BSM program, including establishing time frames for 
consolidating and retiring legacy systems. 

We have four observations related to the BSM program and fiscal year 
2007 expenditure plan: 

IRS Has Made Additional Progress in Implementing BSM Projects and in 
Meeting Cost and Schedule Commitments, but Two Key Projects Experienced 
Significant Cost Overruns. During 2006, IRS deployed additional 
releases of the following modernized systems: the Customer Account Data 
Engine (the new taxpayer information database), Modernized e-File (a 
new electronic filing system), and Filing and Payment Compliance (a tax 
collection case analysis support system). Each of the five associated 
project segments delivered during 2006 were completed on time or within 
the targeted 10 percent schedule variance threshold, and two of them 
were also completed within the targeted 10 percent variance threshold 
for cost. However, two project segments-Modernized e-File Release 3.2, 
Milestone 4/5 and Customer Account Data Engine Release 2.1, Milestone 4-
experienced cost increases of 36 percent and 15 percent, respectively. 

IRS Could Improve Its Reporting of Progress in Meeting Project Scope 
Expectations. IRS's expenditure plan provides descriptive information 
on changes in project releases' scope (i.e., functionality). However, 
the plan does not provide a quantitative measure of whether project 
releases delivered planned functionality. Such a measure would be 
helpful in providing the Congress with more complete information on 
IRS's performance in implementing BSM project releases. IRS recognizes 
the value of having such a measure and, to its credit, recently held a 
meeting to address ways to develop it. 

Future BSM Project Releases Continue to Face Significant Risks and 
Issues, which IRS Is Addressing. IRS has identified significant risks 
and issues with its future planned system deliveries. For example, IRS 
has reported that there is no slack in the schedule for Release 2.2 of 
the Customer Account Data Engine, which is planned to be delivered in 
January 2007, and that late-breaking tax law legislation or other 
mandatory filing season changes will have an adverse effect on the 
development and testing schedules. The agency, however, recognizes the 
potential impact of these project risks and issues on its ability to 
deliver planned functionality within cost and schedule estimates, and 
has developed mitigation strategies to address them. 

IRS Has Made Further Progress in Addressing High-Priority BSM Program 
Improvement Initiatives. IRS's high-priority improvement initiatives 
continue to be an effective means of assessing, prioritizing, and 
incrementally addressing BSM issues and challenges. IRS is currently 
focusing on 13 high-priority initiatives, which it plans to complete by 
the end of March 2007. These initiatives include establishing 
requirements development/management processes and guidance as well as 
defining governance structures and processes across all projects. 

To allow for more effective congressional oversight of the BSM program, 
we are recommending that the Commissioner of Internal Revenue direct 
the Chief Information Officer (CIO) to do the following: 

ensure that future expenditure plans include a quantitative measure of 
progress in meeting project scope expectations. In developing this 
measure, IRS should consider using earned value management,[Footnote 8] 
since this is a proven technique required by the administration for 
measuring cost, schedule, and functional performance against plans. 

In commenting on a draft of this briefing, the Associate CIO for 
Applications Development stated that the briefing is balanced and 
accurate and that IRS plans to implement the recommendation. She also 
provided technical comments. 

Background: 

To date, we have reviewed and reported on 13 BSM expenditure plans: 

Since mid-1999, we have reported[Footnote 9] on the risks associated 
with IRS's approach of building systems while concurrently developing 
and implementing program management capabilities-for example, having a 
fully operational program management office and implementing its 
enterprise life cycle (ELC) methodology. IRS's ELC is a structured 
method for managing system modernization program and project 
investments throughout their life cycles. We reported that attempting 
to acquire modernized systems before having the requisite management 
capability increases the risk that systems will experience cost, 
schedule, and performance shortfalls. In addition, we have noted 
numerous modernization management control deficiencies and made 
recommendations to correct them. 

We have also reported[Footnote 10] that the risk of cost increases and 
schedule delays associated with building systems without the requisite 
management controls is not as severe early in projects' life cycles 
when they are being planned (project definition and preliminary system 
design), but escalates as projects are built (detailed design and 
development) and implemented (deployment). In the case of IRS and its 
ELC, a key point of risk escalation is milestone 3, at the end of the 
system architecture phase. From this point through design and 
development (milestone 4) to system deployment (milestone 5), risk will 
increase significantly if requisite controls are not in place. In 
February 2002, we reported that as IRS moved forward with its BSM 
program, it faced increasing risks that it would be unable to deliver 
promised system capabilities on time and within budget. To address the 
escalating risks facing IRS, we recommended that the agency reconsider 
the planned scope and pace of the BSM program with the goal of better 
balancing the number of system acquisition projects underway and 
planned with IRS's capacity to manage the workload. 

In our June 2003 report,[Footnote 11] we identified key IRS projects 
that were approaching or had passed milestone 4 that were experiencing 
cost, schedule, and performance shortfalls, and concluded that program 
risks were heightened. In our November 2004 report,[Footnote 12] we 
stated that key agency projects were continuing to incur significant 
cost increases and schedule delays, and that independent assessments of 
the BSM program had identified significant weaknesses and risks, 
consistent with our prior reviews. 

In our July 2005 report,[Footnote 13] we noted that IRS had made 
progress in implementing our prior recommendations to improve its 
modernization management controls and capabilities; however, certain 
controls and capabilities related to configuration management, human 
capital management, cost and schedule estimating, contract management, 
and post-implementation reviews had not yet been fully implemented or 
institutionalized. In addition, we noted that IRS had made progress 
toward addressing issues raised in independent BSM assessments and 
implementing program improvement initiatives, but significant 
challenges and high-priority risks remained. 

We also reported that although IRS had deployed the initial phases of 
several modernized systems and met short-term cost and schedule 
estimates, much more work remained to be done to complete the 
modernization, and challenges confronted the agency in meeting its 
longer-term cost and schedule estimates. In addition, we reported that 
in response to its assessment of the PRIME contractor's performance and 
budget reductions, IRS (1) was shifting significant BSM program 
responsibilities from the contractor to the agency, and (2) had made 
adjustments to project funding allocations and future delivery 
schedules, including suspending work on the Custodial Accounting 
Project and postponing future releases of the Integrated Financial 
System indefinitely. Finally, we concluded that the BSM vision and 
strategy was no longer current given project delays, and recommended 
that the agency fully revisit it and develop a new set of long-term 
program goals, strategies, and plans that is consistent with the 
budgetary outlook and IRS's management capabilities. 

In our February 2006 report,[Footnote 14] we noted that IRS had made 
further progress in implementing BSM, but some projects did not meet 
short-term cost and schedule commitments. In addition, we noted that 
future project deliveries faced significant risks and issues, which the 
agency was actively working to mitigate. We also reported that IRS had 
made additional progress in addressing high-priority program 
improvement initiatives; however, much more work remained for the 
agency to fully address BSM program issues and challenges. 

In addition, we reported that, in response to our prior recommendation, 
IRS was developing a new Modernization Vision and Strategy to address 
BSM program changes and provide a modernization roadmap. Finally, we 
concluded that the fiscal year 2006 expenditure plan submitted to the 
Congress contained outdated program status information and omitted key 
details concerning deferred BSM functionality. To allow for effective 
congressional oversight of the BSM program, we recommended that the 
agency ensure that future expenditure plans provide current and 
complete program status information and report any changes to prior 
commitments concerning the delivery of BSM project functionality. 

IRS's fiscal year 2007 expenditure plan describes the agency's efforts 
to: 

continue ongoing program-level initiatives (e.g., Architecture & 
Integration and Program Management) and core infrastructure projects 
(e.g., Infrastructure Shared Services), 

continue three tax administration project releases (Filing and Payment 
Compliance Release 1.2, Modernized e-File Release 4, and Customer 
Account Data Engine Release 2.2) to their next milestones, and: 

begin six new tax administration project releases (Modernized e-File 
Release 5; Customer Account Data Engine Releases 3.1, 3.2, 4, and 5; 
and Accounts Management Services Release 1.1[Footnote 15]). 

Table 1 shows a financial summary of the plan. 

Table 1: Summary of IRS's Fiscal Year 2007 BSM Expenditure Plan (in 
thousands of dollars)[A]: 

Tax administration projects: Filing and payment compliance; 
Amount requested: 3,500. 

Tax administration projects: Modernized e-file; 
Amount requested: 20,000. 

Tax administration projects: Customer account data engine; 
Amount requested: 58,500. 

Subtotal- Tax administration projects; 
Amount requested: 82,000. 

Core infrastructure projects: Development, integration, and testing 
environments (DITE); 
Amount requested: 16,000. 

Core infrastructure projects: Infrastructure Shared Services (ISS); 
Amount requested: 27,000. 

Core infrastructure projects: DITE/ISS risk adjustment; 
Amount requested: 500. 

Subtotal- Core infrastructure projects; 
Amount requested: 43,500. 

Architecture, integration, and management: Architecture and 
integration; 
Amount requested: 15,220. 

Architecture, integration, and management: Business integration; 
Amount requested: 5,250. 

Architecture, integration, and management: Business rules; 
Amount requested: 3,500. 

Architecture, integration, and management: Management processes; 
Amount requested: 3,920. 

Architecture, integration, and management: Federally funded research 
and development center-MITRE; 
Amount requested: 7,600. 

Architecture, integration, and management: Program management; 
Amount requested: 3,270. 

Architecture, integration, and management: Architecture, integration, 
and management risk adjustment; 
Amount requested: 740. 

Subtotal- Architecture, integration, and management; 
Amount requested: 39,500. 

Management reserve; 
Amount requested: 2,310. 

Total; 
Amount requested: $167,310. 

Source: IRS. 

[A] See appendix I for a description of each BSM project and program- 
level initiative. See appendix II for additional detail on the plan. 

[End of table] 

Scope and Methodology: 

To accomplish our objectives, we: 

reviewed the fiscal year 2007 expenditure plan submitted by IRS in 
September 2006; 

analyzed the plan against the legislative conditions to identify any 
variances; 

interviewed IRS program and project management officials to corroborate 
our understanding of the plan and other BSM activities; 

analyzed available evidence on recent agency efforts to implement our 
prior recommendations, including progress on improving its 
modernization management controls and capabilities; 

reviewed and analyzed modernization program review and project 
management briefings and related documentation to assess program/ 
project status and associated issues and risks; and: 

reviewed program management reports to assess the progress IRS has made 
in completing actions and implementing program management improvements 
related to the BSM Highest Priority Initiatives. 

To assess the reliability of the cost and schedule information 
contained in this expenditure plan, we interviewed IRS officials in 
order to gain an understanding of the data and discuss our use of the 
data. In addition, we checked that information in the plan was 
consistent with information contained in IRS internal briefings. 

We performed our work between September and November 2006, in 
Washington, D.C., in accordance with generally accepted government 
auditing standards. 

Results: 

Objective 1: The plan satisfies the conditions in IRS's Fiscal Year 
2007 appropriations act. 

Table 2: Fiscal Year 2007 Expenditure Plan Provisions for Satisfying 
Legislative Conditions: 

Legislative conditions: 1. Meets OMB capital planning and investment 
control review requirements; 
Expenditure plan provisions: IRSís fiscal year 2007 expenditure plan 
identifies funding required for managing information technology (IT) 
investments as part of a single portfolio through its capital planning 
and investment control process. This includes conducting periodic 
reviews to select and control IT investments. 

Legislative conditions: 2. complies with IRS's enterprise architecture; 
Expenditure plan provisions: The plan identifies funding required to 
continue definition and implementation of the enterprise architecture 
(EA).  For example, it identifies funding needed for: 
* finalizing and publishing updates to the EA based on change 
requests,  
* supporting the performance of EA compliance certification activities, 
and; 
* improving the IRS Enterprise Transition Strategy and Release 
Architecture. 

Legislative conditions: 3. Conforms with IRS's enterprise life cycle 
methodology; 
Expenditure plan provisions: The plan identifies funding required for 
meeting the requirements in IRSís enterprise life cycle (ELC) 
management program. For example, the plan calls for: 
* maintaining responsibility for coordinating, tracking, and 
integrating all programwide costs, schedules, releases, issues, and 
risks and; 
* maintaining and enhancing the ELC. 

Legislative conditions: 4. Complies with the acquisition rules, 
requirements, guidelines, and systems acquisition management practices 
of the federal government; 
Expenditure plan provisions: As part of the ELC, IRS has defined 
processes, roles, and responsibilities for implementing Carnegie Mellon 
Universityís Software Engineering Institute (SEI) Software Acquisition 
Capability Maturity Model practices for the key process areas within 
the repeatable level (level 2) of the 5-stage model.a These practices 
are consistent with federal acquisition requirements and management 
practices, and the plan calls for implementation of the ELC on all 
projects.  Further, all PRIME contractor cost reimbursement task orders 
are subject to a final independent audit by the Defense Contract Audit 
Agency to ensure that costs are incurred only for tasks actually 
completed on the contract. 

Legislative conditions: 5. Approved by IRS, the Department of the 
Treasury, and OMB; 
Expenditure plan provisions: 
* IRS Ė May 19, 2006; 
* Treasury Ė July 13, 2006; 
* OMB Ė August 18, 2006. 

Legislative conditions: 6. Reviewed by GAO; 
Expenditure plan provisions: GAO Ė November 14, 2006, briefing to IRSís 
appropriations subcommittees. 

Source: IRS's fiscal year 2006 appropriations act (Pub. Law 109-115), 
fiscal year 2007 Current Resolution (Pub. Law 109-289), and GAO 
analysis of IRS data. 

[A] These are acquisition planning, solicitation, requirements 
development and management, project management, contract tracking and 
oversight, evaluation, and transition to support. 

[End of table] 

Objective 2: IRS has made significant progress in implementing our 
prior recommendations and improving its modernization management 
controls and capabilities, although some have not yet been fully 
addressed. 

IRS has made significant progress in addressing our prior 
recommendations and improving its modernization management controls and 
capabilities, as the following table illustrates: 

Table 3: Status of IRS Progress in Implementing Prior GAO 
Recommendations: 

Prior GAO recommendations: Configuration management: Institutionalize 
configuration management (CM) procedures for the Business Systems 
Modernization Office; 
Implemented: Check; 
In Progress: [Empty]; 
Status as of fiscal year 2007 plan: Since January 2005, IRS has (1) 
developed an implementation guide and checklist for establishing CM 
across the organization, (2) developed and conducted various CM 
training modules, 
(3) established several Configuration Control Boards, (4) conducted 
additional CM process compliance assessments on BSM projects, and 
(5) revised the compliance assessment procedure to assign the issues 
and risks resulting from these reviews to the applicable projects for 
mitigation. Future plans include continuing CM process compliance 
assessments (four per year, depending on resources) on modernization 
projects both under development as well as transitioned to production. 

Prior GAO recommendations: Human capital management: Implement plans 
for obtaining, developing, and retaining requisite human capital 
resources; 
Implemented: Check; 
In Progress: [Empty]; 
Status as of fiscal year 2007 plan: In October 2005, IRS completed its 
BSM Human Capital Strategy, which includes a detailed recruitment plan 
to bring necessary personnel on board as well as strategic plans for 
employee training, leadership development, and workforce retention. IRS 
is implementing its strategy to develop and maintain a knowledgeable 
and highly-skilled workforce to more effectively manage the BSM program 
and support future operations of modernized IT systems. For example, 
within the new Applications Development (AD) organization (formed by 
merging BSM and the Business Systems Development production information 
applications systems support organization), IRS has established a 
Centers of Excellence office to, among other things, (1) determine 
required skill sets and level of competency for each area of expertise 
and grade level in the AD organization and (2) develop a recruitment 
strategy and define training requirements. The AD organization recently 
hired and trained 25 entry-level programmers to support project 
development efforts. 

Prior GAO recommendations: Cost and schedule estimation: Implement 
effective procedures for validating contractor-developed cost and 
schedule estimates; 
Implemented: Check; 
In Progress: [Empty]; 
Status as of fiscal year 2007 plan: During 2005 and 2006, IRS has taken 
a number of actions to further improve the BSM cost and schedule 
estimation process and procedures. For example, IRS mapped its existing 
estimation capabilities to the Software Engineering Institute's 
requisites for reliable estimating processes, identified and 
prioritized gaps between the agency's existing capabilities and 
industry best practices, and developed a phased improvement approach. 
Consistent with its prioritized phased approach, IRS has contracted 
with an estimation support contractor to augment the agencyís project 
estimation capability and has established a Cost and Schedule 
Estimation Support Services Concept of Operations identifying support 
paths for requesting, managing, and overseeing in-house and contractor 
estimation support. In addition, the agency is creating an estimation 
data repository to capture historical cost and schedule data to enable 
identification and extraction of relevant baseline data to support 
estimation development. In a related effort, IRS has also developed and 
implemented, in May 2006, a scalable Basis of Estimate guide to promote 
uniform standards for development and submission of supporting 
documentation to enable comprehensive evaluation, replication, and 
assessment of estimates. IRS plans to continue to leverage and expand 
upon its current capabilities, within resource constraints, to achieve 
a cost-effective BSM cost and schedule estimating system. 

Prior GAO recommendations: Contract management: Establish and implement 
a process for determining the type of task order to be awarded in 
acquiring modernized systems; 
Implemented: Check; 
In Progress: [Empty]; 
Status as of fiscal year 2007 plan: During fiscal years 2005 and 2006, 
IRS (1) issued a Milestone 4A Statement of Work template for use in 
developing performance-based task orders, 
(2) developed revised guidance on the selection of appropriate contract 
types for BSM task orders, 
(3) issued a BSM performance monitoring directive establishing the 
requirement for preparing task order monitoring plans, (4) conducted 
performance-based contracting and performance monitoring training 
sessions, and (5) performed semiannual compliance assessments. As of 
September 2005, four assessments had been completed on a total of 19 
statements of work and 18 monitoring plans, resulting in a cumulative 
average of about 80 percent compliance with the applicable performance-
based contracting templates and guidance. 

Prior GAO recommendations: Requirements development and management: 
Ensure that BSM completes the delivery of policies and procedures for 
requirements development and management as planned;  
Implemented: [Empty]; 
In Progress: Check; 
Status as of fiscal year 2007 plan: (See p. 19). 

Prior GAO recommendations: Requirements development and management: 
Immediately implement interim policies while the final policies and 
procedures are being developed; 
Implemented: Check; 
In Progress: [Empty]; 
Status as of fiscal year 2007 plan: (See p. 19). 

Prior GAO recommendations: Post-implementation reviews: Perform 
analysis of investment data to determine whether completed projects 
have achieved expected benefits; 
Implemented: [Empty]; 
In Progress: Check; 
Status as of fiscal year 2007 plan: (See pp. 20-21). 

Prior GAO recommendations: Modernization vision and strategy: Fully 
revisit the vision and strategy for the BSM program and develop a new 
set of long-term goals, strategies, and plans that are consistent with 
the budgetary outlook and IRS's management capabilities; 
Implemented: [Empty]; 
In Progress: Check; 
Status as of fiscal year 2007 plan: (See pp. 22-24). 

Prior GAO recommendations: Expenditure plan timeliness and 
completeness: Ensure that future expenditure plans submitted to the 
congressional appropriations subcommittees provide current and complete 
program status information and report any changes to prior commitments 
concerning the delivery of BSM project functionality; 
Implemented: Check; 
In Progress: [Empty]; 
Status as of fiscal year 2007 plan: In February 2006, IRS coordinated 
with the Department of the Treasury and OMB to develop a timeline and 
process to effect timelier review and submission of future expenditure 
plans. In April 2006, IRS issued a directive that established a process 
to ensure prompt notification and centralized recording of all changes 
to BSM projects and program-level initiatives. Implementation of this 
new policy facilitated near real-time updates to program and project 
status information contained in the fiscal year 2007 expenditure plan 
throughout the development and review process. Also, the fiscal year 
2007 plan includes a new change request summary that provides 
information on BSM project scope changes. 

Source: GAO analysis of IRS data. 

[End of table] 

Requirements Development and Management: 

According to the Software Engineering Institute's (SEI) Capability 
Maturity Model Integration[Footnote 16] (CMMI), the requirements for a 
system describe the functionality needed to meet user needs and perform 
as intended in the operational environment. A disciplined process for 
developing and managing requirements can help reduce the risk of 
developing or acquiring a system. In addition, a well-defined and 
managed requirements baseline can improve understanding among 
stakeholders and increase stakeholder buy-in and acceptance of the 
resulting system. 

In March 2006, we reported[Footnote 17] that BSM did not yet have 
adequate policies and procedures in place to guide its systems 
modernization projects in developing and managing requirements. As a 
result of the lack of policies and procedures, BSM projects did not 
consistently follow disciplined requirements development and management 
practices. We recommended that IRS ensure that BSM completes the 
delivery of policies and procedures for requirements development and 
management as planned. We also recommended that IRS immediately 
implement interim guidance for ongoing BSM projects while the final 
policies and procedures are being developed. 

In response to our first recommendation, IRS has established a schedule 
for developing and issuing detailed requirements management and 
development policies, procedures, and guidance. High-level policies 
have been issued, and lower level policies, procedures, and templates 
are being developed. IRS expects to complete the development of these 
items by March 2007. In response to our second recommendation, IRS has 
made draft policies and procedures available to BSM projects through 
the agency's Business Rules and Requirements Management online 
repository. Until IRS completes the development of detailed policies 
and procedures to ensure disciplined requirements development and 
management processes, BSM projects will continue to face risks, 
including cost overruns, schedule delays, and performance shortfalls. 

Post-Implementation Reviews: 

Conducting post-implementation reviews (PIR) is a process for reviewing 
IT projects to identify lessons learned from investments and determine 
whether the benefits anticipated in the business case for the 
investment have been realized. 

OMB Guidance,[Footnote 18] GAO's Information Technology Investment 
Framework[Footnote 19], and IRS's ELC require that post implementation 
reviews be performed on deployed information systems. According to our 
framework, the reviews should include (1) the collection, evaluation, 
and analysis of both quantitative and qualitative investment data, and 
(2) documentation of lessons learned and recommendations for improving 
the information technology investment process. 

In November 2004, we reported[Footnote 20] that IRS had performed PIRs 
on deployed projects; however, these reviews were incomplete and did 
not follow IRS's procedure. Although the PIRs documented lessons 
learned in implementing the projects and provided recommendations for 
future improvements, the reviews did not (1) compare and analyze actual 
versus planned benefits and systems performance, (2) determine the 
validity of original business assumptions, or (3) compare and analyze 
actual versus planned cost and schedule estimates. We recommended that 
future post- implementation reviews of deployed BSM projects include an 
analysis of quantitative and qualitative investment data to determine 
whether expected benefits were achieved. 

In July 2005, we reported[Footnote 21] that IRS had issued a new 
procedure for conducting post-milestone reviews and PIRs on BSM 
projects, which we found to be compliant with established federal 
guidance. The post- milestone reviews are to focus on the processes 
used in systems development, while the PIRs are to focus on outcomes 
related to expected business benefits, user expectations, and technical 
performance requirements. 

Between May and July 2006, IRS conducted a pilot PIR on the e-Services 
Transcript Delivery System, utilizing the new procedure. The pilot 
review identified process improvement opportunities that will be 
considered during a planned PIR redesign effort. 

However, IRS reported that no additional PIRs are scheduled to be 
conducted at this time, due to fiscal year 2007 resource constraints 
and other priorities. By not performing PIRs on all deployed BSM 
projects, the agency lacks important information on whether expected 
benefits have been achieved or expectations have been met for these 
projects. 

Modernization Vision and Strategy: 

In July 2005, we reported[Footnote 22] that the significant delays and 
other substantive changes that the BSM program had experienced since 
the development of the initial BSM vision and strategy in 2000 and 2001 
indicated a need for IRS to revisit its long-term goals, strategies, 
and plans for the modernization program. To address the many changes 
associated with the BSM and clearly describe what the modernization 
program is intended to accomplish, when it will be completed, and at 
what cost, we recommended that IRS fully revisit the vision and 
strategy for the BSM program and develop a new set of long-term goals, 
strategies, and plans consistent with the budgetary outlook and IRS's 
management capabilities. 

During fiscal year 2006, IRS conducted the initial cycle of a new IT 
Modernization Vision and Strategy (MV&S) activity. The MV&S initiative 
established a 5-year plan (also known as the Enterprise Transition 
Strategy) to guide IT investment decisions during fiscal years 2007 
through 2011 and address priorities around modernizing front-line tax 
administration functions and the supporting technical capabilities 
provided by the infrastructure and security. Key characteristics of the 
new vision and strategy include a partnership among IRS's IT and 
business leadership; an emphasis on delivering smaller, more frequent 
incremental releases; the leveraging of existing systems (or components 
of existing systems) where appropriate; and a unified, portfolio-level 
view of investments. 

The MV&S framework is built on a functional segmentation of the IRS 
into the following core mission business functions that directly relate 
to front-line tax administration: 

Submissions Processing, 

Manage Taxpayer Accounts, 

Customer Service, 

Reporting Compliance, 

Filing and Payment Compliance, and: 

Criminal Investigation. 

These six segments, referred to as "Business Domains", reflect a purely 
functional, rather than organizational, view of the business. They are 
supported by services necessary to provide for the effective and secure 
execution of the core mission-critical business functions. These 
services are addressed by two "Service Domains" that provide cross- 
cutting data, infrastructure, and security services as well as common 
business functions, which can be leveraged to support the Business 
Domains. Within each domain, opportunities have been defined that 
reflect the priorities that are expected to yield the greatest benefit 
to taxpayers and the IRS. 

The agency's Enterprise Transition Strategy describes the overall IRS 
vision and strategy and how existing and proposed investments align to 
it. It also provides an organization-wide view of programs and 
projects, including known dependencies, across the agency, and is 
intended to give leadership the visibility to use the agency's 
enterprise architecture for organization-wide planning. The Enterprise 
Transition Strategy documents the scope, business challenges, current 
and transition architectures, redesign opportunities, strategy, 
proposed projects and associated release strategies (e.g., Accounts 
Management Services[Footnote 23]), and the planned evolution (i.e., 
reuse, consolidation, retirement) of related key current production 
environment (CPE) systems for each of the MV&S Business Domains. 

IRS's MV&S initiative is intended to be an annual process through which 
the agency integrates the strategic plans, business concepts of 
operations, IT planning roadmaps, and proposed investments into a set 
of integrated strategies and investment proposals for each domain and 
ultimately into a proposed IT investment portfolio. During the initial 
fiscal year 2006 MV&S cycle, IRS recognized that the six Business 
Domains and two Service Domains addressed did not represent the entire 
scope of IRS activities, but felt that the limited scope was 
appropriate, given time and resource constraints. 

For the current MV&S cycle, IRS is adding a Business Domain (Internal 
Management) and splitting one of the Service Domains into three 
separate domains (Data, Infrastructure, and Security). Of these 
redefined Service Domains, the Security domain is being addressed 
during the current cycle. Additional refinements and extensions are 
anticipated in future cycles to address additional Business Domains 
(e.g., Financial Management) and develop a more comprehensive plan for 
the Service Domains. IRS expects to regularly revise and update the 
content of the MV&S to address the full scope of tax administration 
functions and the changing business priorities. 

In addition, IRS recognizes the need to proactively plan for the 
disposition (i.e., consolidation, retirement, or potential reuse) of 
each of the over 700 legacy systems comprising the current production 
environment, but noted that it has not been able to conduct all of the 
necessary detailed, highly complex analyses due to resource 
constraints. The CPE system evolution information contained in the 
current (June 2006) version of the Enterprise Transition Strategy is 
preliminary and is largely driven by the planning activities of 
individual modernization projects and, therefore, limited to plans for 
related key CPE systems. IRS intends to conduct further analyses and 
provide additional details and refinements in the future regarding its 
plans for legacy system dispositions. 

IRS's new IT MV&S and associated 5-year plan embodied in the Enterprise 
Transition Strategy represent significant progress toward defining the 
agency's future plans for the modernization program. However, more work 
remains for IRS to fully address our prior recommendation of developing 
a long-term vision and strategy for completing BSM, including 
establishing time frames for consolidating and retiring legacy systems. 

Objective 3: Observations about IRS's BSM Program and Expenditure Plan: 

Observation 1: IRS Has Made Additional Progress in Implementing BSM 
Projects and in Meeting Cost and Schedule Commitments, but Two Key 
Projects Experienced Significant Cost Overruns. 

During 2006, IRS's BSM program has delivered additional releases of the 
following modernized systems that have provided benefits to taxpayers 
and the agency: 

Customer Account Data Engine (CADE). CADE is intended to provide the 
modernized database foundation that will eventually replace IRS's 
antiquated Master File processing system, which contains the agency's 
repository of taxpayer information, and, therefore, is the BSM 
program's cornerstone and highest priority project. CADE facilitates 
faster refund processing and timelier response to taxpayer inquiries. 
In January 2006, IRS implemented Release 1.3.2 of CADE, which was used 
to process a subset of filing year 2006 Form 1040EZ, 1040, and 1040A 
tax returns with no schedules for single taxpayers with refund or even- 
balance returns and no dependents. In September 2006, IRS deployed CADE 
Release 2.1, which adds the capability to process Form 1040 and 1040A 
tax returns with certain schedules and supporting forms as well as 
returns for taxpayers filing as head of household. According to IRS, 
CADE has processed about 7.4 million tax returns and issued about 6.6 
million refunds totaling over $3.4 billion during the 2006 filing 
season. 

Modernized e-File (MeF). This project is intended to initially provide 
electronic filing for large corporations, small businesses, and tax- 
exempt organizations and ultimately replace the 1040 e-file program. In 
March 2006, IRS completed MeF Release 3.2, which enables corporations 
and tax-exempt organizations to file joint federal/state tax returns 
electronically and allows states to retrieve their applicable returns 
from MeF. IRS reported that, during the 2006 filing season, over 
900,000 tax returns have been received using MeF, including over 13,000 
mandated returns (corporations with assets of over $50 million) and 
about 600 state returns, which have been made available to the three 
participating states (as of September 24, 2006). 

Filing and Payment Compliance (F&PC). F&PC is intended to provide 
support for detecting, scoring, and working non-filer (filing 
compliance) and delinquency (payment compliance) cases. F&PC Release 
1.1, which began full production operation in September 2006, provides 
advanced software to analyze tax collection cases and separate the 
complex cases requiring IRS involvement from the simpler (balance due) 
cases that can be handled by private collection agencies (PCAs) for 
case resolution. On September 7, 2006, an initial inventory of over 
11,500 collection cases was delivered to the three PCAs for processing. 

IRS continued to make progress in meeting cost and schedule commitments 
for completed and ongoing project releases during 2006, but two key 
projects experienced significant cost increases. Our analysis of IRS's 
reported project costs and completion dates shows that each of the five 
project segments delivered during 2006 were completed on time or within 
the targeted 10 percent schedule variance threshold, and two of them 
were also completed within the targeted 10 percent variance threshold 
for cost. For example, F&PC Release 1.2 exited Milestones 3 and 4a on 
time, and Milestone 4a was completed at the estimated project cost. 
Also, CADE Release 1.3.2 was delivered within the targeted 10 percent 
variance threshold for both cost and schedule. However, two project 
segments-MeF Release 3.2, Milestone 4/5 and CADE Release 2.1, Milestone 
4-experienced cost increases of 36 percent and 15 percent, 
respectively, against the original commitments. The MeF project cost 
increase was due to unplanned functionality related to security and 
large file/mandate requirements, stress test requirements, the large 
number of change requests received late in development, and higher than 
expected defect reports in production. The CADE project cost overrun 
was driven by restart/rework of the business process engineering effort 
and the associated Design Specification Report. Appendix III provides 
the complete list of BSM project cost and schedule changes reported by 
IRS. 

Observation 2: IRS Could Improve Its Reporting of Progress in Meeting 
Project Scope Expectations. 

IRS's expenditure plan includes tables showing, for each project 
release segment, the status of activities that were planned as of the 
fiscal year 2006 expenditure plan and an explanation of changes in 
these plans, if any. The expenditure plan also features a list of 
changes (i.e., additions, deletions, and deferrals) to requirements/ 
scope for its project releases. While the tables and list provide 
information on the status of project releases, they do not provide a 
quantitative measure of IRS's progress in meeting scope expectations. 
Such a measure would help to provide the Congress with more complete 
information on IRS's performance in delivering BSM project releases. 
IRS recognizes the value of having a quantitative measure of progress 
in meeting functional performance, and, to its credit, recently held a 
meeting to address ways to develop it. Several BSM projects use earned 
value management,[Footnote 24] a proven technique required by the 
administration[Footnote 25] for measuring cost, schedule, and 
functional performance. However, earned value management data are not 
reported in IRS's expenditure plan. 

Observation 3: Future BSM Project Releases Continue to Face Significant 
Risks and Issues, which IRS Is Addressing. 

IRS has reported that significant challenges and risks confront future 
planned project releases. For example, 

Customer Account Data Engine Release 2.2. IRS has reported that there 
is no slack in the schedule for Release 2.2, which is planned to be 
delivered in January 2007. Late-breaking tax law legislation or other 
mandatory filing season changes will have an adverse effect on the 
development and testing schedules. Also, the implementation of last 
minute changes to the Telephone Excise Tax Refund (TETR)[Footnote 26] 
functionality has the potential to impact Release 2.2 scope and 
schedule. 

Customer Account Data Engine Release 3. According to IRS, potential 
scope problems could result in schedule delays and loss of planned 
functionality for Releases 3.1 and 3.2, which are currently scheduled 
to be deployed in August 2007 and December 2007, respectively. 
Maintaining alignment with the Accounts Management Services project is 
also a key area of concern. 

Accounts Management Services Release 1.1. If the Release Content Master 
Plans for the Accounts Management Services and Customer Account Data 
Engine projects are not aligned, then a coordinated release structure 
may not be possible, and delivery of Release 1.1 functionality, planned 
for September 2007, may be impacted. Also, if additional resources, 
including technical project staff, are not provided to the Accounts 
Management Services project office, then the project may experience 
significant schedule delays. 

Filing and Payment Compliance Release 1.2. IRS reports that Release 
1.2, which is scheduled to be deployed in January 2007, faces risks 
associated with the delivery of business and system requirements. 

Modernized e-File Release 4. Release 4, which is planned to be 
completed in March 2007, also faces critical risks, including the 
potential impact of the Excise Tax e-File and Compliance 
(ETEC)[Footnote 27] application on the Modernized e-File development 
and infrastructure as well as tight budget constraints and the 
potential for shortfalls if additional issues arise. 

IRS recognizes the potential impact of these project risks and issues 
on its ability to deliver planned functionality within cost and 
schedule estimates, and has developed mitigation strategies to address 
them. 

Observation 4: IRS Has Made Further Progress in Addressing High- 
Priority BSM Program Improvement Initiatives. 

During 2004, the Associate CIO for BSM established the following seven 
key focus areas for improving IRS's capability to design, develop, and 
deliver modernized IT systems: 

Staffing and Skill Sets, 

Contractor Management, 

Requirements and Demand Management, 

Systems Engineering, 

Project Management Disciplines, 

Communication and Collaboration, and: 

Empowerment/Accountability. 

Corrective actions recommended by GAO and the Treasury Inspector 
General for Tax Administration for improving modernization management 
controls and processes as well as several additional IRS-defined 
improvement initiatives were then mapped to these key focus areas to 
form a BSM program improvement framework. 

In August 2004, the Associate CIO initiated an incremental approach to 
assess, prioritize, and address the "highest priority initiatives" from 
the program improvement framework in 6-month cycles. As of October 
2005, IRS reported it had completed 27 highest priority initiatives 
during the first two cycles, and was in the process of addressing a 
third set of 22, which was planned to be completed by the end of March 
2006. In April 2006, IRS reported that 17 of these 22 initiatives had 
been completed and closed, 1 initiative had been dropped due to a lack 
of resources, and the remaining 4 were being carried over to the next 6-
month period. 

In October 2006, IRS reported that it had successfully completed and 
closed its fourth set of 15 highest priority initiatives, which 
included efforts related to implementing an Applications Development 
productivity measurement system, integrating the change management 
process into the configuration management function, institutionalizing 
the Modernization Vision and Strategy approach and integrating it with 
IRS's capital planning and investment control process, hiring and 
training 25 entry-level programmers to support development of the 
Customer Account Data Engine, and developing an electronic filing 
strategy through 2010. 

IRS is currently focusing on its fifth set of 13 newly selected high 
priority improvement initiatives, which are scheduled to be completed 
by the end of March 2007. These initiatives involve functions within 
the agency's Applications Development and Enterprise Services 
organizations and include: 

defining the governance structures and process across all projects, 

establishing requirements development processes as well as guidance on 
requirements traceability and tracking the cost/schedule impact of 
requirements changes (in response to our prior recommendation), 

continuing to strengthen Enterprise Services technical capabilities 
through filling current systems integration vacancies, 

aligning IRS's Service Oriented Architecture with the Modernization 
Vision and Strategy, and: 

refining the new Applications Development organization. 

IRS's program improvement process continues to be an effective means of 
regularly assessing, prioritizing, and incrementally addressing BSM 
issues and challenges. 

Conclusions: 

IRS's fiscal year 2007 plan satisfies the legislative conditions. 

Although IRS has made significant progress in addressing our 
recommendations to improve its modernization management controls and 
capabilities, critical controls and capabilities have not yet been 
fully implemented. The new IT Modernization Vision and Strategy 
represents a significant step towards defining IRS's future plans for 
the modernization program; however, more work remains for the agency to 
fully develop the long-term strategy for completing BSM, including 
establishing time frames for consolidating and retiring legacy systems. 
IRS recognizes this and intends to conduct further analyses and update 
its vision and strategy to address the full scope of tax administration 
functions and provide additional details and refinements regarding the 
agency's plans for legacy system dispositions. 

IRS has made further progress in implementing BSM and in meeting cost 
and schedule commitments during 2006, but two key projects experienced 
significant cost overruns. While the expenditure plan includes 
information on changes in projects' scope, it does not provide the 
quantitative measure of progress in delivering planned functionality 
that earned value management, for example, provides. 

Future project deliveries continue to face significant risks and 
issues, which the agency is actively working to mitigate. In addition, 
IRS has significant program challenges and issues that it must resolve, 
and has established an effective process for continual improvement to 
incrementally assess, prioritize, and address them. 

Recommendation for Executive Action: 

To allow for more effective congressional oversight of the BSM program, 
we recommend that the Commissioner of Internal Revenue direct the CIO 
to take the following action: 

ensure that future expenditure plans include a quantitative measure of 
progress in meeting project scope expectations. In developing this 
measure, IRS should consider using earned value management, since this 
is a proven technique required by the administration for measuring 
cost, schedule, and functional performance against plans. 

Agency Comments: 

In providing written comments on a draft of this briefing, the 
Associate CIO for Applications Development stated that the briefing is 
balanced and accurate and that IRS plans to implement the 
recommendation. She also provided specific technical comments that we 
have incorporated into the briefing, as appropriate. 

Appendix I: Description of Business Systems Modernization (BSM) 
Projects and Program-Level Initiatives: 

Proposed modernization initiative: Tax administration projects: Filing 
and Payment compliance (F&PC); 
Description: Is to provide support for detecting, scoring, and working 
nonfiler (filing compliance) and delinquency (payment compliance) cases 
through advanced case selection methods. 

Proposed modernization initiative: Tax administration projects: 
Modernized e-File; 
Description: Is to provide a single standard for filing electronic tax 
returns. Initial releases will address large corporations, small 
businesses, and tax-exempt organizations.  Its ultimate goal is the 
conversion of IRSís 1040 e-file program. 

Proposed modernization initiative: Tax administration projects: 
Customer account data engine (CADE); 
Description: Is to build the modernized database foundation to replace 
the existing Master File processing system that contains the repository 
of taxpayer information. 

Proposed modernization initiative: Tax administration projects: 
Accounts Management Services (AMS); 
Description: Is to deliver improved customer support and functionality 
by leveraging existing IRS applications (Desktop Integration and 
Correspondence Imaging System) and new technologies to bridge the gap 
between modernization initiatives, such as CADE, and legacy systems. 
AMS is to enhance CADE by providing applications for IRS employees and 
taxpayers to access, validate, and update accounts on demand. 

Proposed Modernization Initiative: Core infrastructure projects: 
Development, Integration, and testing Environments; 
Description: Is to provide oversight for laboratory environments that 
support evaluation, development, and testing of components from 
multiple projects:  (1) Virtual Development Environment provides a 
software development environment and a standardized set of tools; (2) 
Enterprise Integration and Test Environment provides an integration and 
testing environment for all projects. 

Proposed Modernization Initiative: Core infrastructure projects: 
Infrastructure shared services; 
Description: Is to deliver, in incremental releases over multiple 
years, a fully integrated shared information technology infrastructure 
to include hardware, software, shared applications, data, 
telecommunications, security, and an enterprise approach to systems and 
operations management. 

Proposed Modernization Initiative: Architecture, Integration, and 
management: Architecture and integration; 
Description: Is to ensure that systems solutions meet IRS business 
needs and that the development projects are effectively integrated into 
the business environment. 

Proposed Modernization Initiative: Architecture, Integration, and 
management: Business integration; 
Description: Is to ensure that IRSís BSM program is aligned with the 
business unitsí vision and delivers the desired business results. It 
provides support to key activities such as transition management, 
business rules enterprise management, and requirements development and 
management operations. 

Proposed Modernization Initiative: Architecture, Integration, and 
management: Business rules; 
Description: Is to support business process analysis and redesign, 
business rules harvesting and management, and business requirements 
definition. 

Proposed Modernization Initiative: Architecture, Integration, and 
management: Management processes; 
Description: Is to provide sustaining support for program-level 
management processes, including quality assurance, risk management, 
program control and process management, and ELC maintenance and 
enhancements. 

Proposed Modernization Initiative: Architecture, Integration, and 
management: Federally funded research and development center-MITRE; 
Description: Is to provide program management and systems engineering 
support. 

Proposed Modernization Initiative: Architecture, Integration, and 
management: Program management; 
Description: Is to ensure that projects achieve their objectives; 
provide the management information and IT infrastructure that supports 
risk management, project cost and schedule estimating, and financial 
management; and provide procurement management for the CSC contract and 
associated task orders. 

Source: IRS. 

[End of table] 

Appendix II: Additional Detail on IRS's Fiscal Year 2007 BSM 
Expenditure Plan (in thousands of dollars): 

[See PDF for Image] 

Source: IRS. 

[A ]Releases are software versions that provide a subset of the total 
planned project functionality. 

[B] Milestones correspond to phases within IRS's ELC (0-Vision & 
Strategy / Enterprise Architecture, 1 - Project Initiation, 2 - Domain 
Architecture, 3 - Preliminary Design, 4a - Detailed Design, 4b - System 
Development, 5 - System Deployment). 

[C] Core infrastructure projects and management initiatives are funded 
on a fiscal year (FY) basis rather than by milestone. 

[End of table] 

Appendix III: IRS Reported Project Cost/Schedule Changes (in thousands 
of dollars): 

[See PDF for Image] 

Source: IRS. 

[A] During FY 2006, IRS realigned a significant portion of the costs 
previously identified with the CADE Requirements Management Engineering 
and Project Management/Transition Management initiatives to the 
specific project release/milestone those funds directly supported. The 
CADE project funding amounts shown in this table include the realigned 
costs. 

[End of table] 

[End of section] 

Appendix II: Comments from the Internal Revenue Service: 

Department Of The Treasury: 
Internal Revenue Service: 
Washington, D.C. 20224: 
Commissioner: 

February 2, 2007: 

Mr. David A. Powner: 
Director, Information Technology Management Issues: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, DC 20548: 

Dear Mr. Powner: 

I have reviewed the Government Accountability Office (GAO) draft report 
titled "Business Systems Modernization: Internal Revenue Service's 
Fiscal Year 2007 Expenditure Plan" GAO-07-247 (Job Code No. 310835). We 
continue to appreciate the sound and balanced work of the GAO and are 
pleased that it: 

* Confirmed that the Internal Revenue Service's (IRS) Fiscal Year 2007 
expenditure plan satisfies the conditions specified in the law. This 
includes meeting the Office of Management and Budget's capital planning 
and investment control review requirements and complying with the 
federal systems acquisition requirements and management practices. 

* Recognized that the IRS made further progress in 2006 toward 
implementing Business Systems Modernization (BSM) projects and meeting 
cost and schedule commitments. Under the jurisdiction of BSM, we 
deployed additional releases of three systems: Customer Account Data 
Engine (the new taxpayer database); Modernized e-File (a new electronic 
filing system); and Filing and Payment Compliance (a tax collection 
case analysis support system). In 2006, each of the five associated 
project segments was delivered within the targeted 10 percent schedule 
variance threshold. 

* Acknowledged the potential impact of significant risks and issues on 
the IRS' ability to deliver planned functionality within cost and 
schedule estimates, and that we have developed mitigation strategies. 

* Validated that we have made further progress in addressing high- 
priority BSM program improvement initiatives, which continue to be an 
effective means of assessing, prioritizing, and incrementally 
addressing BSM issues and challenges. 

In summary, we are in agreement with the audit recommendation and plan 
to work with GAO and the Treasury Inspector General for Tax 
Administration to define quantitative measures in meeting project scope 
expectations. 

Additionally, in accordance with your recommendation, we evaluated 
options available, including the use of Earned Value Management (EVM), 
to determine the best approach for providing quantitative measures in 
meeting scope expectations. Our preliminary plan is to implement the 
results of our analysis in phases, with an interim approach targeted 
for September 2007. Our comments on the draft report's recommendation 
are enclosed. 

We appreciate your continued support, along with the assistance and 
guidance provided by your staff. If you have any questions, or if you 
would like to discuss our response in more detail, please contact 
Richard A. Spires, Chief Information Officer, at (202) 622-6800. 

Sincerely, 

Signed by: 

Mark W. Everson: 

Enclosure: 

Draft Report - Business Systems Modernization: Internal Revenue 
Service's Fiscal Year 2007 Expenditure Plan Report GAO-07-247 (Job Code 
No. 310835): 

Recommendation # 1: GAO recommends that the Commissioner of Internal 
Revenue direct the Chief Information Officer to ensure that future 
expenditure plans include a quantitative measure of progress in meeting 
project scope expectations. 

Corrective Action #1: The IRS plans to work with GAO and the Treasury 
Inspector General for Tax Administration to define such a measure. In 
accordance with your recommendation, we evaluated options available, 
including the use of earned value management (EVM), to determine the 
best approach for providing quantitative measures in meeting scope 
expectations. Our preliminary plan is to implement the results of our 
analysis in phases, with an interim approach targeted for September 
2007. Phase II process implementation is currently targeted for May 
2008. 

Implementation Date: May 1, 2008: 

Responsible Official: Associate Chief Information Officer, Applications 
Development: 

Corrective Action Monitoring Plan: We enter accepted Corrective Actions 
into the Joint Audit Management Enterprise System (JAMES). These 
Corrective Actions are monitored on a monthly basis until completion. 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

David A. Powner, (202) 512-9286: 

Staff Acknowledgments: 

In addition to the contact person named above, Timothy D. Hopkins, Paul 
B. Middleton, and Sabine R. Paul made key contributions to this report. 

(310835): 

FOOTNOTES 

[1] BSM funds are unavailable until 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) complies with federal acquisition rules, 
requirements, guidelines, and systems acquisition management practices; 
(5) is approved by IRS, the Department of the Treasury, and OMB; and 
(6) is reviewed by GAO. See Pub. L. No. 109-115, Div. A, Title II, 
November 30, 2005. Currently, IRS's fiscal year 2007 funding is 
provided under a Current Resolution, Pub. L. No. 109-289, Div. B, 
September 29, 2006, as amended by Pub. L. No. 109-383, December 9, 
2006, which continues BSM's funding subject to the "authority and 
conditions" provided in the fiscal year 2006 appropriations act. 

[2] Earned value management is a project management tool that 
integrates the investment scope of work with schedule and cost elements 
for investment planning and control. This method compares the value of 
work accomplished during a given period with that of the work expected 
in the period. Differences in expectations are measured in both cost 
and schedule variances. 

[3] Recent Office of Management and Budget guidance directed agencies 
to implement earned value management on major information technology 
investments, in an effort to meet baseline cost, schedule, and 
performance goals. 

[4] Accounts Management Services (AMS) is a strategic project intended 
to deliver improved customer support and functionality by leveraging 
existing IRS applications and new technologies to bridge the gap 
between modernization initiatives, such as the Customer Account Data 
Engine (CADE), and legacy systems. AMS is to enhance CADE by providing 
applications for IRS employees and taxpayers to access, validate, and 
update accounts on demand. The development and implementation of the 
AMS project is also essential to enabling CADE to accept more 
complicated tax returns and to deal with taxpayer issues. 

[5] Pub. Law 109-115, Div. A, Title II, Nov. 30, 2005. Currently, IRS's 
fiscal year 2007 funding is provided under a Current Resolution, Pub. 
Law 109-289, Div. B, Sept. 29, 2006, which continues BSM's funding 
subject to the "authority and conditions" provided in the fiscal year 
2006 appropriations act. 

[6] An enterprise architecture (EA) is an institutional blueprint 
defining how an enterprise operates today, in both business and 
technology terms, and intends to operate in the future. An EA also 
includes a roadmap for transitioning between these environments. 

[7] IRS refers to its life cycle management program as the enterprise 
life cycle (ELC). 

[8] Earned value management is a project management tool that 
integrates the investment scope of work with schedule and cost elements 
for investment planning and control. This method compares the value of 
work accomplished during a given period with that of the work expected 
in the period. Differences in expectations are measured in both cost 
and schedule variances. 

[9] For example, see GAO, Business Systems Modernization: Results of 
Review of IRS' March 2001 Expenditure Plan, GAO-01-716 (Washington, 
D.C.' June 29, 2001) and Internal Revenue Service: Progress Continues 
But Serious Management Challenges Remain, GAO-01-562T (Washington, 
D.C.' April 2, 2001). 

[10] For example, see GAO, Tax Systems Modernization: Results of Review 
of IRS' Third Expenditure Plan, GAO-01-227 (Washington, D.C.' January 
22, 2001) and Business Systems Modernization: IRS Needs to Better 
Balance Management Capacity with Systems Acquisition Workload, GAO-02-
356 (Washington, D.C.' February 28, 2002). 

[11] GAO, Business Systems Modernization: IRS Has Made Significant 
Progress in Improving Its Management Controls, but Risks Remain, GAO-03-
768 (Washington, D.C.' June 27, 2003). 

[12] GAO, Business Systems Modernization: IRS's Fiscal Year 2004 
Expenditure Plan, GAO-05-46 (Washington, D.C.' November 17, 2004). 

[13] GAO, Business Systems Modernization: Internal Revenue Service's 
Fiscal Year 2005 Expenditure Plan, GAO-05-774 (Washington, D.C.' July 
22, 2005). 

[14] GAO, Business Systems Modernization: Internal Revenue Service's 
Fiscal Year 2006 Expenditure Plan, GAO-06-360 (Washington, D.C.' 
February 21, 2006). 

[15] IRS plans to use unobligated fiscal year 2005 Management Reserve 
funding to begin work on the Accounts Management Services project. 

[16] The CMMI is SEI's process model, which describes how to develop 
the processes needed for software development and specific practices 
that organizations should follow. 

[17] GAO, Business Systems Modernization: IRS Needs to Complete Recent 
Efforts to Develop Policies and Procedures to Guide Requirements 
Development and Management, GAO-06-310 (Washington, D.C.' March 20, 
2006). 

[18] Executive Office of the President, Office of Management and 
Budget, Evaluating Information Technology Investments: A Practical 
Guide (November 1995) and Circular A-130, Transmittal Memorandum #4, 
Management of Federal Information Resources (November 2000). 

[19] GAO, Information Technology Investment Management: A Framework for 
Assessing and Improving Process Maturity, GAO-04-394G (Washington, 
D.C.' March 2004). 

[20] GAO-05-46. 

[21] GAO-05-774. 

[22] GAO-05-774. 

[23] Accounts Management Services (AMS) is a strategic project intended 
to deliver improved customer support by leveraging legacy systems. As a 
part of the fiscal year 2006 MV&S process, a strategy was developed to 
create and retain Customer Account Data Engine (CADE) account data by 
processing on-line transactions. The development and implementation of 
the AMS project is integral to this strategy and essential to enabling 
CADE to accept more complicated tax returns and to deal with taxpayer 
issues. AMS project releases are to provide functional components 
synchronized with the CADE development schedule as well as other 
components delivered independent of the CADE schedule. 

[24] Earned value management is a project management tool that 
integrates the investment scope of work with schedule and cost elements 
for investment planning and control. This method compares the value of 
work accomplished during a given period with that of the work expected 
in the period. Differences in expectations are measured in both cost 
and schedule variances. 

[25] Recent OMB guidance directed agencies to implement earned value 
management on major IT investments, in an effort to meet baseline cost, 
schedule, and performance goals. 

[26] Under the TETR, taxpayers are being refunded the telephone excise 
tax they have paid over the last three years, including interest. 
Individuals and businesses are affected. This is a one time event. 

[27] The ETEC project is funded by the Department of Transportation and 
supports the compliance of highway use and fuel excise tax. It 
leverages the Modernized e-File capabilities for filing excise tax 
forms. 

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