No Easy IT Fix for the IRS

The internal revenue service’s Master File is an accident waiting to happen. A legacy of the Kennedy administration, this database stores the taxpaying histories of 227 million individuals and corporations, including every transaction between taxpayers and the IRS for the past 40 years. The Master File is used to determine if you’ve paid what you owe, and without it the government would have no way to flag returns for audits, pursue tax evaders or even know how much money is or should be flowing into its coffers.

Yet the system still runs code from 1962, written in an archaic programming language almost no one alive understands. Every year, programmers, some who have worked at the IRS for decades, add new code to the Master File to reflect new rules passed by Congress. As a result, the system has become a high-tech Rube Goldberg machine. Those familiar with the Master File say it is poised for a fatal crash that would shut the government down.

Congress and the IRS had hoped that by this tax season, this fragile system would be partially replaced by a centralized database that could provide both IRS agents and individual taxpayers with daily updates of taxpayer accounts, just as credit card companies and banks do, enabling speedier refunds and more timely customer service. This new Customer Account Data Engine, or CADE, is part of a massive $8 billion modernization program launched by the IRS in 1999 to upgrade its IT infrastructure and more than 100 business applications.

But the program, called Business Systems Modernization, has stumbled badly, running into serious delays and substantial cost overruns. The first of multiple software releases planned for the new database (which would enable faster processing of returns and faster refunds for 6 million out of the 21.5 million people who file the 1040EZ form) is nearly three years late and $36.8 million over budget. Eight other major projects have missed deployment deadlines by at least three months, and costs have ballooned by more than $200 million, according to the U.S. General Accounting Office and the congressionally chartered IRS Oversight Board, an independent panel of tax industry and technology experts who advise the IRS and Congress.

Those familiar with the program say the fault lies largely with the IRS’s entrenched bureaucracy. The agency did not follow its own procedures for developing the new systems and failed to give consistent direction and oversight to Computer Sciences Corp. (CSC), the vendor it hired to do the work. Longtime managers resistant to change undercut CSC and the private-sector IT executives who were hired to oversee the program, according to Mark Forman, who, as associate director for IT and e-government at the Office of Management and Budget, oversaw the government’s major IT initiatives from June 2001 until last summer. Three CIOs have come and gone in the seven years since planning began for Business Systems Modernization.

For their part, IRS executives, as well as the IRS Oversight Board, say CSC was overwhelmed and underqualified. They complain that CSC didn’t fully understand the tax collection business or grasp the complexity of the assignment, an assessment the company does not dispute. "I have never encountered a program of the size and complexity as the Business Systems Modernization program at the IRS," Paul Cofoni, president of CSC’s Federal Sector business, told the U.S. House Ways and Means Oversight Subcommittee at a recent hearing.

More than once, the IRS considered firing CSC. Each time, officials decided against it, although in February, IRS Commissioner Mark Everson barred CSC from taking on any new projects unless it meets deadlines for delivering work in progress. Charles Rossotti, who was IRS commissioner from the launch of the program until the end of 2002, now says it was a mistake to think that CSC, or any vendor for that matter, could manage such a huge undertaking without heavy input from the IRS. "We really thought we were going to have a very, very thin IRS team managing this," recalls Rossotti, who is now a senior adviser to The Carlyle Group.

Indeed, Business Systems Modernization provides a case study for almost everything that can go wrong managing a large, complex IT portfolio. At stake in this bungled implementation is the IRS’s very ability to conduct timely audits and go after tax evaders, not to mention its long-term goal of delivering customer service on par with private-sector financial institutions. If the Master File crashes, the government would not be able to collect its $2 trillion in revenue or pay for anything, whether it’s Social Security benefits or the bill for new weapons systems. Meanwhile, the cost of collecting $1 of revenue?45 cents in 2002, the last year for which statistics are available?has not appreciably declined in two decades. Modernization "is crucial to delivering better service to taxpayers and increasing the agency’s efficiency and productivity," said Larry Levitan, a member (and former chairman) of the IRS Oversight Board, at the House Ways and Means hearing.

A Legacy of Failure

The IRS has twice before failed to modernize. In the late 1970s, President Carter put the kibosh on a project to replace the aging Master File when an external review questioned whether the agency could adequately protect taxpayer privacy. Almost two decades later, in 1995, Congress pulled the plug on a second modernization program after the IRS spent 10 years and $2 billion with little to show for it.

At that time, it was clear to the IRS’s congressional overseers what had gone wrong. Projects didn’t have business sponsors. Contracts with vendors didn’t have clear deliverables. And no one, either within the IRS or among its dozens of contractors, was held accountable for results. (For more about past IRS project management problems and the early stages of Business Systems Modernization, see "The Taxman’s Burden" at

To prevent those problems from recurring, the IRS and Congress tried to apply textbook IT management wisdom. In 1996, the IRS hired a new CIO, Arthur Gross, who had directed the modernization of New York state’s tax systems, to craft a strategy for updating the agency’s IT infrastructure and systems. A year later, President Clinton appointed IRS Commissioner Rossotti, an entrepreneur whose company, American Management Systems, developed accounting systems for financial services and government clients. As the first IRS commissioner who was a businessman?not a tax expert?Rossotti was selected to champion change.

With Congress’s blessing, the agency made plans to outsource Business Systems Modernization to a prime contractor. The contractor would bear the burden of program management and systems integration. The vendor was supposed to be a "thought leader," bringing in fresh ideas for how IT could transform the agency’s business processes.

Around the same time, Congress passed a law reforming IRS management and raising salaries for key managers, including the CIO, to attract talent from the private sector. The IRS Reform and Restructuring Act also mandated a reorganization of the IRS bureaucracy from a set of geographically based fiefdoms to a structure organized by business function. For instance, the Wage and Investment Division is responsible for dealing with individual taxpayers and their returns, while other divisions serve different types of businesses.

As part of this realignment, Rossotti put the CIO in charge of the entire IS budget and staff, large portions of which had been dispersed among the old geographic units. The modernization team morphed into a new Business Systems Modernization Office, or BSMO (pronounced "Bizmo"), reporting to Rossotti and the CIO. When Gross quit a few months into Rossotti’s tenure (the two didn’t get along), Rossotti hired Paul Cosgrave, a consultant with more than two decades of private-sector experience. By the end of 1998, the IRS had chosen CSC over Lockheed Martin to lead a team of elite vendors, including IBM, Lucent, Northrop Grumman, Science Applications International and Unisys. Rossotti wanted a roster of heavy hitters with large project experience. The team CSC put together (called Prime) had a long history of working with the IRS on its legacy systems.

The IRS and CSC would spend most of the next year planning. Even today, some of these early steps are praised by the program’s critics. "They had a good plan and a good strategy, and I think they still do," says former IRS Oversight Board Chairman Levitan. "The problem was they didn’t execute it."

In fact, the threads that held Business Systems Modernization together began to unravel almost immediately.

The Enemy Within

Despite the fact that the IRS and CSC had agreed that CSC would make most project-related decisions, midlevel IRS managers never bought into the concept. They were used to doing things themselves, their way.

Within the agency’s IS department, resentment seethed between what one CIO called the "fair-haired folk" who worked on modernization and the rest of the 8,500-strong technology workforce that kept the existing systems running. Despite the fact that the modernized systems would eventually replace the legacy applications and infrastructure, managers operating those systems were frequently left out of the loop when the new systems were being discussed. The thinly staffed Bizmo either didn’t have the time, or didn’t make the time, to educate their peers. Nor, in the IRS’s view, did CSC make much effort to reach out to those legacy managers. As a result, designs for new systems often lacked important requirements, and this empowered the managers of the legacy systems to push for customizations that did not conform to new enterprise standards.

In fact, no one, not even the CIO, had enough stature within the agency to champion the business process changes that modernization required. Business managers were involved in approving plans, making deployment decisions and resolving problems, but only as members of large committees?not as accountable individuals. Scoping out requirements and getting the projects done was considered IS’s responsibility, and business unit leaders were not held accountable for ensuring that new systems were delivered. "That was probably the single biggest issue," says Levitan.

When Cosgrave resigned as CIO early in 2001 (ostensibly because of the financial restrictions of being a public official), John Reece, who had recently retired as CIO of Time Warner, was offered the job. He says he was so disturbed during his interviews by "the body language and the comments people made" about Bizmo and IS operations that he told Rossotti over dinner that he had to have control over both modernization and operations to bring them together. Rossotti agreed.

Fixing Too Little, Too Late

Reece was no stranger to big projects, bureaucratic foot-dragging or the need to ride herd on vendors. At Time Warner, he had overseen the installation of numerous enterprisewide systems. A large part of that was corralling diverse business divisions that "were almost at war with each other."

But soon after Reece sat down at his government-issued desk in March 2001, he realized that the problems facing Business Systems Modernization were bigger than he had thought. Of the first set of projects that were scheduled for deployment, most were late and over budget. A system for routing taxpayer inquiries to the IRS call center was fielded only after after several sleepless days of testing and frantic calls to suppliers for help tuning equipment. Two other projects?an application to make audits more efficient and online services for tax preparers?suffered from scope creep. The Customer Account Data Engine, scheduled to launch in May 2002, was also about to derail.

Neither Bizmo nor CSC had developed a full set of procedures to follow. Nor were they following the procedures they had established. As the treasury inspector general for tax administration would later report, among CSC’s lapses was its failure to properly measure project costs, adequately define requirements and fully assess project risks. "The estimates that were done early on were built on such fragile knowledge that they were useless," says Reece. He was incensed, and he let CSC know it. He even broached the idea of firing CSC, but became convinced it wouldn’t be practical. For one thing, no one was ready to declare the effort a failure. The issue became "how to fix Prime’s warts and turn them into the Prince Charming we need them to be," says Reece. The IRS had already forced out one general manager that CSC had put in charge of Prime. Reece would go through two more.

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