Taxpayer Account Strategy:

IRS Should Finish Defining Benefits and Improve Cost Estimates

GAO-11-168: Published: Mar 24, 2011. Publicly Released: Mar 24, 2011.

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In August 2008, the Internal Revenue Service (IRS) began defining a new strategy for modernizing the way it manages individual taxpayer accounts. The strategy, known as Customer Account Data Engine (CADE) 2, is expected to provide service, compliance, and other benefits to IRS and to taxpayers beginning in 2012. IRS expects to implement CADE 2 in three phases. The first phase is expected to be delivered in 2012, the second in 2014, and the third at a later yet to be determined date. GAO was asked to (1) determine whether IRS has identified the expected benefits of CADE 2 and set targets for measuring success, (2) examine the estimated costs and assess IRS's process for developing them, and (3) assess IRS's process for managing the risks associated with CADE 2 and describe the risks IRS has identified using this process. To do so, GAO reviewed relevant documentation, attended program review meetings, and interviewed IRS officials.

IRS has identified 20 service, compliance, and other benefits for the first phase of CADE 2, including increasing the percentage of refunds processed daily and reducing the number of erroneous notices due to better account information, and has set quantitative targets for most of these benefits. GAO has previously reported that quantitative targets can be useful for tracking program performance. While it may not always be possible to quantify targets, doing so helps to objectively measure the extent to which expected benefits have been realized. However, IRS has not yet finalized expected benefits for the second phase or set related quantitative targets, because, according to officials, these are contingent upon yet to be made design and funding decisions. Nevertheless, addressing the second phase's benefits and related targets as the design is being considered could influence design decisions and help identify early on how systems and processes might be affected. IRS reported preliminary life cycle cost estimates for the first two phases of the CADE 2 program of about $1.3 billion through 2024. This includes about $377 million for development and $922 million for operations and maintenance. IRS's process for developing the preliminary estimates was generally consistent with best practices. However, the agency did not follow three practices intended to improve the credibility of cost estimates. Specifically, IRS did not (1) consistently document excluded costs or provide a rationale for excluding them; (2) use inflation in calculating costs; and (3) perform an analysis to examine the effects of changing ground rules and assumptions. While IRS stated it would perform the analysis of changing ground rules and assumptions in revised estimates to be available by the completion of our audit, until the agency implements all these practices its estimates may not be credible. IRS's process for managing the risks associated with CADE 2 is generally consistent with best practices. Through its process, IRS identified significant risks facing CADE 2, including that filing season and other top information technology investment priorities may result in contention for key resources, the delivery of the first phase of CADE 2 may be delayed if deficiencies identified in requirements are not corrected in a timely manner, and the risk that technical challenges and other risks to implementing the database identified as a result of prototyping efforts may not be addressed. To its credit, IRS has developed mitigation strategies for each identified risk. While IRS is working to ensure CADE 2 is successfully managed, the schedule for delivering the initial phase is nevertheless ambitious. IRS officials have acknowledged this and are taking actions to increase their chances of meeting it, including moving certain activities up, performing others concurrently, and adding checkpoints to monitor the program's status. While these actions may increase the likelihood of meeting the schedule, some of them, such as performing activities concurrently, could potentially introduce more risk to CADE 2's successful development and implementation. GAO's recommendations include (1) identifying all of the second phase benefits, setting the related targets, and identifying how systems and business processes might be affected; and (2) improving the credibility of revised cost estimates by including all costs or providing a rationale for excluded costs, and adjusting costs for inflation. In its comments on a draft of this report, IRS agreed with GAO's recommendations.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In April 2011, IRS issued the CADE2 Program Business Case and Benefit Management Plan. The document provides a detailed description of planned TS1 benefits including quantitative targets for each.

    Recommendation: The Commissioner of Internal Revenue should direct the appropriate officials to provide a better basis for measuring CADE 2 performance in achieving transition state 1 (TS1) benefits, set the remaining quantitative targets where feasible as soon as possible in 2011.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Open

    Comments: In a May 2013 briefing to us on the status of TS2, IRS provided us a "TS2 Core Team Executive Summary" listing the transition state's expected high-level taxpayer, business and technical benefits and list of interfaces and systems which might be affected. In April 2015, IRS officials stated they are performing additional work to define TS2 benefits and expect to have them finalized along with quantitative targets in a Business Case and Benefits Management Plan targeted to be completed in September 2015. We plan to follow up with IRS at that time.

    Recommendation: The Commissioner of Internal Revenue should direct the appropriate officials, in conjunction with developing the approach for transition state 2 (TS2) expected in May 2011, to finalize the phase's expected benefits, set quantitative targets where feasible, and identify how related systems and business processes might be affected.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: While IRS did not include inflation-adjusted costs in its revised cost estimate for CADE 2, it included them in the Office of Management and Budget business case document (exhibit 300) it updated in February 2012.

    Recommendation: The Commissioner of Internal Revenue should direct the appropriate officials to ensure the revised estimates for CADE 2 are credible by including inflation when calculating costs.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Closed - Implemented

    Comments: In May 2011, IRS confirmed--and we verified--that the CADE 2 February 2011 revised cost estimate includes all costs required to complete transition state 1 of the program, except for the business costs, which are managed by the business operating divisions under separate funding sources.

    Recommendation: The Commissioner of Internal Revenue should direct the appropriate officials to ensure the revised estimates for CADE 2 are credible by including the costs IRS explicitly excluded or provide a rationale for excluding them.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  5. Status: Open

    Comments: In May 2011, IRS stated it would not update its February 2011 revised cost estimate to address this recommendation because the program was entering its final development phase. However, the agency reported that the CADE 2 transition state 2 Basis of Estimate would include associated business costs or a rationale for excluding them to ensure that the cost estimates are credible. In April 2015, IRS informed us that it was updating the Basis of Estimate to reflect new assumptions and was targeting to have it completed by September 2015. We plan to follow up with IRS at that time.

    Recommendation: The Commissioner of Internal Revenue should direct the appropriate officials to ensure the revised estimates for CADE 2 are credible by including any business costs associated with moving to daily processing or document that these costs were excluded and provide a rationale for excluding them.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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