$4 Billion Later, Why IRS Awaits Computer Era

It's tax time again, and Americans everywhere are collecting their receipts and W-2 forms and starting to wrestle with their 1996 income-tax returns.

When the Internal Revenue Service receives those returns it will process them in much the same way it has since the 1950s: Forms will be date-stamped, processed by hand, and filed in a drawer. While the IRS has spent $4 billion since 1986 in an effort to bring tax processing into the modern era, the program is stalled where it was in 1988.

The impact: Taxpayers are out $4 billion, and the IRS still can't account for how much it is taking in and how much it is paying out in refunds.

Nor will the Tax Systems Modernization Program be ready by a planned start date in 2001. Critics say that unless serious changes are made, it's impossible to tell just when the program will go on line.

Developing and installing a computer system is a difficult task for any organization. Those who are designing it and those who will use it must agree on what the system is supposed to do. For huge government agencies, the challenge can be complicated by political meddling at any point from the White House or Congress.

The IRS, however, has found itself in a tangle of its own making.

The revenue service wanted a system that would allow it to do what most financial and insurance firms can do now: Allow a representative to help inquiring customers by calling up their case histories on a computer screen and analyzing them on the spot, providing appropriate advice or instruction, usually by phone. Most IRS processing is still done by hand using paper forms that are not available to the IRS representatives who deal with the public. The tax agency also wanted to reduce the amount of paper that floods its offices by increasing the number of tax returns filed electronically.

But the IRS went forward with no precise plan for what the new systems should do, how they should do it, and how they should connect to each other, critics say. Moreover, management of the development efforts focused only on the parts instead of the whole. Two components, one costing $300 million and another $22 million, have been canceled or suspended.

"If this was a house that was being built ... IRS is probably out there building the roof right now. Nobody has dug a foundation anywhere yet, and the plumbing is probably going to end up in the living room - you flush the commode and the lights come on in the garage," complained Rep. James Lightfoot (R) of Iowa, at hearings last March.

"There's no architecture, no definitions, no blueprint, nothing," says Rona Stillman, chief scientist for computers and telecommunications at the General Accounting Office (GAO), Congress's investigation and auditing arm. Furthermore, the IRS hasn't even thought through the business strategy it wants the systems to support, says Dr. Stillman, who has authored several reports critical of IRS's modernization efforts. "Even if it worked as defined, it doesn't account for advances in capability that IRS says they want."

The IRS had no process to evaluate the project's progress, did no cost-benefit analysis, and continued to spend money on various parts of the effort even though no results were forthcoming, according to Stillman's GAO reports.

"A crucial problem was that there was no strong manager," says a Capitol Hill source who requested anonymity. The situation was made worse by inadequate congressional oversight: "We took IRS at its word," year after year that it was ironing out the program's problems, the source says. "We never queried them in depth."

IRS simply does not have the talent needed to write software for what everyone agrees is an extremely complex effort. "IRS had no business trying to develop this itself," the congressional source says. "It would be as if the Air Force built its own airplanes."

Concerns reached a head this year. The GAO reported in August that a year after it had found serious flaws in the program and recommended fixes, "IRS has not made adequate progress in correcting its management and technical weaknesses, and none of our recommendations have been fully implemented."

Then the IRS was forced to suspend an electronic-filing system after spending $22 million. GAO found that the project, which began in December 1995, took none of its recommendations into account: IRS had simply repeated the same mistakes.

So Congress, spurred by Representative Lightfoot, decided it was time to act. House and Senate conferees writing the Omnibus Appropriations bill, passed at the end of September, redefined the TSM program to ensure that development funds would not be diverted to systems already operating. Then they demanded that the Treasury secretary (who oversees the IRS) report quarterly on the program's progress and come up with a plan to hire a commercial firm to take it over by July 31, 1997. And they ordained that the number of IRS employees assigned to the program "be significantly reduced."

Lawmakers further expressed their pique with the IRS by reducing its budget $315 million over fiscal 1996, cutting it for the second year in a row. The TSM program got $336 million, only half the administration's request.

The Treasury and the IRS say they are making changes. It brought in Arthur Gross, who oversaw New York's effort to modernize its tax-processing systems, as the IRS's associate commissioner and chief information officer. Mr. Gross oversees a new office that will centralize and consolidate management of modernization efforts. The IRS is also developing a systems blueprint to provide design and construction guidance to the developers. And it is setting up an investment review board to prioritize investments and requests and justifications for systems.

But Gross, who says the agency is caught in a race against time, cautions against expecting too much too soon. "This is not all going to turn around in a day, week, or year," he says. "We need to be realistic in IRS, we need to be prudent in selecting our systems-development efforts, and our reach should not exceed our grasp."