IRS 5.0

Six years into the Internal Revenue Service's latest modernization effort, IRS officials are nearing a fully digitized agency. In some cases, the future is almost here. For the first time, more individual tax returns were sent to the IRS this year via the Internet than by any other means. The agency, which is under a legislative mandate to electronically receive 80 percent of all tax returns by 2007, received about 55 percent online during the 2005 tax season.

Despite the improvement, many observers doubt the service can achieve the 80 percent mandate, even though public interactions with the IRS will increasingly be electronic, said John Dalrymple, the agency's deputy commissioner of operations support.

Dalrymple said he envisions a day when people can use the Web to look up account information, change addresses and complete simple financial transactions, among other things. "That's not [IRS] state-of-the-art technology," he said. "There's no reason that's not available." In the future, "people won't go to offices any longer. There'll be a virtual office online."

And the IRS has on the horizon improvements to existing projects. Modernized e-File, for example, which has been used for corporate and nonprofit returns, will be expanded to include the more common 1040 tax form, Dalrymple said.

Despite recent developments, decades of problems have stymied the IRS' modernization efforts. Congress and the mainstream media have identified the program as the epitome of a failed government information technology project. The botched IRS modernization helped spur procurement reforms in the 1990s, which culminated in the Clinger-Cohen Act of 1996.

"Seven years into the IRS' $7 billion Tax Systems Modernization project, the agency still must define what it wants to do," then-Sen. William Cohen (R-Maine) wrote in the 1994 report "Computer Chaos: Billions Wasted Buying Federal Computer Systems." The IRS, the report notes, was already on its "third unsuccessful attempt since 1968 to modernize its computers."

So, many people around Washington, D.C. — including congressional appropriators — are wary of declaring any IRS modernization efforts a victory.

Although they have not achieved their final goal of replacing the agency's antiquated systems, IRS officials believe they know how to reach it. As they continue to replace old technology, they have turned to the private sector for management techniques — and employees — that enable them to make headway on seemingly immovable problems.

Follow the paper

Each tax season, paper returns embark on a journey of envelope-tearing, sorting and stamping before IRS workers manually key in the data. Electronic returns go through a less intensive procedure. But all taxpayer data — electronic or paper — ultimately lands in Martinsburg, W.Va., for processing at the Martinsburg Computing Center.

At the Martinsburg facility, a four-decade-old magnetic tape system built by IBM in the early 1960s and programmed with Assembler Language Code processes tax forms in batches on weekends. It's the IRS Master File, the computer system that takes tax returns from individuals and businesses and spits out reports and refunds. Dependent on a cadre of workers nearing retirement age and on systems brittle with patches and adjustments, the Master File is long past its use-by date. "As time passes, a catastrophic disruption in our nation's tax system becomes more likely," a recent IRS Oversight Board report warns.

A watershed moment came last summer for the IRS. The agency's most recent attempt in two decades to replace the Master File with something new had run years behind schedule and tens of millions of dollars over budget. But IRS officials flipped a switch last July and something new happened. The replacement system, the Customer Account Data Engine (CADE), worked. It handled only a small bunch of the simplest returns, the 1040EZ forms of people who didn't owe taxes. But the relief was palpable.

"We've waited a long time for this moment," IRS Commissioner Mark Everson said last summer. CADE has processed about 1.2 million returns since then. Agency officials say upgrades to the system are due every six months, each new version allowing the system to manage more complex tax returns until it can replace the Master File by 2012 for individual tax returns.

By the end of 2004, IRS officials began touting what they said was the most successful year for its Business Systems Modernization (BSM) program.

Introducing enterprise services

It's easy for people whose job it is to shepherd individual projects to lose sight of the bigger picture. "You can have the best processes since sliced bread, but if you as an organization do not have the discipline to follow all of those things, then you have issues," said Linda Gilpin, associate chief information officer in charge of a new IRS office called enterprise services.

Failure to follow procedures is a big reason why the IRS' modernization projects got bogged down in cost overruns and schedule delays. "When push came to shove, those kind of functions lost out," said W. Todd Grams, the IRS' CIO.

For example, functions that managed system configuration, enterprise architecture and capacity forecasting were scattered across modernization production units or the IRS' existing IT services.

"In the production units, Job One is production," Grams said, which meant enforcing compliance with methodologies lost out.

Gilpin's office has a mandate to reinforce correct procedures at every step of project development to make sure projects aren't rush through checkpoints, Grams said. The office's scope is larger than that of the Business Systems Modernization Office, he said, adding, "This is all of our IT programs and projects."

Gilpin's job is to stabilize the balance of power between the need to get a project finished on time and the need to ensure it's done correctly, he said.

He set about creating the office shortly after his appointment as agency CIO. "You could call it a lesson learned," he added. "I'd call it common sense."

Testing rapid development

One important step is the IRS' adoption of rapid application development, said David Powner, who monitors the agency as Government Accountability Office director of IT management issues. When building applications tailored to users, it's hard to imagine what they might need, like or dislike in an application. Once the project is complete and ready to go, it's too late to change much.

But under the rapid development model, "the idea is that you haven't gotten that far," said Richard Spires, the IRS' associate CIO for business systems modernization. Developers don't build a completely new release with more functionality that's difficult to modify and takes years to finish. Rather, "you build a prototype of a system, of an interface for a user, you get their feedback, you come back, you get more feedback, you go back and do it again," he said. That process requires about three iterations before a completed product evolves, he added. Rapid application development will primarily be used for new Web-based projects, according to IRS officials.

A comparable process of iterative releases will be evident in the IRS' next big modernization project, Filing and Payment Compliance, Spires added.

The IRS will also make changes to the process for approving projects and creating budgets. Projects typically go through five milestone reviews before they're declared ready for full-time action. In the past, when agency officials estimated project costs, "either there were wild guesses what the cost would be or the business didn't think about things and the contractor didn't think about them," said Eugene Barbato, director of IT project services in the IRS' IT Services (ITS) division.

As a result, the agency is adopting a "Milestone Zero" for projects that "haven't really been approved yet. It's a twinkle in somebody's eye," he said. "We want the twinkle to be informed."

Milestone Zero would force officials to consider new projects' total costs, not only project coding costs but also adjustments and operating requirements that add to the price tag. It's about "ensuring that before we start projects, that we are comfortable as an IRS institution that we will be devote adequate resources to successfully running the project and delivering the project," Grams said.

Cost estimates for individual projects also now include a margin for delays. "On a project this large and this complex, invariably things won't be perfect," Grams said.

IRS planners haven't always been the best at dealing with risk, he said. IRS officials must now include reserve funds for the inevitable moment when projects become more complicated than predicted.

"We think there are some efficiencies we can get in the IT environment that will help us cover these costs," Grams said. That includes a major effort to restructure the Modernization and IT Services (MITS) organization.

ITS steps into the limelight

Modernization is not only about the BSM program office, Grams said. MITS, which he leads, includes two operational entities: BSM and ITS. The latter handles the operations, maintenance and upgrades of existing systems.

Once an IRS modernization project is complete, ITS assumes full responsibility. But the IRS can't complete modernization projects "if the people in ITS are not involved from the very first day," Grams said.

Projects shifting to ITS this fall include the Integrated Financial System, an internal accounting system, and the Modernized e-File program.

"This is a big year," Barbato said.

IT officials working on current systems and those developing new systems say they're working more closely with one another than they once did. The modernization development team always included legacy systems experts, but "we are putting a much higher premium on code reuse than we did before," Grams said.

Under the moniker of co-development, ITS managers are looking for existing functions that they could easily transfer to CADE. For example, if a tax return is too complicated for CADE, it returns to the Master File system for processing. Rather than ask modernization programmers to recode the process, they could capture ITS' existing translation code and place it in CADE, Barbato said. ITS workers proved on paper that co-development could be done.

"Now what we've got to do is work with BSM and with the contractor to say, 'Where are our opportunities to do this kind of things?'" he added.

Fulfilling the promise of co-development will require ITS employees to work with contractor teams to create application code, IRS officials say.

Co-development likely will become institutionalized for future releases of CADE starting in fiscal 2006, Barbato said.

Looking to the future

A deeper look at modernization's potential and goals awaits IRS officials. "When you get beyond 2007, it's a little unclear what the game plan is," Powner said.

Despite the IRS' successes, the agency must overcome decades of disappointment among lawmakers, many of whom have repeatedly heard IRS officials say modernization is fixed.

Despite an already considerably scaled-down budget request for fiscal 2005, congressional appropriators lopped off $82 million from the modernization account, appropriating $203 million. As a result, agency officials had to scale back modernization projects.

One project, the Custodial Accounting Project, a data repository of taxpayer accounts, was canceled. Managers decided to tap into the central reserve account fund. For fiscal 2006, the IRS requested $199 million — the absolute minimum necessary to keep modernization going on its scaled-down track, IRS officials say. But soon they'll need more funds to finish the task of modernizing IRS systems.

"We'll probably be asking for more money in the BSM budget as we go forward," Dalrymple said.

IRS officials say they're working to reassess the modernization vision and strategy. But replacing Master File with CADE will always be the centerpiece, Grams said.

He said the agency plans to have another modernization blueprint in place by the end of the year, Grams said.

The modernization effort has union support, said Colleen Kelley, president of the National Treasury Employees Union. "We want the IRS to be successful."

But Congress is not convinced, based on the preliminary signs. The House voted June 30 to approve the $199 million modernization request, but shaved $30 million from the ITS' request.

"The budget is what the budget is," Grams said. "You make it work."