IRS to kill $1.3B DPS program

The Internal Revenue Service has decided to cancel its $1.3 billion Document Processing System and is considering outsourcing the handling of paper tax returns in the future.

But the agency has not yet terminated its contract with Lockheed Martin Federal Systems pending a decision about whether it can salvage any of its $298.5 million investment in the ambitious imaging proj-ect.According to sources familiar with DPS Lockheed Martin successfully tested a prototype and the agency still might decide to use the technology for some of its paper-processing.

"We're trying to do everything we can to help them at this point " said Mark Meudt Lockheed Martin communications director. "We feel we've done very valuable work."

The decision to cancel DPS was not sudden. IRS and Treasury Department officials faced with deep cuts in their budget for Tax Systems Modernization concluded several months ago that the system would cost too much. Although Lockheed Martin reportedly had cut the cost of DPS nearly in half "we feel at this moment it is not cost-effective to continue " said Wushow "Bill" Chou Treasury deputy assistant secretary for information systems.

An analysis of more than two dozen TSM programs that Treasury published earlier this year ranked DPS near the bottom in terms of the return IRS expected to get from its investment.

Nevertheless shutting down the project leaves IRS without an immediate long-term plan for processing nearly 200 million paper tax forms information returns and correspondence it expects to collect annually by 2001. The agency is studying alternatives including performing some paper processing in house hiring multiple private firms to capture hard-copy data and expanding its electronic filing programs Chou said.

In the meantime Congress has given the IRS $9 million to replace its aging Distributed Input System/Remittance Processing System one of the data capture systems DPS was supposed to supplant so that the agency can continue operations. IRS also will continue to use the Service Center Recognition/Image Processing System supplied by Northrop Grumman Data Systems for scanning some simple forms.

Hank Philcox the former IRS chief information officer who was involved in drafting the original plans for DPS said it would be "a travesty" to cancel the project completely because "the technology will work and there's a huge cost sunk in this that they'd be throwing away." He said there are "significant benefits that can come out of eliminating human intervention " though IRS would not necessarily have to run data capture systems itself. Philcox is now CIO of Dyncorp an IRS contractor but under federal ethics laws he is prohibited from doing any work for his former employer.

Outsourcing returns processing is an option IRS is reviewing in part because Congress has demanded the agency turn over most of its systems design development and management to contractors. In addition Arthur Gross the current IRS CIO is said to favor this approach because it is the one he chose when he was deputy commissioner in charge of information systems for the New York state Department of Taxation and Finance.

A spokeswoman for the Federation of Tax Administrators a professional association whose members are mainly state tax officials said that while most states contract out some returns processing tasks New York is the only state to have done so on such a comprehensive scale.

IRS officials declined to comment for this story.