IRS Contracts Ready for Prime Time

If your agency is contemplating hiring a contractor to build a major information system, it's in the minority. The federal government's big, multi-year system integration startups are dwindling. Many of the most ambitious programs-the Defense Department's Defense Message System, the Commerce Department's Advanced Weather Information Processing System, and so on-are still under way, but new ones of their magnitude are not coming along.

Except, that is, for the biggest one of all. The new plan for tax systems modernization at the IRS "is the single largest systems integration undertaking in the world, eclipsing in breadth and depth any previous efforts of either the private of public sector," in the words of the request for comments (RFC) the IRS issued in May. If the program is on track, the agency will issue its request for proposals in December. In October 1998 a new prime contractor will be chosen, probably from among the dozen companies that responded to the RFC.

The Modernization Prime Systems Integration Services Contract, as it's now known, will be in some senses a throwback to an earlier era of system development, when the prime contractor was a concept more familiar to Defense Department managers than to their civilian counterparts. As IRS has laid out its modernization plan, the prime contractor will manage the program but not necessarily do a great deal of the nitty-gritty development work. The prime will hire subcontractors and be responsible for their performance. The prime will focus on developing a systems architecture, planning and managing the program, and integrating the pieces.

Those pieces will include the legacy IRS systems that must keep running while a new system is built. The legacy systems are every bit as disjointed as the accompanying IRS diagram suggests. A customer service representative trying to answer a taxpayer's query can access online only 1 percent of the agency's taxpayer accounts, although they are the 1 percent most likely to be needed. Besides the online retrieval system, a representative may have to search through six other data systems to find all the records pertaining to one taxpayer. Worse yet, the employee may have to use several different computer terminals to get the records.

IRS systems won't stand still during the process of retaining a contractor. The agency is using contractors already on board for a crash program of making its systems ready for the year 2000, consolidating and standardizing its 60 mainframes, and continuing to update its networks and other infrastructure. As a result, IRS won't promise would-be prime contractors that they will have solid information about the status of existing systems when it is time for them to submit their proposals.

What's more, the agency isn't drawing up detailed plans for the work it wants done. "A traditional government procurement for systems development and integration," the RFC says, "is predicated on the preparation of government cost estimates which, in turn, are based on detailed systems design documentation including projected tasking, costs schedules and deliverables." Without that groundwork, the agency says, the challenge is "to forge a business plan and public/private sector partnership in accordance with federal government procurement laws and regulations, absent the traditional level of detailed requirements typically established as the basis for the competitive process."

Share the Risks

Instead, the RFC says, the agency wants to share risks with its contractor and have the contractor "either share or assume the 'front-end' capital investment." It suggests that the contractor could be paid out of the increased revenues to be captured by the new systems or paid according to agreed-upon performance measures for the new system, plus costs. Either approach would require the contractor to wait for payment until results were achieved.

So in many ways the Modernization Prime contract won't be a conventional federal systems integration effort. It is a last, best hope for accomplishing what previous IRS integration programs have failed to do. For the earlier programs, IRS was its own integrator and systems development manager. Those programs produced "less than acceptable results," as the agency's chief information officer, Arthur A. Gross, puts it in the RFC. Indeed, for the last couple years the General Accounting Office has issued reports criticizing IRS systems at least monthly.

But more reliance on contractors is not the sole answer, Gross says. Already they're doing much of the modernization work. "Another modernization myth is the belief that the private sector would, independent of significant government participation, successfully modernize the IRS," he writes. "Just the opposite is true."

Gross is calling for a partnership "in which the IRS contributes its knowledge of tax administration and the operational systems and infrastructures, while the private sector provides project management, re-engineering, systems engineering, design and development and integration expertise."

What might the new system look like? Gross and his staff made an up-front decision not to use a client-server architecture that would distribute information across many repositories nationwide. Instead, he is calling for a single authoritative set of databases on an up-to-date mainframe system. Such an architecture would put all taxpayer information and related data, such as the 53 million annual reports of individuals' earnings on Form W-2, in one enormous data warehouse. "We need to be able to scan the entire horizon of our data," Gross says. Sophisticated retrieval tools, some based on Web browser concepts, would let employees dig for information.

This design would give IRS tight control over access and changes to its data. The agency has been criticized for allowing some employees to obtain taxpayer information not related to their work assignments, and it is clear that a major IRS security failure resulting in public release of private taxpayer information would do irreparable harm to the agency. "The architecture we've chosen facilitates creation of improved prevention and detection systems," Gross says.

The volume of information going to and from the database will require batch updates, similar in concept to the current setup but with contemporary storage and data transfer technology rather than the tapes currently used. Simultaneously, authorized users will be able to access and update records through an online transaction processing system like those used by large banks and credit card companies. Today it can take 10 days or longer to update a taxpayer's records; the new system will do it almost at once. Software also will manage enforcement cases, support compliance research, handle financial reporting, audit data and transactions for security and consistency, manage workloads, and more.

As it's envisioned, the central system will pull together functions handled by several dozen systems today. But it will not deal with how the information gets into the system. Gross and his staff have chosen to treat data input as a separate issue.

The agency receives 205 million tax returns each year, more than half from individuals. Only about 16 percent of the individuals' returns are filed electronically, although IRS officials believe another 40,000 or so were prepared with computers, then printed out and mailed in. IRS once again is trying to increase the rate of electronic tax return filing, in which the taxpayers and their tax preparers (H&R Block and its many competitors) do the input work for IRS.

When returns are filed on paper, taxpayer errors and IRS data entry errors afflict about one in every five returns. "Because electronically filed returns usually are prepared by computer programs with built-in checks, undergo pre-screening by the IRS, and experience no keypunch errors, these returns have an error rate of less than 1 percent," Congress' National Commission on Restructuring the IRS reported in June. So there are multiple reasons for IRS to prefer electronic returns, but until last year, the agency made it more difficult for many individuals to file electronically than on paper. The electronic filing program depended on authorized tax preparers, relying on them to screen out some of the false and inaccurate returns. Then it was slowed by a mini-scandal associated with refund-anticipation loans some preparers were offering.

Now IRS is planning a separate program to obtain private-sector assistance with electronic filing. Meanwhile, the agency is proceeding slowly to plan a pilot program for outsourcing its data entry. Congress, which has been turning up the heat under IRS, directed it to study the feasibility of contracting for the initial processing of returns. Although IRS is doing so, Gross has said no pilot can begin before 2001 and no large-scale program can begin before 2002. He says the Modernization Prime contractor might get a pilot going sooner. Savings from use of modern imaging technology could be plugged into a performance-based prime contract where fees depend on measurable improvements in efficiency and other parameters.

A History of Failure

Such a contract raises questions about IRS' ability to oversee its contractors. After all, there is a long history of failed agency attempts to modernize its systems and improve customer service. For example, the agency spent $284 million on contract development of a Document Processing System that was supposed to use imaging to input the tax returns. That program was abandoned last year.

The National Commission on Restructuring the IRS, along with GAO and others, have questioned whether history might not repeat itself with the newest modernization drive. "If IRS is to use additional contractors effectively, it will have to first strengthen and improve its ability to manage those contractors," GAO reported in February. Gross agrees. He interviewed dozens of applicants this summer for 10 managerial jobs. The new managers will work with the existing ones and with the contractors to reshape IRS systems.

Commission members and other IRS critics are cautiously optimistic that Gross, a former New York State tax systems executive who joined IRS last year, is the right man for the job. The White House, meanwhile, signaled its commitment to modernization by nominating a Washington area technology firm's founder and chairman as IRS' first commissioner with a systems background. The nomination of Charles O. Rossotti, chairman of American Management Systems Inc. who got his start as a Pentagon management "whiz-kid," seemed likely to win early Senate approval.

But the administration and Congress have been engaged in something of a contest to see who can claim credit for unraveling the snarled tax systems. In May the White House created a permanent IRS management board to assist with decisions in technology and related areas. The board is headed by Deputy Treasury Secretary Lawrence H. Summers and is supposed to include representatives of the National Performance Review, Office of Management and Budget, Treasury and other agencies.

Such high-level attention is good news for IRS, in the view of some observers. The agency, which for obvious reasons is not one of America's favorites, has been regarded much like the servant in the kitchen or the garage, instead of being recognized as the organization that "interacts with more citizens than any other government agency or private-sector business in America and collects 95 percent of the revenue needed to fund the federal government," as the congressional commission described it.

On the other hand, the agency could suffer from excessive oversight. Some potential Modernization Prime contractors are asking themselves whether the high visibility of the program and the political ramifications don't add up to trouble. One noted pointedly that IRS is one of the most heavily unionized federal agencies. The National Treasury Employees Union has resisted efforts to cut IRS jobs in the name of automation and outsourcing.

Still, there aren't many new billion-dollar contracts around these days. There's no official cost estimate for the Modernization Prime contract, but GAO told Congress in June that IRS and Treasury expected to spend $2 billion on systems modernization over the next five years. For the administration's budget, OMB revised that to $500 million in each of the next two fiscal years.

The technical challenge will attract some players. "It's the first big system to press the technical edge in a long time," says Gary Hobbs, president of External Information Systems and Technical Services in Northrop Grumman's Data Services and Systems Division. Given the size of the databases, the volume of transactions and the need for a seamless migration from the disjointed old systems, he says, "it's going to be a monumental undertaking."

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