False Starts: IRS Modernization

(Written for an Admin. in Political Systems [GOVT351] class at George Mason University.)

The Internal Revenue Service, or IRS, is arguably the most despised agency in the United States government. Their purpose is essentially to take money from the citizens of this country . . . lots of it. In fact, the IRS collected over 2 trillion dollars in the year 2000 and processed 226 million tax returns—a daunting task, to say the least.1

Originally called the “Bureau of Internal Revenue” and only levying a 1 percent tax on incomes over $3,000 (and a 6 percent ‘surtax’ on incomes over $500,000), it’s not a leap of logic to say that the agency has grown exponentially since its inception in 1913.2 The difficulties of managing such an agency through such drastic changes, combined with the fact that almost nobody likes what the IRS does, created a monster that almost nobody thinks highly of—from the Congress all the way down to the rest of us.

It was with this concept in mind that the United States Congress enacted the IRS Restructuring and Reform Act of 1998, aiming to turn the behemoth agency that employed roughly 100,000 people at the time into a taxpayer-oriented and friendly organization.3 Revenue Secretary John LaFaver had one said that the IRS, “Can’t make anything work,” and he was promptly selected to head up the reorganization effort. “We need to do more to make the taxpaying process easier, simpler, and more straightforward.”4

Today, the IRS is working on it. They are deep into a restructuring plan that is expected to continue for at least 10 years from its beginnings in 1998. Rather than a geographically based region system, the agency will instead be structured around four operating divisions delineated by the types of taxpayers they serve. ‘Wage and Investment’ will deal with individual and joint tax returns, ‘Small Business and Self Employed’ is self explanatory, ‘Large and Mid-Size Business’ is equally self-explanatory, and finally ‘Tax Exempt and Government Entities’ which deals with non-profits and other tax-exempt organizations.5

But while this massive organizational shift is in direct response to congressional action, the IRS has been in the midst of a technology modernization called the “Tax Systems Modernization” or TSM since 1986 that can only be described as broken-record of repeated failure, setbacks, and cost overruns.

Founded amid good intentions, the IRS had wished to replace labor-intensive non-electronic tax systems which had existed since the 1950’s. Paper records would be replaced with a comprehensive computer database and all IRS records and activities would be linked through a unified interface available from desktop computers to any employee who needed them. Various goals included electronic tax filing, more responsive customer service, and significantly increased reliability and efficiency.6

Just under one decade into the TSM program, however, the rosy picture had turned incredibly grim. With little to show for ten years of development and expenditures, the IRS found themselves in a sticky situation. There were no clear priorities and no clear plan for the TSM money IRS had requested, and after so many years of blindly funding the program Congress began to ask questions. IRS missed a December 1995 deadline and later a March 1996 deadline to provide the House Appropriations Subcommittee on the Treasury, Postal Service, and General Government with a comprehensive blueprint for the TSM program.7

There had been some successes in the program, however. Previous to the TSM program, the scattered and archaic IRS communications system created a situation where service representatives could not access information from other parts of the country. This resulted in delays that could stretch response times on comparatively simple requests into the realm of weeks. With the upgraded system, most requests could be handled in only one phone call. The same phone system enabled taxpayers to file their 1040-EZ personal tax form over the phone (this is called Telefile).8

But despite these successes, there were still serious problems within the IRS. In fact, as late as 1998 the agency used seven entirely separate and independent email systems.9 Also, the IRS had planned to jump on the internet bandwagon early, hoping to establish a revolutionary internet filing system called Cyberfile launching in January of 1996. This would have been a free service, eliminating the need for taxpayers to file electronically through a third party.

Needless to say, the Cyberfile system never got off the ground—taxpayers must still file through a third party to file electronically today. This 30 million dollar project was shut down after the General Accounting Office (GAO) discovered over 50 system security breeches ranging from completely insecure password practices to missing locks and hinges in the physical data center.10 IRS had been reluctant to contract these projects to outside companies, but lacked the technological expertise necessary to design and operate these kinds of systems internally.

With these notable failures and an increasingly impatient congress, the IRS announced in March of 1996 that they had hired Arthur Gross as a new Chief Information Officer (CIO) to oversee the TSM program and help to get it back in line.11 In June of 1996 then-Treasury Secretary Robert Rubin addressed the House subcommittee in response to GAO and National Research Council (NRC) reports about the IRS failures saying that many actions had been taken to hold the IRS accountable and require solid plans for all IRS technology initiatives.12

While it appeared that the IRS would now have to answer for its actions (or inaction), the problems certainly did not end in 1996. According to Edward Cone who wrote an in-depth article for InformationWeek dealing with the modernization project, “No planning document has materialized.” After ten years of developing without direction, the IRS not only had to plot its future course but justify its ongoing projects. CIO Arthur Gross took on this daunting task and promptly canceled 17 incomplete projects which were going nowhere, and costing about 400 million dollars.13

For two years Gross attempted to overcome internal and external resistance to drastically change IRS technology policy with moderate levels of success, but left the agency in early 1998 before the IRS had awarded new contracts for the second wave of technology modernization.14

After an investment of $3.3 billion over the span of the TSM program, IRS had little to show for the huge expenditure. Coinciding closely with the IRS Restructuring and Reform Act of 1998, IRS was prepared to make a second attempt. One of the failed projects from the original program had been the Document Processing System, an electronic method of scanning and storing filed tax forms. The original system had run up a price tag of $1.3 billion and, like so many of the other programs, never turned out as planned. It was among those canceled in 1996.15

This time around, the IRS had developed a comprehensive blueprint and expected contractors to share in the financial risk. The goal was to develop a tax administration system that was streamlined and efficient, at an estimated cost of 709 million dollars. IRS referred to it as, “The largest systems integration undertaking in the world.”16

Nearly simultaneously, Commissioner Charles O. Rossotti named an executive committee to oversee a broad modernization and reorganization of the IRS including the replacement CIO—Paul A. Cosgrave. From a technological standpoint, Rossotti envisioned a tax system with technology well integrated to the point that in seconds a service representative could have a complete taxpayer file in from of them complete with the scanned returns, bringing an unprecedented level of responsiveness for the IRS to the taxpayers.17 The overarching plan would be called “Business Systems Modernization”, or BSM.

Once again, with the managerial reorganization underway and the IRS seemingly on-the-ball with its technology modernization it seemed as 1998 rolled to a close that the situation, after 12 years, was finally locking into a trend of improvement. Less than five years later, however, it would seem that the IRS is settling into some of its old patterns.

In early 2002, the IRS Oversight Board joined the GAO and the Treasury Inspector General for Tax Administration in criticizing the still-ongoing technology modernization program. Having awarded the bulk of its contracts to Computer Sciences Corp. (CSC), the IRS was assailed for a lack of management control and technological knowledge and for drastic errors in its estimation of project costs.18

The IRS was still plagued with cost overruns, project delays, and other shortfalls—including a ‘Customer Account Data Engine’ to track taxpayer information which was six months late and 5 million dollars more expensive than had been planned and an e-Services project that was delayed 9 months and went $4.2 million over budget.19

The GAO recommended that the IRS slow some of their ongoing projects and delay new ones until they were able to improve their project management processes. Also, they recommended a strengthening of IRS management over the modernization project and that the agency work closer with their contractors. Larry R. Levitan, chairman of the IRS Oversight Board, said, “IRS knows it’s in trouble, knows the problems and has plans to fix it and is in the process of executing it. We would [however] like to see it move faster and see more results.” Levitan went on, “The IRS is very dependent on the contractor. We need a better track record of performance and CSC has to strengthen its team and show better results.”20

This year, IRS employees have seen the first tangible changes to the technology systems they use every day—the PC workstations, there since roughly 1996 and painfully slow, are now being replaced with brand new workstations. This aspect of the modernization, however, has been about as successful as the other projects. It’s millions of dollars over budget, and the installations are happening nearly a year after they had been planned.21

The IRS has had limited success converting internal documents—such as the multi-volume bookshelf-size Internal Revenue Manual and more managable Private Letter Rulings from the IRS Chief Counsel office—into SGML and Extensible Markup Language (XML) format. This forces documents to conform to their legal specifications (which, when written in Microsoft Word as they had been, was hit-and-miss) and makes it possible to easily and quickly display them in multiple mediums such as print and internet. These projects are ongoing.22

Also, the IRS has been able to make virtually all tax forms available online for download in PDF format. Most interestingly, working with contractors (Plexus Scientific Corp. and Adobe Systems) twenty of the most popular tax forms will be available in a format so they can be navigated, filled out, printed and mailed by the visually impaired using screen-reader technology.23 But while the IRS has made great strides with their BSM program, and it has been almost definitely more successful than the original TSM program, they still aren’t considered by many to be a friendly agency.

“The folks at the IRS are regular people just like you, except that they can destroy your life,” said columnist Dave Barry after finding out he’d be audited in the 2001 tax season.24 This attitude is prevalent, and in many ways it’s understandable. While some of the animosity toward the agency stems from the fact that their job is to take your money, part of it stems from the longtime unresponsive attitude from that agency when people called for help or clarification. While nothing can be done about them taking the citizens’ money, the IRS has made great strides toward generating a helpful attitude and the systems required to support it.

In March of 1998, the IRS operated over 60 ‘mainframe’ computer systems in ten service centers across the country which housed the main taxpayer databases and technical support system in a decentralized manner. With an influx of more modern server-based systems and other methods of centralization, the IRS now runs a controlled and networked system with less than 15 mainframes in only two locations alongside more flexible, modern systems.25

But although the IRS remains behind the technological curve—understandably after 16 years of mismanagement, false starts, and failed projects—it would appear that they have made headway. As their management and organizational structure adjusts to meet the 1998 congressional stipulations they become more and more capable of managing their technology. Archaic mainframes still live in IRS server rooms, but so do state-of-the-art Windows and Linux based server systems. Considering that in 1996 the agency ran possibly hundreds of incompatible computer systems created during the original TSM program, the fact that there are new PC’s on most of the employees’ desks plugged into a useful central intranet is nothing short of miraculous.

The IRS still has a long way to go before its technology is completely consistent, and even longer before it’s well liked by the American population, but in the years since 1998 they have successfully gotten a hold on their out-of-control modernization program, dumped useless systems, and begun to create new ones as necessary. It’s a challenge, and a monumental one at that. While their troubles have continued, it has to be expected considering the mess the current IRS management inherited from the years of unplanned and disorganized expansion. Overall, the Internal Revenue Service has made incredible strides toward modernization which will make the taxpaying experience only painful, rather than the excruciating experience it once was.

1 IRS Introduction and Mission. <,,id=98141,00.html>

2 IRS History and Structure. <,,id=09142,00.html>

3 Gross, Arthur A. Opening Remarks. House Government Reform and Oversight Subcommittee on Government Management, Information and Technology. <>

4 Manning, Carl. LaFaver says IRS needs to get on Friendly Track. The Associated Press State & Local Newswire. Aug. 13, 1998.

5 IRS History and Structure

6 Cone, Edward. The Mess at IRS. InformationWeek. n.575 p. 38-43, Apr. 15, 1996.

7 Cone, Edward.

8 Cone, Edward.

9 Manning, Carl.

10 Cone, Edward.

11 Cone, Edward.

12 Amid Criticism, Treasury Secretary defends IRS Modernization Program. Journal of Accountancy. v.181 n.6 p.32, Jun. 1996.

13 Crenshaw, Albert B., Barr, Stephen, others. IRS Technology Expert Resigns. The Washington Post. p.A17, Feb. 4, 1998.

14 Crenshaw, Albert B., Barr, Stephen, others.

15 Crenshaw, Albert B., Barr, Stephen, others.

16 Crenshaw, Albert B., Barr, Stephen, others.

17 Johnston, David Cay. Commissioner to Name Executive Team to Remake Troubled Agency. The New York Times. p.A17, Aug. 11, 1998.

18 Vasishtha, Preeti. IRS Modernization off track. Government Computer News. v.21 i.7 p.16, Apr. 1, 2002.

19 Vasishtha, Preeti.

20 Vasishtha, Preeti.

21 Lew, Melissa. IRS XML/SGML helpdesk contractor (Plexus Scientific). (Interview).

22 Lew, Melissa.

23 Rumbelow, Helen. ‘Talking’ Tax Forms for Blind Developed. The Washington Post. p.A21, Aug. 30, 2002.

24 Barry, Dave. Complimenting the IRS while on my way to prison. South Bend Tribune. p.F2, Apr. 1, 2001. (reprinted from the Miami Herald).

25 Gross, Arthur A., with Lew, Melissa contributing.

Scott Bradford is a writer and technologist who has been putting his opinions online since 1995. He believes in three inviolable human rights: life, liberty, and property. He is a Catholic Christian who worships the trinitarian God described in the Nicene Creed. Scott is a husband, nerd, pet lover, and AMC/Jeep enthusiast with a B.S. degree in public administration from George Mason University.