This is the accessible text file for GAO report number GAO-05-46 entitled 'Business Systems Modernization: IRS's Fiscal Year 2004 Expenditure Plan' which was released on November 17, 2004. This text file was formatted by the U.S. Government Accountability Office (GAO) to be accessible to users with visual impairments, as part of a longer term project to improve GAO products' accessibility. Every attempt has been made to maintain the structural and data integrity of the original printed product. Accessibility features, such as text descriptions of tables, consecutively numbered footnotes placed at the end of the file, and the text of agency comment letters, are provided but may not exactly duplicate the presentation or format of the printed version. The portable document format (PDF) file is an exact electronic replica of the printed version. We welcome your feedback. Please E-mail your comments regarding the contents or accessibility features of this document to Webmaster@gao.gov. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. Because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. Report to Congressional Committees: November 2004: BUSINESS SYSTEMS MODERNIZATION: IRS's Fiscal Year 2004 Expenditure Plan: [Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-46]: GAO Highlights: Highlights of GAO-05-46, a report to congressional committees Why GAO Did This Study: The Internal Revenue Service’s (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 that are intended to replace the agency’s aging business and tax processing systems. BSM funds are not available until IRS submits an expenditure plan that meets various conditions to congressional appropriations committees for approval. In January and July 2004, the Department of the Treasury submitted IRS’s initial and revised fiscal year 2004 plans, respectively. As required by law, GAO reviewed the plans to (1) determine whether the plans 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 plans and IRS’s BSM program. What GAO Found: IRS’s initial (January 2004) and revised (July 2004) fiscal year 2004 expenditure plans, which requested about $388 million for the BSM program, satisfied the conditions specified in the law. These conditions include meeting the Office of Management and Budget’s capital planning and investment control review requirements and complying with federal systems acquisition requirements and management practices. IRS has made progress in implementing our recommendations to improve its modernization management controls and capabilities and in completing BSM projects that have benefited taxpayers and the agency. For example, IRS has implemented our prior recommendation to promptly update its enterprise transition strategy to conform to changes in the agency’s enterprise architecture. In addition, IRS has deployed several modernized systems that provide benefits, including Modernized e-File Release 1, which provides electronic filing for large businesses and tax-exempt organizations. Although progress has been made, GAO’s previous recommendations on modernization management controls and capabilities related to configuration management, human capital management, cost and schedule estimating, and contract management have not yet been fully implemented or institutionalized. Weaknesses in these controls and capabilities have contributed, in part, to BSM project cost and schedule shortfalls. GAO’s observations on IRS’s expenditure plans and the BSM program include the following: * Projects continue to incur significant cost increases and schedule delays. In its revised fiscal year 2004 plan, IRS disclosed that key BSM projects have continued to experience cost and schedule shortfalls against prior commitments. For example, the total life cycle cost for full deployment of the initial release of IRS’s new core accounting system has increased by almost $74 million, and project completion has been delayed by 15 months. Reasons cited for the increases and delays include an inability to resolve key system design, integration, and performance issues in a timely manner. * In-depth internal and independent assessments of the BSM program conducted during 2003 identified significant weaknesses and risks, consistent with our prior reviews. IRS developed 48 action issues to address the concerns raised by these program reviews and has taken actions to resolve them; however, most of the issues remain open. * IRS has also performed post-implementation reviews on three deployed projects, but they were incomplete in that they did not include, for example, an analysis of actual versus planned benefits. Without such an analysis, IRS lacks important information about whether BSM projects are meeting expectations. What GAO Recommends: GAO recommends that the Commissioner of Internal Revenue direct the Chief Information Officer to ensure that, after BSM projects are deployed, post-implementation reviews are performed that include an analysis of quantitative and qualitative investment data to determine, at a minimum, whether expected benefits were achieved. In commenting on a draft of this report, the Commissioner agreed with GAO’s recommendation. www.gao.gov/cgi-bin/getrpt?GAO-05-46. 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 March 8, 2004, Briefing to the Senate and House Appropriations Subcommittee Staffs: Appendix II: Briefing Slides from the August 31, 2004, Briefing to the Senate and House Appropriations Subcommittee Staffs: Appendix III: Comments from the Internal Revenue Service: Appendix IV: GAO Contacts and Staff Acknowledgments: GAO Contacts: Staff Acknowledgments: BSM: Business Systems Modernization: CIO: Chief Information Officer: EA: Enterprise Architecture: IRS: Internal Revenue Service: OMB: Office of Management and Budget: Letter November 17, 2004: The Honorable Richard C. Shelby: Chairman: The Honorable Patty Murray: Ranking Member: Subcommittee on Transportation, Treasury and General Government: Committee on Appropriations: United States Senate: The Honorable Ernest J. Istook, Jr.: Chairman: The Honorable John W. Olver: Ranking Minority Member: Subcommittee on Transportation, Treasury and Independent Agencies: Committee on Appropriations: House of Representatives: As required by law, the Department of the Treasury submitted the Internal Revenue Service's (IRS) initial and revised fiscal year 2004 expenditure plans in January and July 2004, respectively, to the congressional appropriations committees, requesting about $388 million from the Business Systems Modernization (BSM) account. Our objectives in reviewing the plans were to (1) determine whether the plans 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 initial and revised plans and IRS's BSM program. On March 8 and August 31, 2004, we briefed your respective offices on the results of our reviews. This report transmits the materials used at those briefings and reiterates the recommendation that we made to the Commissioner of Internal Revenue in our August 2004 briefing. The full briefing materials, including our scope and methodology, are reprinted in appendixes I and II. In summary, we made the following major points in our March 2004 briefing on the results of our review of IRS's initial expenditure plan for fiscal year 2004: * IRS's initial expenditure plan satisfied each of the six legislative conditions. * IRS had made progress in implementing our recommendations to improve its modernization management controls and capabilities and in completing some modernization projects during fiscal year 2003 that have benefited taxpayers and the agency. For example, IRS had (1) implemented our prior recommendation to promptly update its enterprise transition strategy to conform to changes in the agency's enterprise architecture;[Footnote 2] (2) reported the deployment of an application that provides refund status for the Advanced Child Tax Credit; and (3) reported the delivery of the first release of a new human resources system, HR Connect, to 73,000 IRS employees that allows them to access and manage their human resources information online. Although progress had been made, modernization management controls and capabilities related to configuration management,[Footnote 3] human capital management, cost and schedule estimating, and contract management had not yet been fully implemented or institutionalized. Weaknesses in these controls and capabilities had contributed, in part, to BSM project cost and schedule shortfalls. * Projects continued to incur cost increases and schedule delays for several reasons, including inadequate definition of systems requirements, increases in project scope, and cost and schedule estimating deficiencies. Cost overruns and schedule delays impaired IRS's ability to make appropriate decisions about investing in new projects, delayed delivery of benefits to taxpayers, and postponed the resolution of material weaknesses affecting other program areas. * In-depth and more comprehensive internal and independent assessments of the BSM program had identified significant weaknesses and risks that are consistent with our prior reviews. IRS was taking actions to address the issues identified in these BSM assessments. In our August 2004 briefing on the results of our review of IRS's revised fiscal year 2004 expenditure plan, we reported that IRS had deployed several modernized systems to date that provide benefits, including (1) Modernized e-File Release 1, which provides electronic filing for large businesses and tax-exempt organizations; (2) e- Services, which creates a Web portal and other e-Services to promote the goal of conducting most IRS transactions with taxpayers and tax practitioners electronically; and (3) Customer Account Data Engine[Footnote 4]--Individual Master File Release 1.1, which is expected to improve processing of all formats (telefile, electronic, or paper) of the 1040EZ return for single taxpayers with refund or even- balance returns. In addition, we made the following major points in the August 2004 briefing: * IRS's revised plan satisfied the conditions specified in the appropriations law. * Projects continued to incur significant cost increases and schedule delays. In its revised fiscal year 2004 plan, IRS disclosed that key BSM projects had continued to experience cost and schedule shortfalls against prior commitments. For example, the total estimated life cycle cost for full deployment of Release 1 of the Integrated Financial System had increased by almost $74 million, and project completion had been delayed by 15 months. IRS cited various reasons for cost increases and schedule delays related to this and other projects, including an inability to resolve key system design, integration, and performance issues in a timely manner. * IRS had taken actions to address issues raised in independent BSM assessments. IRS developed 48 action issues to address concerns raised by various program reviews conducted during 2003 and, in a May 2004 report, stated that almost all of them were closed based on completed actions. However, many of these action issues were prematurely closed because required activities were incomplete. Subsequent to the May report, the Associate Chief Information Officer (CIO) for Modernization Management began tracking the progress of the action issues, including those that had been previously closed (merging some of these issues so that 38 issues instead of 48 were being tracked). As of the end of August 2004, 10 of the 38 issues had been closed, leaving 28 issues open. IRS reported that some of the issues will take time to fully complete, while others will span the life of the program. * IRS had performed post-implementation reviews on three deployed projects, but they were incomplete. Federal and IRS guidance calls for post-implementation reviews to be performed on completed projects to determine whether expected benefits have been achieved and to document lessons learned. IRS had performed three such reviews, but they did not include, for example, an analysis of actual versus planned benefits. Without such an analysis, IRS lacks important information about whether its BSM projects are meeting expectations. Recommendation for Executive Action: We recommend that the Commissioner of Internal Revenue direct the CIO to ensure that, after BSM projects are deployed, post-implementation reviews are performed that include an analysis of quantitative and qualitative investment data to determine, at a minimum, whether expected benefits were achieved. Agency Comments: In providing written comments on a draft of this report, the Commissioner of Internal Revenue agreed with our recommendation and commented on the actions IRS is taking to implement it. The Commissioner also provided additional information on various improvement efforts that IRS has undertaken. The Commissioner's written comments are reprinted in appendix III. We are sending copies of this report to the Chairmen and Ranking Minority Members of other Senate and House committees and subcommittees that have appropriations, 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 Linda Lambert, Assistant Director, at (202) 512-9556. We can also be reached by E-mail at [Hyperlink, pownerd@gao.gov] and [Hyperlink, lambertl@gao.gov], respectively. Key contributors to this report are listed in appendix IV. Signed by: David A. Powner: Director, Information Technology Management Issues: [End of section] Appendixes: Appendix I: Briefing Slides from the March 8, 2004, Briefing to the Senate and House Appropriations Subcommittee Staffs: [See PDF for images] [End of slide presentation] [End of section] Appendix II: Briefing Slides from the August 31, 2004, Briefing to the Senate and House Appropriations Subcommittee Staffs: [See PDF for images] [End of slide presentation] [End of section] Appendix III: Comments from the Internal Revenue Service: DEPARTMENT OF THE TREASURY: INTERNAL REVENUE SERVICE: WASHINGTON, D.C. 20224: COMMISSIONER: October 28, 2004: Mr. David A. Powner: Director, Information Technology Management Issues: United States Government Accountability Office: Washington, D.C. 20548: Dear Mr. Powner: We have reviewed the Government Accountability Office (GAO) draft report entitled "Business Systems Modernization: IRS's Fiscal Year 2004 Expenditure Plan" (GAO-05-46, November 2004). We are pleased that the GAO: * Validated that we satisfied the six x-legislative conditions as specified in Congressional appropriations; * Acknowledged that we have shown marked improvement in implementing modernization management controls and capabilities; * Noted that we are implementing GAO's past recommendations; and: * Recognized that we are providing real benefits to American taxpayers and IRS employees as a result of delivering several modernized systems (e.g., Modernized e-File Release 1, e-Services, and the Customer Account Data Engine Release 1.1). We would also like to comment on additional improvements we have made in two areas. The first area pertains to program performance as it relates to cost estimating and scheduling. The report states that "projects continue to incur significant cost increases and schedule delays." In the Fall/ Winter of 2003 (during the annual program planning process), we re- baselined the cost estimates and delivery schedules for each of the BSM program projects. Since then, our cost and scheduling performance have dramatically improved. With the exception of one (IFS), all projects were delivered on time (either early or within a few weeks of schedule) and within budget. This is a major accomplishment. It demonstrates that the steps we took in 2004 to improve program performance are having a positive impact. Thus, due to the successful implementation . of numerous program management improvements, 2004 did not follow the pattern of cost overruns that had occurred from 1999 through 2003. The second area pertains to the action items we developed to improve the BSM program. The report discusses the list of 48 action items that we developed and the fact that many are still open. In that connection, we would note that many of these action items are ongoing and continuous. We would also emphasize the other program improvement goals that were met. For example, external studies conducted in 2003 confirmed: * The BSM portfolio of projects far exceeded the IRS and PRIME's management and technical capacity; * The IRS Business United were not involved enough in project management; and: * Contractor performance was not at an acceptable level. We have made significant progress in addressing each of these major challenges. First, the 2005 IRS budget to Congress reflects a portfolio reduction of 37% from the 2003 level, which more closely aligns the BSM workload with the IRS's and PRIME contractor's management capacity. Second, a Business Unit leader is assigned to each project with responsibility for leading the related BSM Governance Committee, and sharing accountability for delivering the modernization project as stated in their annual performance commitments. Third, we are making progress in improving the accountability of the PRIME contractor. I meet monthly with the Chief Operating Officer of the Computer Sciences Corporation to reinforce the accountability of the contractor to the IRS. Additionally, we have made significant progress in restructuring BSM project contracts with the PRME that shift an appropriate amount of financial risk to the contractor and tie costs to performance. These steps have resulted in improved contractor performance as demonstrated in the deliverables in 2004 and the general adherence to costs and schedules. In addition, we have concluded that we did not have enough seasoned technology executives with a proven track record of managing and delivering large, complex IT projects. In response, we made great progress in hiring experienced executive and seasoned managers who have expertise in running large IT programs and projects. A little over a year ago the mix of leadership at the top of the BSM program consisted of one outside expert and six internal IRS executives. Today, that mix will soon be five outside experienced experts and three internal IRS executives. This mix is a much better balance of the technology talents and tax administration experience needed to successfully run BSM. We recognize that there is still a lot of work ahead of us to continue to mature the BSM Program, and we appreciate your assistance in this effort. To that end, we will continue to provide GAO with monthly dashboard reports on our progress in maturing our management controls (as we have done over the past 30 months). We believe that in the future, however, some of our management controls will have matured enough to eliminate the need for monthly tracking of progress, and we will further discuss these issues with GAO. I would like to briefly comment on the specific recommendation in the report: RECOMMENDATION: After BSM projects are deployed, post-implementation reviews are performed that include an analysis of quantitative and qualitative investment data to determine, at a minimum, whether expected benefits were achieved. We agree with this recommendation. As the report indicates, we concluded some time ago that the Post-Implementation Review (PIR) process we were following (as called for in the Enterprise Life-Cycle methodology) was inadequate. We have developed new procedures that not only extend the PIR process as recommended by the GAO, but that will take a look at lessons learned at the end of each project milestone and retain the results of these comprehensive reviews in a repository that is available to everyone on the BSM Program. We expect to conduct the first PIR's under the new process by the end of the calendar year and within 45 days of passing each subsequent project milestone. This repository will also contain all previous reviews. We appreciate your continued support and the valuable assistance and guidance from your staff. If you have any questions, please contact W. Todd Grams, Chief Information Officer, at (202) 622-6800. Sincerely, Signed by: Mark W. Everson: [End of section] Appendix IV: GAO Contacts and Staff Acknowledgments: GAO Contacts: David A. Powner, (202) 512-9286: Linda J. Lambert, (202) 512-9556: Staff Acknowledgments: In addition to the individuals named above, other key contributors were Bernard R. Anderson and Timothy D. Hopkins. (310477): 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) is approved by IRS, the Department of the Treasury, and OMB; (5) is reviewed by GAO; and (6) complies with federal acquisition rules, requirements, guidelines, and systems acquisition management practices. See P.L. 108-199, Div. F, Title II, Jan. 23, 2004, for fiscal year 2004 funding. [2] An enterprise architecture (EA) is an institutional blueprint that defines how an organization operates today, in both business and technology terms, and intends to operate in the future. An EA also includes an enterprise transition strategy that describes how an organization will migrate from its current operating environment to its future operating environment. [3] Configuration management is the means for ensuring the integrity and consistency of system modernization program and project products throughout their life cycles. Through effective configuration management, for example, integration among related projects and alignment between projects and the enterprise architecture can be achieved. [4] The Customer Account Data Engine is to build the modernized database foundation to replace the current master files processing systems, which are the agency's repository for taxpayer information. There are master files for individuals, businesses, and employer retirement plans. 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