This is the accessible text file for GAO report number GAO-05-774 
entitled 'Business Systems Modernization: Internal Revenue Service's 
Fiscal Year 2005 Expenditure Plan' which was released on July 22, 2005. 

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Report to Congressional Committees: 

July 2005: 

Business Systems Modernization: 

Internal Revenue Service's Fiscal Year 2005 Expenditure Plan: 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-774] 

GAO Highlights: 

Highlights of GAO-05-774, 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 intended to replace the agencyís aging 
business and tax processing systems. As required by law, IRS submitted 
its fiscal year 2005 expenditure plan in April 2005 to congressional 
appropriations committees, requesting about $203 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 what 
progress IRS had made in implementing our prior recommendations, and 
(3) provide any other observations about the plan and IRSís BSM 
program. 

What GAO Found: 

IRSís fiscal year 2005 expenditure plan, which requested about $203 
million for the BSM program, 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 progress in implementing GAOís 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 have not yet been fully 
implemented or institutionalized. Weaknesses in these controls and 
capabilities have contributed, at least in part, to project cost and 
schedule shortfalls. 

GAOís observations on the expenditure plan and BSM program include the 
following:

* During the past year, IRS has made progress implementing BSM, but 
much work remains. While IRS has deployed initial versions of several 
modernized tax processing and business systems, these deliveries only 
represent the initial steps toward modernization. For example, initial 
deliveries of the Customer Account Data Engine (CADE) project will 
process less than 1 percent of all tax returns filed this year. 

* IRS has not met long-term cost and schedule estimates, but its new 
incremental approach contributed to short-term improvements. In the 
second quarter of fiscal year 2004, systems modernization projects were 
rebaselined, and IRS adopted a new strategy to develop and deploy more 
manageable project segments. Since that time, IRS has met its short-
term cost estimates and delivery dates for the initial releases of CADE 
and the Custodial Accounting Project. However, concerns remain about 
IRSís ability to continue meeting cost and schedule targets. 

* IRS has made progress toward addressing issues raised in independent 
BSM assessments and implementing program improvement initiatives, but 
high-priority issues and challenges remain in areas such as quality 
assurance, the change request process, and integrated schedule and 
baseline management. 

The BSM vision and strategy need revision in order to clearly show what 
the modernization program will consist of, when it will be completed, 
and at what cost. For example, the latest modernization strategy 
referenced in an expenditure plan dates back to fiscal year 2002, and 
its planned delivery dates no longer reflect reality. 

What GAO Recommends: 

GAO recommends that the Commissioner of Internal Revenue 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 IRSís 
budgetary outlook and management capabilities. In providing comments on 
a draft of this report, the Commissioner agreed with GAOís findings and 
described actions IRS is taking to address GAOís recommendation.

www.gao.gov/cgi-bin/getrpt?GAO-05-774.

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 May 20, 2005, 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: 

BSM: Business Systems Modernization: 

CIO: Chief Information Officer: 

IRS: Internal Revenue Service: 

OMB: Office of Management and Budget: 

PRIME: Prime Systems Integration Support: 

Letter July 22, 2005: 

The Honorable Christopher S. Bond: 
Chairman: 
The Honorable Patty Murray: 
Ranking Member: 
Subcommittee on Transportation, Treasury, the Judiciary, Housing and 
Urban Development, and Related Agencies: 
Committee on Appropriations: 
United States Senate: 

The Honorable Joe Knollenberg: 
Chairman: 
The Honorable John W. Olver: 
Ranking Member: 
Subcommittee on the Departments of Transportation, Treasury, and 
Housing and Urban Development, the Judiciary, District of Columbia, and 
Independent Agencies: 
Committee on Appropriations: 
House of Representatives: 

As required by law, the Internal Revenue Service (IRS) submitted its 
fiscal year 2005 expenditure plan in April 2005 to the congressional 
appropriations committees, requesting about $203 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 what 
progress IRS had made in implementing our prior recommendations, and 
(3) provide any other observations about the plan and IRS's BSM 
program. 

On May 20, 2005, we briefed your respective offices 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 2005 plan satisfies each of the six legislative 
conditions. 

* Although IRS has made progress in implementing our recommendations 
and improving its modernization management controls and capabilities, 
certain controls and capabilities related to configuration management, 
human capital management, cost and schedule estimating, contract 
management, and post-implementation reviews have not yet been fully 
implemented or institutionalized. Weaknesses in these controls and 
capabilities have contributed, at least in part, to BSM project cost 
and schedule shortfalls. 

* IRS has made progress in implementing BSM, but much work remains. IRS 
has deployed initial phases of several modernized systems during the 
past year, including the Customer Account Data Engine (the new taxpayer 
information database), Modernized e-File (a new electronic filing 
system), and e-Services (a new Web portal and electronic services for 
tax practitioners). The deployment of these systems provides several 
benefits to the taxpayer, including faster processing of tax refunds 
and more timely response to customer inquiries. However, these 
deliveries represent only a beginning, and much more remains to be done 
by IRS before the BSM program is complete. For example, the Customer 
Account Data Engine will process less than 1 percent of all tax returns 
filed this year. 

* IRS has not met long-term cost and schedule estimates, but its new 
incremental approach contributed to short-term improvements. 
Historically, BSM has experienced significant cost overruns and 
schedule slippages. In the second quarter of fiscal year 2004, IRS 
rebaselined its projects and decided to change its BSM project strategy 
to enable it to develop and deploy more manageable project segments. 
Since making this change, IRS has met its short-term cost estimates and 
scheduled delivery dates for initial releases of the Customer Account 
Data Engine and the Custodial Accounting Project. However, concerns 
remain about IRS's ability to continue meeting its cost and schedule 
targets because of persistent weaknesses in the agency's capabilities 
to deliver modernization initiatives on time and within budget. 

* IRS has made progress toward addressing issues raised in independent 
BSM assessments and implementing program improvement initiatives, but 
significant issues and challenges remain. IRS has made further progress 
in addressing the items in its BSM Challenges Plan, completing 44 of 
the 48 action items. In addition, the current IRS Associate Chief 
Information Officer (CIO) for BSM developed a new BSM program 
improvement framework, which covers all identified issues and allows 
the agency to regularly identify, prioritize, and resolve these issues. 
Currently, there are 17 high-priority initiatives. These initiatives 
address key areas, including quality assurance, cost and schedule 
estimation, the change request process, and integrated schedule 
management and baseline management. If it is effectively implemented, 
this program improvement process should help IRS manage program risk. 
However, until the agency has addressed its high-priority initiatives, 
BSM remains at risk of further cost overruns and delays in its delivery 
of critical functionality. 

* IRS is adjusting the BSM program in response to its assessment of the 
prime systems integration support (PRIME) contractor's performance and 
budget reductions. As a result of its assessment of the PRIME 
contractor's performance in 2004, IRS began to transfer program 
management operations from the contractor to the agency. Subsequent 
budget reductions resulted in further shifting of responsibilities away 
from the contractor. IRS has taken over significant responsibilities 
for program management, systems engineering, and business integration. 
Also, IRS has made adjustments to project funding allocations and 
future delivery schedules. Because IRS does not have all the expertise 
and processes needed to discharge these responsibilities effectively, 
these changes could impact future modernization budgets and cause 
further delays in implementing functionality that is intended to 
provide benefits to IRS and to taxpayers. 

* The BSM vision and strategy need revision. The BSM program is based 
on visions and strategies developed several years ago. The significant 
delays experienced by the program over the past few years and the 
changes brought about by the shift of significant program 
responsibilities from the PRIME contractor to IRS, indicate a need for 
IRS to revisit its long-term goals, strategies, and plans for BSM, 
including an assessment of when significant future BSM functionality 
would be delivered and at what cost. 

Recommendation for Executive Action: 

To address the many changes associated with the BSM and to clearly 
describe what the modernization program is intended to accomplish, when 
it will be completed, and at what cost, we recommend that the 
Commissioner of Internal Revenue direct the CIO to take the following 
action: 

* 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. 

Agency Comments: 

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

We are sending copies of this report to the Chairmen and Ranking 
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 [Hyperlink, 
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 major 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 May 20, 2005, Briefing to the 
Senate and House Appropriations Subcommittee Staffs: 

[See PDF for images]

[End of slide presentation] 

[End of section] 

Appendix II: Comments from the Internal Revenue Service: 

DEPARTMENT OF THE TREASURY: 
INTERNAL REVENUE SERVICE: 
COMMISSIONER: 

WASHINGTON, D.C. 20224: 

June 28, 2005: 

Mr. David 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 "Internal Revenue Service's Fiscal Year 2005 Expenditure Plan" 
(GAO-05-774, July 2005). We are pleased the GAO: 

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

* Acknowledged the progress made in the Business Systems Modernization 
(BSM) Program;

* Confirmed the new incremental approach and strategy to develop and 
deploy more manageable project segments thus meeting short-term cost 
estimates and delivery dates for some of our projects; and: 

* Acknowledged the progress made towards addressing the issues raised 
in independent BSM assessments and in implementing program initiatives. 

We agree with your report's findings and with your observations that 
much work remains ahead of us. However, we have the management focus 
and discipline in place to ensure that we are "doing things right" as 
opposed to "doing things fast," such as exiting milestones prematurely. 
We are also consistently following the proper methodologies and holding 
people accountable if they do not. Some ongoing challenges, however, 
will be: 

* Balancing the scope and pace of projects consistent with capacity;

* Ensuring that the right people are in place before launching a 
project; and: 

* Setting realistic delivery schedules and cost estimates. 

We have begun with the implementation of a human resource capacity 
management model to ensure that we have the right number of resources 
with the right skills and backgrounds available to a project. 

We also developed and implemented a more robust approach to post- 
milestone and post-implementation reviews. In addition to extending the 
post-implementation review process, we also look at lessons learned at 
the end of each project milestone. We then retain the results of these 
comprehensive reviews in a repository that is available to everyone 
involved with the BSM program. We have now conducted several Post 
Milestone Reviews according to the new BSM procedures on Post Milestone 
and Post Implementation Reviews (PIRs). 

We are aware that the magnitude of the BSM program dictates that we 
will always be going through an evolution of assessment and 
improvements. In that regard, the BSM Challenges Action Plan has 
evolved to support our goal of continuous improvement of the program. 
Every 6 months, the BSM leadership team identifies new high priority 
items from the various oversight audit findings and the team's own 
assessment of the program's needs. We are placing a major focus and 
thrust towards completing these highest priority items over a 6-month 
period. The BSM leadership team will continue to reevaluate the state 
of the BSM program and set new priority items for improving the program 
every 6 months. 

I would like to briefly comment on your report's recommendation: "To 
address the many changes associated with the BSM and to clearly 
describe what the modernization program is intended to accomplish, when 
it will be completed, and at what cost, we recommend that the 
Commissioner of the Internal Revenue direct the CIO to 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 the IRS's management capabilities."

The IRS has begun a planning effort to reset its IT Modernization 
Strategy and approach. As part of this effort, we will be updating the 
Enterprise Transition Strategy and Release Architectures that are part 
of the IRS Enterprise Architecture. Our intent is to have the high- 
level strategy, goals, and plans in place by the end of this fiscal 
year (FY 2005), with more detailed engineering analysis and sequencing 
strategies that will be completed during the first quarter of FY 2006. 
We believe that this approach will address this recommendation. 

We appreciate your continued support and the valuable assistance and 
guidance from your staff. If you have any questions, or if you would 
like to discuss this response in more detail, please contact Todd 
Grams, Chief Information Officer, at (202) 622-6800. 

Sincerely,

Signed by: 

Mark W. Everson: 

[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 named above, Bernard R. Anderson, John L. 
Dale, Joanne L. Fiorino, Timothy D. Hopkins, and Tonia L. Johnson made 
key contributions to this report. 

(310495): 

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) 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 P.L. 108-447, Div. H, Title II, Dec. 8, 
2004, for fiscal year 2005 funding. 

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