E-Government: IRS Modernization–Will Third Time Be the Charm?

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Learn how better project management is giving the IRS its best chance to succeed

Find out why the IRS is still facing an uphill battle

In January, just three months before the internal revenue service planned to field a new call center application, its first system upgrade in a $10 billion modernization project, its CIO of almost three years, Paul Cosgrave, quit. ? Not surprisingly, eyebrows were raised. ? During the past 25 years, the IRS has twice tried–and twice failed–to modernize. In 1978, then-President Jimmy Carter halted a project to network the IRS’s central databases–its Master Files–with its business applications, because the agency had not figured out how it would protect taxpayer privacy. In 1995, Congress in effect pulled the plug on a second effort, which involved multiple new systems, after the IRS had spent 10 years and $2 billion with, in Congress’s view, very little to show for it. Now, after spending $231 million without actually deploying a single system, Cosgrave jumped ship. (See “The Revolving Door,” Page 66.)

Was this third modernization project on the brink of disaster?

Perhaps not.

Bad management–projects without business sponsors, vendor contracts without clear deliverables and no consistent accountability for systems development–sank the IRS’s last modernization effort, prompting Congress to make documented management procedures a condition of funding. As a result, IRS executives and observers who monitor the agency say things are different this time. Now senior business managers must sign off on every proposed system before IT gets a go-ahead to build it. The agency’s contractor, El Segundo, Calif.-based Computer Sciences Corp. (CSC), gets detailed work orders. And unlike last time, the IRS isn’t trying to do everything all at once. Although agency executives think it could take at least a decade to achieve their grand vision of integrating their databases with all of their business applications and abolishing paper returns, only two years’ worth of projects, representing $625 million of the total $10 billion price tag, are currently on the drawing board. By focusing on the short term, says Bill Duncan, a principle with Project Management Partners in Lexington, Mass., the IRS appears to be approaching the project correctly. Large projects are most successful when they’re broken into small chunks, he says.

And this one had better be successful. The stakes for the IRS are extremely high. Our collective patience with the agency is wearing thin, especially when taxpayers compare the quality of its services with those offered by the banks, credit card companies and others that handle their money. If this project fails, the IRS will still collect taxes, but it’ll be collecting them from increasingly angry taxpayers. Angry taxpayers mean angry congressmen. And angry congressmen mean budget cuts, media scrutiny and micromanagement.

“It gets right to the heart of people’s confidence in their government,” says former Sen. Bob Kerrey (D-Neb.), now president of the New School University in New York City, who sponsored a 1998 law that set the current modernization project in motion. “Every American who pays taxes has a relationship with the IRS,” he adds, and the belief that it’s there to serve not to harass the public influences people’s willingness to declare what they owe every April 15.

[On Feb. 27, just before going to press, the IRS appointed John Reece, former vice president of IT at Time Warner, as deputy commissioner for modernization and CIO. An IRS spokesman said another IS executive reporting to Reece would be hired to assume Cosgrove’s responsibilities for IS operations.]

A New Mandate

The 1998 IRS Restructuring and Reform Act gave the agency a new mandate: treat taxpayers like customers, not perpetrators. The law set taxpayer service goals for the agency that can only be accomplished with new technology. Congress wanted taxpayers to be able to access their accounts online, file electronically and receive straight answers to their tax questions via telephone the first time they ask.

The IRS’s current systems are decades old and hard to use. More than 200 accounting, research and auditing systems aren’t integrated, so IRS agents can’t even fix simple errors easily, much less tell whether it’s their records or yours that are wrong. The agency’s Master Files, as it calls its central databases of tax records, is a legacy of the Kennedy administration, still running software written when the IRS first fielded the system in 1962. To illustrate their problems, officials frequently brandish a black-and-white diagram that shows a call center representative surrounded by 10 terminals. Arrows from these terminals connect to a dozen boxes, each representing a different system, with more arrows connecting these to another layer of applications until it’s impossible to trace the links among them.

The first phase of the new IRS modernization is intended to begin untangling this Web. The nine systems to be fielded between now and 2002 include a revamped Master File based on modern database technology. If this Master File works, it will feed all IRS business applications and provide online access to taxpayer accounts. Taxpayers who file electronically would benefit first, getting their accounts updated in real-time and their refunds in hours. The projects include:

• Upgrading IRS call centers to screen and route calls more efficiently so that taxpayers get their questions answered speedily.
• New software to enable examiners to more quickly compute tax liability for corporations during audits.
• E-Services: A first phase will make it easier for professional tax preparers to exchange data with the IRS online. This is considered a test of a new security infrastructure for exchanging information with all taxpayers.
• Replacing the 35-year-old Master File of taxpayer data.
• A new financial management system to enable the IRS to accurately track how much money it collects. (Unbelievably, the IRS failed its fiscal year 1999 government audit.)
• New network and data security technology.
• Upgraded voice and data services for IRS employees.
• New help-desk and asset-management applications for the IS department.
• Software to allow IRS agents to access the new Master File.

“Every dollar and line of code has a business sponsor and satisfies a business need,” says Bert Concklin, associate commissioner for business systems modernization, who is running the project day to day. That was rarely the case in the past, he says.

A Legacy Of Failure

Past modernization projects were ostensibly geared toward greater efficiency and customer service too. A quarter century ago, when the IRS took its first stab at modernizing, its stated goal was to reduce data entry errors and make audits go more smoothly. That’s when officials first suggested upgrading the Master File and networking it with business applications used by its agents.

That project, called the Tax Administration System (TAS), would have cost approximately $750 million to $1 billion, but it never got off the ground. While TAS was on the drawing board, a technical review ordered by Congress questioned whether the agency could keep taxpayer data away from prying eyes. It was 1977, and revelations that the Nixon administration had used IRS records to attack its political opponents were fresh in the public consciousness. Less than a year later, then-President Carter pulled the plug. Michael Murphy, president of the Tax Executives Institute (TEI), a Washington, D.C.-based lobbying organization for corporate tax officials, was an IRS employee at the time (he eventually became deputy commissioner, the number-two post at the agency). He says officials failed to test the political waters.

Stung by the backlash, the IRS waited to try again until a hardware and software meltdown paralyzed its Philadelphia service center in 1985, creating a political firestorm. The new project again featured a state-of-the-art, networked Master File. The agency also began to develop plans that called for a new imaging system to capture data from paper returns and systems to enable taxpayers to file electronically. Although the IRS made the assistant commissioner for information systems, Hank Philcox, the agency’s first CIO in 1990, Philcox had little control over the agency’s systems or its IS staff. Many of the IS employees reported to the directors of what were then 10 regional service centers, where tax returns were processed. As a result, projects relating to modernization were managed by people who weren’t accountable to the CIO and built without reference to any enterprisewide standards or vision.

In 1996, after spending $299 million, the agency cancelled the imaging project that had been touted as a cornerstone of modernization because officials determined it wasn’t cost-effective–and after an internal audit concluded that the IRS didn’t have enough technical expertise to deliver it. One source familiar with that project, who requested anonymity, says the field offices where it was to be deployed didn’t really want it. “We ended up with systems that didn’t work or were stovepiped,” says Robert Albicker, former IRS deputy CIO in charge of systems and currently deputy associate commissioner. And when projects flopped, “we were really good at pointing fingers,” says Toni Zimmerman, who was named acting CIO when Cosgrave left.

Furthermore, past IRS commissioners never seriously entertained the idea that modern information systems would change many of the agency’s existing business practices. According to Philcox, who left the IRS to become CIO of Reston, Va.-based software services vendor DynCorp in 1995 and is now semi-retired, key legislators in the Democrat-controlled Congress told the IRS to focus on catching tax evaders, placing a lower priority on the project’s taxpayer service-related goals. “That changed dramatically [after the 1994 election] when Congress became Republican,” Philcox recalls. The change in power created a bipartisan coalition for IRS reform. Among other mandates, lawmakers told the IRS that it wouldn’t get money for new systems unless it applied the best IT management practices from the private sector.

All Together Now

With its budget and perhaps its autonomy at stake, the IRS has begun to get its house in order. The General Accounting Office (GAO), which scrutinizes the agency’s management practices for Congress, says the IRS has improved its systems development and IT management practices to the point that officials now know how they’re supposed to run the project. Not a ringing endorsement, perhaps, but typical of government assessments of current IRS performance. As Randy Hite, who as director of IT systems issues for the GAO is in charge of IRS IT systems oversight, says, “The glass is half full.”

The IRS is training its project staff to follow its systems development methodology, is staffing up its program management office under Concklin and has drafted an IT architecture. In recent reports, the GAO sites these steps as positive. Now, the IRS has to deliver.

And quickly, says consultant Duncan, for the sake of morale and political support. “There need to be milestones defined so that people can recognize they’re doing something and celebrate the success,” he says. “And you have to change your definition of success as you move forward. People aren’t going to think you’re successful five years from now [based on] how you define it today.”

Duncan figures the IRS has a year and a half from the time it defines users’ requirements for each system to field it if the agency is to keep pace with changes in technology. According to a project schedule provided by the IRS, most of the nine systems under development currently fall in that time frame. The planned financial management system, telecommunications upgrades and systems management applications for the IS department will take up to two years to deploy. Another factor working in the agency’s favor is that the IS staff and business-side executives are working more closely than ever before. When the agency reorganized its business operations–another mandate of the 1998 IRS reform law–IRS Commissioner Charles Rossotti put the CIO in charge of the entire IS staff. “The IS function was elevated tremendously in terms of stature,” says Philcox. Now, the CIO doesn’t have to scrounge for money from business units’ operating budgets, he says. The CIO sits as an equal with business executives on an executive steering committee headed by Rossotti. This committee meets monthly to review how the modernization project is progressing. Zimmerman says the forum, carried over from meetings senior managers held while they were working on Y2K upgrades, encourages people to come clean about problems before they threaten a project. This group also has to approve each new stage of a project.

That alignment is critical, says John Thomas Flynn, former California state CIO and now a CEO with Sacramento, Calif.-based TechEd Strategies. In the mid-’90s, Flynn pulled the plug on nearly a dozen IT projects in California because the state had no idea what it was getting for the hundreds of millions of dollars these projects cost. When he started asking for monthly reports on project budgets and requiring quality checks on what vendors delivered, he found money being wasted on systems that didn’t work. He doesn’t just blame the vendors. “I’ve had directors of large government agencies tell me that an IT project was 20th on the list of things important to them,” says Flynn.

At the IRS, Concklin say his main contribution so far has been to bring order to the process of assigning work to CSC and holding the company accountable for its performance. “When I arrived [June 2000], converting requirements [for a project] into a task order was in a relatively primitive state,” he says. Prices, deliverables and deadlines were ill defined, exposing the IRS to cost overruns and delays. Now work orders detail more specifically what CSC has to do to get paid. And every month, several dozen IRS and CSC managers meet to review the schedule, budget and progress of every project. That’s a far cry from the past, when IRS managers and vendors rarely met face to face and communicated mainly through memos. It’s no wonder that when it came to IRS modernization, failure was as sure a bet as death and taxes.

Trouble Ahead, Trouble Behind

The IRS hasn’t put the bad old days completely behind it. TEI’s Murphy, the former IRS deputy commissioner, says there are plenty of ways this current modernization project can go awry. One fear is that the agency will lose momentum while it’s searching for a new CIO and then again while getting the new appointee up to speed. Before Reece was named to replace Cosgrave, Commissioner Rossotti downplayed the importance of Cosgrave’s resignation, saying that public sector CIOs inevitably come and go. He insisted that “one of the things Paul [Cosgrave] and I tried to do is set up a management structure and process that is robust enough not to be dependent on the heroic efforts of one individual.”

Faith that the project will stay on track still rests with Rossotti. “We’re very comfortable with him,” says a congressional staff member who is following the project. But Rossotti has less than three years left to his term. President Bush could reappoint him, but Rossotti hasn’t said whether he’s interested.

Another worry is whether Congress will continue to support modernization. The agendas of 535 members of the House and Senate, cobbled together in tax and budget bills, often send conflicting messages to agency managers about how to invest their IT budgets. “Part of the problem with the IRS’s information technology is that they’re trying to design it to accommodate a moving target–the tax code,” says Pete Sepp, a spokesman with the National Taxpayers Union in Alexandria, Va., which lobbies for lower taxes and tax simplification. “If you find that the more complex areas of the tax code are the ones people make more mistakes with, you’re going to have to devote a larger proportion of upgrades to the systems that spit out tax returns for audits, [rather than to customer service or electronic filing].”

Finally, there’s the risk inherent in every large IT project that the new systems simply won’t work. That’s particularly worrisome because the new IRS Master File, designed to be accessible by the public, obviously will be more vulnerable to hackers and unscrupulous employees. The IRS’s ability to protect taxpayer records from unauthorized access by its workers has a checkered history. Concklin says officials know they have to get security right, but the details are classified: “All I can say is we’re approaching it in a professionally rigorous and contemporary way. When these systems are up, people can make a judgement whether this is something that is trustworthy.”

If the public decides it isn’t, all bets are off. Once taxpayers lose confidence, “you run a risk that the compliance rate will slip,” says Murphy. If that happens, he worries, it would set the IRS on another downward spiral, forcing it to rely on its legal powers, rather than user-friendliness, to get people to pay what they owe. He notes the IRS generally gets low approval ratings from the public. “People say that because there’s a certain amount of fear of its power,” Murphy says.

All the IRS needs is a few horror stories. Once that happens, it will be almost impossible to earn back taxpayer confidence.

And that will be another $10 billion down the drain.