GAO

United States General Accounting Office

Report to Congressional Requesters

June 1999 TAX SYSTEMS 

MODERNIZATION

Results of Review of 

IRS’ Initial 

Expenditure Plan

GAO/AIMD/GGD-99-206

Page 1 GAO/AIMD/GGD-99-206 IRS’ Initial Expenditure Plan

United States General Accounting Office

Washington, D.C. 20548

Accounting and Information

Management Division

B-282877.1 Letter

June 15, 1999

The Honorable Ben Nighthorse Campbell

Chairman

The Honorable Byron L. Dorgan

Ranking Minority Member

Subcommittee on Treasury and

 General Government

Committee on Appropriations

United States Senate

The Honorable Jim Kolbe

Chairman

The Honorable Steny H. Hoyer

Ranking Minority Member

Subcommittee on Treasury,

 Postal Service, and General Government

Committee on Appropriations

House of Representatives

This report provides the results of our review of the Internal Revenue 

Service’s (IRS) initial Information Technology Investments Account (ITIA) 

expenditure plan pursuant to the fiscal year 1998 Treasury and General 

Government Appropriations Act (Public Law 105-61) and the fiscal year 

1999 Omnibus Consolidated and Emergency Supplemental Appropriations 

Act (Public Law 105-277). In these acts, the Congress limited IRS’ ability to 

obligate ITIA funds until the service and the Department of the Treasury 

submit to the Congress for approval an expenditure plan that as stated in 

the acts, (1) implements the IRS Modernization Blueprint,1 (2) meets Office 

of Management and Budget (OMB) investment guidelines for information 

systems, (3) is reviewed and approved by IRS’ Investment Review Board,2

OMB, and Treasury’s IRS Management Board and is reviewed by GAO,

1In the conference report accompanying the fiscal year 1997 Omnibus Appropriations Act (Public Law 

104-208), the Congress directed Treasury to, among other things, develop a blueprint to define, direct, 

and control future tax systems modernization efforts. Treasury submitted the IRS Modernization 

Blueprint to the Congress on May 15, 1997. 

2According to IRS, the investment review board has been replaced by the Core Business Systems 

Executive Steering Committee, which is chaired by IRS’ Commissioner.

Letr
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(4) meets the requirements of IRS system life cycle management program,3

and (5) is in compliance with acquisition rules, requirements, guidelines, 

and system acquisition management practices of the federal government. 

These conditions are consistent with recommendations on IRS’ tax systems 

modernization that we have made over the past 5 years. 

IRS provided us a copy of the expenditure plan that it submitted to the 

Congress. As agreed with your offices, we reviewed this plan to determine 

whether (1) the plan satisfies the conditions specified in IRS’ fiscal year 

1998 and 1999 appropriations acts, (2) the plan is consistent with our past 

recommendations on IRS’ systems modernization, and (3) we have any 

other observations on the modernization efforts. The results of this review 

are based on our ongoing monitoring of IRS’ modernization efforts that is 

being performed at the request of your offices. Our work was performed 

from January 1999 through May 1999 in accordance with generally 

accepted government auditing standards. (See appendix I for details on 

our scope and methodology.) The Commissioner provided us with written 

comments, which are discussed in the “Agency Comments” section of this 

report and are reprinted in appendix II.

Results in Brief IRS’ initial expenditure plan is the first in a series of incremental 

expenditure plans that IRS plans to prepare over the life of the 

modernization. As such, the initial plan specifies IRS’ modernization 

initiatives through October 31, 1999, or about the next 5 months, and it 

seeks approval to obligate about $35 million to complete these initiatives. 

Such an incremental approach to investing in systems modernization 

efforts is a recognized “best practice” that leading public and private sector 

organizations use to mitigate the risk of program failure on large, complex, 

multiyear modernization programs. Further, both the Clinger-Cohen Act of 

19964 and OMB policy5 endorse such an incremental investment 

management approach.

3This program includes the policies, processes, and products for managing information technology 

investments from conception, development, and deployment through maintenance and support. 

4Public Law 104-106, February 10, 1996.

5Evaluating Information Technology Investments, A Practical Guide, Version 1.0 (Executive Office of 

the President, OMB, November 1995) and OMB Memorandum M-97-02, Funding Information Systems 

Investments (October 1996), informally referred to as the “Raines Rules.”

Letr
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IRS’ initial expenditure plan is an appropriate first step toward successful 

systems modernization and, with regard to the $35 million being requested 

for this increment, satisfies the conditions that the Congress placed on the 

use of ITIA funds. Moreover, the plan is consistent with our past 

recommendations. To illustrate, the initial expenditure plan provides for, 

among other things, additional blueprint precision and specificity, such as 

validation of selected business requirements, definition of selected systems 

design specifications, and development of selected system business case 

justifications. Additionally, it provides for definition of system 

infrastructure specifications and a revised plan for sequencing the 

introduction of the new technology needed to achieve the target systems 

architecture over the next 3 to 5 years. These initiatives are consistent with 

our past recommendations for completing the blueprint and collectively 

they represent the first steps needed to satisfy the legislative condition to 

implement the blueprint.

To further illustrate, the initial expenditure plan provides for definition and 

targeted implementation of an “Enterprise Life Cycle,” which is consistent 

with our past recommendations for instituting project management rigor, 

software process maturity, and investment management discipline. If 

implemented properly, this effort should satisfy the legislative condition for 

an IRS system life cycle and investment management program that meets 

OMB guidelines.

Building on its initial expenditure plan, IRS plans to define in subsequent 

expenditure plans the follow-on efforts and funding requirements needed 

(1) to continue to incrementally add needed architectural precision and 

project-specific management discipline and (2) to incrementally 

implement, in accordance with its revised sequencing plan, its Enterprise 

Life Cycle, and its target systems architecture. If IRS effectively 

implements the initiatives described in its initial expenditure plan and 

fulfills its commitment to incrementally request and expend future 

modernization funds, IRS would be acting in a manner that is consistent 

with the legislative conditions and our past modernization 

recommendations.

IRS could strengthen its approach to incrementally investing in modernized 

information technology by including in subsequent expenditure plans its 

progress against the previous expenditure plan’s goals and deliverables and 

the benefits realized to date from the funds expended. Measuring and 

tracking on these items are critical to successful implementation of 
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incremental investment management, and thus should be disclosed to the 

Congress to facilitate its deliberations on future expenditure plans.

Background In 1995, we reported on management and technical weaknesses with IRS’ 

tax systems modernization that jeopardized its successful completion and 

made over a dozen recommendations to correct the weaknesses.6 

Because of the seriousness of the weaknesses, we placed the 

modernization on our 1995 list of high-risk federal programs.7 In June 

1996, we reported that IRS had made progress in implementing our 

recommendations.8

 However, to minimize the risk of IRS investing in 

systems before the recommendations were fully implemented, we 

suggested that the Congress limit IRS’ information technology (IT) 

spending to certain cost-effective categories. These spending categories 

were those that (1) support ongoing operations and maintenance,

(2) correct pervasive management and technical weaknesses, such as a 

lack of requisite systems life cycle discipline, (3) are small, represent low 

technical risk, and can be delivered in a relatively short time frame, or

(4) involve deploying already developed systems that have been fully 

tested, are not premature given the lack of a complete systems 

architecture, and produce a proven, verifiable business value. The act 

providing IRS’ fiscal year 1997 appropriations9 limited IRS’ IT spending to 

efforts consistent with these categories. 

In 1997, we again included the modernization on our high-risk list because 

IRS had not yet implemented our recommendations.10 However, we also 

reported that IRS had made progress on the recommendations. For 

example, in May 1997, IRS issued its modernization blueprint. This 

blueprint consisted of four principal components: (1) a systems life cycle,

6Tax Systems Modernization: Management and Technical Weaknesses Must Be Corrected If 

Modernization Is To Succeed (GAO/AIMD-95-156, July 26, 1995).

7High-Risk Series: An Overview (GAO/HR-95-1, February 1995).

8Tax Systems Modernization: Actions Underway But IRS Has Not Yet Corrected Management and 

Technical Weaknesses (GAO/AIMD-96-106, June 7, 1996).

9Public Law 104-208, September 30, 1996.

10High-Risk Series: Information Management and Technology (GAO/HR-97-9, February 1997).
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(2) business requirements, (3) functional and technical architectures,11 and 

(4) a sequencing plan.12 We briefed IRS appropriations and authorizing 

committees on the results of our assessment of IRS’ Modernization 

Blueprint in September 1997. In those briefings and in a subsequent 

report,13 we concluded that the Modernization Blueprint was a good first 

step that provided a solid foundation from which to define the level of 

detail and precision needed to effectively and efficiently build a 

modernized system of interrelated systems. However, we also noted that 

the blueprint was not yet complete and did not provide enough detail for 

building and acquiring new systems. As a result, IRS’ fiscal year 1998 

appropriations act again limited IRS’ fiscal year spending to efforts that 

were consistent with the aforementioned spending categories. The act 

providing IRS’ fiscal year 1999 appropriations continued these spending 

limitations.14

In its fiscal year 1998 and 1999 budget requests, IRS requested over

$1 billion for its ITIA account, and the Congress provided $506 million for 

the account. Specifically, it appropriated $325 million in fiscal year 1998, 

$30 million of which was rescinded in May 1998 for urgent Year 2000 

requirements. The Congress also provided $211 million in fiscal year 1999. 

In providing these sums, the Congress limited IRS’ ability to obligate them 

until IRS and the Treasury submitted to the Congress for approval an 

expenditure plan that, as stated in the law, (1) implements the IRS 

Modernization Blueprint, (2) meets OMB investment guidelines, (3) is 

reviewed and approved by IRS’ Investment Review Board, OMB, and 

Treasury’s IRS Management Board and is reviewed by GAO, (4) meets 

requirements of IRS’ life cycle program, and (5) is in compliance with 

acquisition rules, requirements, guidelines, and systems acquisition 

management practices of the federal government. IRS is not requesting any 

ITIA funds for fiscal year 2000 but is asking for $325 million for fiscal year 

2001. In our April 1999 testimony, we reported this request was not 

11A system architecture defines the critical attributes of an agency’s collection of information systems 

in both business/functional and technical/physical terms.

12A sequencing plan defines the actions that must be taken, and their schedules along with costs, to cost 

effectively evolve from the current to the future systems operating environment.

13Tax Systems Modernization: Blueprint Is a Good Start But Not Yet Sufficiently Complete to Build or 

Acquire Systems (GAO/AIMD/GGD-98-54, February 24, 1998).

14Public Law 105-277, October 21, 1998.
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adequately justified and suggested that the Congress not provide the funds 

until IRS provided the support.15 

In December 1998, IRS awarded its Prime Systems Integration Services 

(PRIME) contract for systems modernization. According to IRS, it planned 

to “partner” with the PRIME contractor, among other things, to

(1) complete the modernization blueprint, as we recommended, and

(2) account for changes in systems requirements and priorities caused by 

IRS’ organizational restructuring, new technology, and IRS Restructuring 

and Reform Act of 1998 requirements. In addition, IRS stated that it 

planned to establish disciplined life cycle management processes and 

structures and mature software development and acquisition capabilities 

before it begins building modernized systems. Because of the 

modernization’s high cost and importance, we continued in 1999 to 

categorize it as a high-risk federal program.16

IRS Plans to Submit a 

Series of Expenditure 

Plans to Incrementally 

Justify Modernization 

Initiatives 

To comply with its statutory mandate to submit an expenditure plan to the 

Congress before obligating ITIA funds, IRS has developed a strategy where, 

in lieu of a single plan, it intends to develop and provide to the Congress a 

series of expenditure plans over the life of the modernization. This 

expenditure plan strategy is a by-product of the Commissioner’s overall 

approach to the modernization, which is to incrementally invest in 

modernized systems in accordance with (1) rigorous systems and software 

life cycle management processes and (2) a revised sequencing plan for 

migrating from IRS’ legacy systems and master file environment to the 

target systems and relational database environment specified in the 

blueprint.

The initial plan requests $35 million for IRS modernization initiatives to be 

delivered by October 31, 1999. This plan proposes three categories of 

modernization investments that IRS calls (1) supporting business goals,

(2) building management capability, and (3) planning a modern 

infrastructure, and is requesting for each category $17 million,

$11.6 million, and $6.5 million, respectively. The supporting business goals 

initiatives include the early phases of selected systems development efforts 

15Tax Administration: IRS’ Fiscal Year 2000 Budget Request and 1999 Tax Filing Season (GAO/T-GGD/

AIMD-99-140, April 13, 1999).

16High-Risk Series: An Update (GAO/HR-99-1, January 1999).
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that are intended to improve taxpayer service by the year 2001 tax filing 

season. The building management capability initiatives provide for 

defining and beginning the institutionalization of mature modernization 

management and systems engineering processes that are to permit 

effective blueprint implementation. The planning modern infrastructure 

initiatives refer to the first steps in establishing the technology foundation 

(e.g., networks, operating platforms, system security, etc.) upon which to 

build, interconnect, and operate modernized system applications.

IRS’ stated intention is to submit to the Congress a series of expenditure 

plans in the future, the next being in October 1999. According to IRS, the 

October 1999 plan will define follow-on modernization initiatives, 

deliverables, and funding requirements into the year 2000. 

Leading public and private sector organizations use an incremental 

approach to investing in systems modernization efforts. In addition, the 

Clinger-Cohen Act and OMB policy endorse this approach to funding large 

system development investments. Using this approach, organizations take 

large, complex modernization efforts and break them into projects that are 

narrow in scope and brief in duration.17 This enables organizations to 

determine whether a project delivers promised benefits within cost and 

risk limitations and allows them to correct problems before significant 

dollars are expended, which in turn mitigates the risk of program failure.18

Initial Expenditure 

Plan Is an Appropriate 

First Step and Meets 

Legislative 

Requirements

IRS’ initial expenditure plan is an appropriate first step to successful 

systems modernization and, with regard to the $35 million being requested 

for this increment, satisfies the conditions that the Congress placed on the 

use of ITIA funds. The key to IRS’ success is now to effectively implement 

the initiatives described in its initial expenditure plan and fulfill its 

commitment to incrementally request and expend future modernization 

funds.

17GAO Executive Guide: Improving Mission Performance Through Strategic Information Management 

and Technology, Learning From Leading Organizations (GAO/AIMD-94-115, May 1994).

18Assessing Risks and Returns: A Guide for Evaluating Federal Agencies’ IT Investment Decisionmaking (GAO/AIMD-10.1.13, February 1997).
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Condition 1: Implements 

the Modernization Blueprint

IRS’ initial expenditure plan lays the foundation for blueprint 

implementation on an incremental basis and begins the implementation 

process for selected modernization initiatives. For example, the 

expenditure plan only requests funds to establish and selectively 

implement an Enterprise Life Cycle (ELC). This ELC is to provide IRS with 

a disciplined and institutional approach for managing its IT investments 

throughout their life cycle--from conception, development, and deployment 

through maintenance and operation. This ELC is to be an adaptation of the 

PRIME contractor’s commercially available and proven systems life cycle 

management approach and associated automated tools, incorporating IRSunique needs such as key investment decision points.19 Once in place at 

IRS, the service plans to begin implementing the ELC on its ongoing 

modernization initiatives. According to IRS, future expenditure plans will 

provide for ELC implementation on all future project initiatives.

As another example, the initial expenditure plan requests funds to add 

missing system architecture precision and detail to selected system 

initiatives. In our February 1998 report,20 we concluded that while the 

architecture in IRS’ May 15, 1997, blueprint provided a solid foundation 

from which to build a complete architecture, it did not provide sufficient 

detail and precision for building or acquiring new systems. For example, 

the architecture did not allocate business requirements to specific 

configuration items (i.e., actual hardware and software components). As 

part of its initial expenditure plan, however, IRS plans to validate existing 

business requirements and develop preliminary hardware and software 

design specifications for IRS’ ongoing projects. Additionally, IRS intends 

for future expenditure plans to incrementally provide for architectural 

specificity for future system initiatives.

The initial expenditure plan also requests funds for IRS to perform business 

system planning, which is to result in a revised modernization sequencing 

plan by October 31, 1999. This initiative is necessary because the May 15, 

1997, blueprint sequencing plan does not recognize, for example, the need 

to introduce electronic tax administration technologies and capabilities 

early in the modernization to respond to the electronic filing requirements 

in the IRS Restructuring and Reform Act of 1998. This revised sequencing 

19The key decision milestones are referred to by IRS as project definition, preliminary business case, 

and final business case.

20GAO/AIMD/GGD-98-54, February 24, 1998.
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plan is to define the general timing, costs, and benefits of future 

modernization projects, and is to be incrementally updated in future 

expenditure plans with more specific cost and benefit information as 

projects are initiated and business case justifications are developed.

Condition 2: Meets OMB 

Information Systems 

Investment Guidelines

If properly implemented, the ELC that IRS’ initial expenditure plan is to 

establish and selectively implement, should meet OMB information system 

investment guidelines.21 These guidelines call for agencies to adopt a datadriven, analytically based approach to selecting, controlling, and evaluating 

investments in information technology. The overriding objective is to 

ensure that investment decisions are made in a disciplined and rigorous 

manner on the basis of established criteria, such as return-on-investment 

and architectural compliance, and that system investments be broken into 

a series of increments. Consistent with these guidelines, IRS’ ELC is to 

include processes for identifying alternative solutions, calculating their 

projected returns-on-investment, and requiring that selected solutions be 

architecturally compliant. Through its ELC, IRS also plans to require that 

systems be acquired and implemented in phased segments that are narrow 

in scope and brief in duration. According to IRS, system initiatives in 

future expenditure plans will be conducted in accordance with the ELC.

Condition 3: Meets the 

Requirements of IRS’ Life 

Cycle Program

IRS’ blueprint included a high-level system life cycle framework that could 

be used to define a disciplined set of processes for managing 

modernization investments. In lieu of using the system life cycle overview 

contained in the blueprint as the framework for developing life cycle 

management processes, IRS’ initial expenditure plan provides for 

establishing the aforementioned ELC. IRS decided to do this because it 

concluded that adapting the PRIME contractor’s commercially available 

methodology to meet its needs would be less costly and faster than 

completing its own unique system life cycle contained in its May 15, 1997, 

blueprint. IRS officials also stated that the PRIME contractor’s 

methodology offered more capability than the blueprint system life cycle 

overview, such as processes for managing business process reengineering. 

21Evaluating Information Technology Investments, A Practical Guide, Version 1.0 (Executive Office of 

the President, OMB, November 1995) and OMB Memorandum M-97-02, Funding Information Systems 

Investments (October 1996).
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We reviewed the PRIME contractor’s commercially available methodology, 

and found that it both meets the requirements specified in the blueprint’s 

system life cycle overview and is consistent with the approaches that 

successful private and public sector organizations use to manage large IT 

investments. If implemented correctly, it should provide IRS with effective 

processes and tools for, among other things, planning, controlling, 

developing, and deploying information systems based on defined activities, 

events, milestones, reviews, and products. As described above, the initial 

expenditure plan provides for implementing the ELC on ongoing projects, 

and, according to IRS officials, future expenditure plans will provide for 

implementing it on follow-on projects. 

Condition 4: Approved by 

IRS, Treasury’s IRS 

Management Board, and 

OMB and Reviewed by GAO

IRS’ Core Business Systems Executive Steering Committee, which replaced 

IRS’ Investment Review Board, approved the $35 million expenditure plan 

on April 20, 1999. Treasury’s IRS Management Board and OMB approved 

the plan on June 9, 1999, and June 10, 1999, respectively. On May 13, 1999, 

IRS provided us with a copy of its initial expenditure plan it submitted to 

the Congress, and the results of our review are contained in this report.

Condition 5: Complies With 

Federal Acquisition Rules, 

Requirements, Guidelines, 

and Management Practices

As described in its expenditure plan, IRS plans to establish, through its 

ELC, the life cycle management processes and practices for acquiring 

modernized systems. If implemented effectively, these processes should 

meet federal acquisition rules and management practices. According to 

federal acquisition laws, rules, and regulations,22 agencies should, among 

other things, use disciplined, decision-making processes for planning, 

managing, and controlling the acquisition of IT. By doing so, agencies 

mitigate the risks of acquiring systems that are not delivered on time and 

on budget and do not work as intended. IRS’ expenditure plan requests 

funds to continue IRS’ efforts to strengthen its capability to effectively 

manage its contractors. For example, as part of its building management 

capability initiatives, IRS plans to implement mature software/systems 

acquisition management practices within the IRS organization responsible 

for managing the PRIME contractor and other modernization contractors. 

IRS intends to build the capability in accordance with the Software 

Engineering Institute’s (SEI) software/system acquisition capability 

maturity model requirements, and plans to have this capability in place by 

22For example, see the Clinger-Cohen Act of 1996, OMB Circular A-109, and the Federal Acquisition 

Regulation.
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October 31, 1999. 23 Among these maturity models’ requirements are 

disciplined and rigorous processes and approaches for measuring and 

tracking progress of contracts and acting to correct problems quickly, 

which will be a key to IRS’ ability to effectively manage the PRIME 

contractor and successfully modernize.

Initial Expenditure 

Plan Is Consistent With 

GAO’s Past 

Recommendations

In 1995, we first made recommendations to correct serious and pervasive 

modernization management and technical weaknesses. Since then, IRS has 

taken actions to address our recommendations. We have monitored these 

actions and have made follow-up recommendations that recognize IRS’ 

progress and define the residual steps that IRS needs to take to ensure that 

it is ready and capable to effectively modernize its systems. Currently, our 

open recommendations fall into three categories: (1) completing the 

modernization blueprint, (2) developing the management and engineering 

capability to effectively modernize systems, and (3) until the first two 

recommendations are implemented, limiting modernization spending to 

certain small, cost-effective, low-risk efforts.

IRS’ initial expenditure plan is consistent with these recommendations. 

Specifically, of the $35.1 million being requested, IRS plans to use 

approximately $14.6 million for initiatives relating to completing the 

blueprint. For example, IRS plans to develop a 5-year “core business 

systems” modernization strategy that leverages new IT and recognizes IRS’ 

recent organizational restructuring and business process reengineering 

efforts prompted by the IRS Restructuring and Reform Act of 1998.24 The 

result is intended to be a revised, business risk-based sequencing plan that 

defines the general timing, cost, and benefits of new modernization 

projects over the next 3 to 5 years. 

In addition, IRS plans to spend about $11.6 million to develop the 

management and engineering capability to build and implement 

modernized systems. Specifically, IRS has designated about $2.2 million for 

PRIME and other contractor support to help IRS implement mature 

program management practices that are to (1) strengthen IRS’ ability to 

manage and control modernization initiatives and (2) ready IRS for an 

23A model developed by the SEI at Carnegie Mellon University to evaluate an organization’s software 

development or acquisition capability.

24Public Law 105-206, July 22, 1998.
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evaluation by SEI against relevant software/system acquisition capability 

maturity model requirements. IRS has earmarked $9.4 million for defining, 

documenting, and implementing its ELC, including training staff in its use, 

on ongoing modernization projects.

Last, IRS plans to spend the remaining $8.9 million on selected relatively 

small, low-risk efforts. For example, IRS is seeking $5.1 million to, among 

other things, validate system requirements and update cost-effectiveness 

(i.e., business case) justifications for two ongoing projects intended to 

provide near-term customer service improvements via better routing of 

taxpayers telephone inquiries. In addition, IRS seeks to spend $3.2 million 

on defining the network and platform technology infrastructure needed to 

support the above two customer service initiatives and to provide the 

foundation for secure future electronic commerce between employees, tax 

practitioners, and taxpayers.

Other Observations on 

IRS’ Modernization 

Efforts

Our review disclosed several additional relevant items concerning IRS’ 

management of the modernization. First, IRS has established a 

modernization “governance” structure that provides for extensive 

involvement by IRS’ top executives, including the Commissioner. This 

structure is an effective way to mitigate the risks associated with the 

various modernization initiatives that IRS has underway and planned. 

Second, although IRS plans to do so by July 1999, it has yet to adequately 

define respective systems modernization roles and responsibilities for 

itself, the PRIME contractor, and other support contractors. Given that 

IRS’ modernization approach provides for an unprecedented “partnership” 

with its contractors, ensuring that these roles and responsibilities are 

defined, understood, and enforced is of particular importance. Last, IRS 

can strengthen its incremental approach to investing in modernized 

systems by regularly disclosing to the Congress in its planned future 

expenditure plans IRS’ progress against the modernization expectations 

that it defined in the preceding expenditure plan.

IRS’ Top Executives Are 

Directly Engaged in 

Ongoing Modernization 

Initiatives 

IRS has established a governance structure for managing its modernization 

initiatives and providing its top executives, including the Commissioner, 

direct and frequent visibility into and control over all initiatives/projects. 

This organizational structure is headed by the Core Business Systems 

Executive Steering Committee, which is chaired by IRS’ Commissioner and 

includes Treasury’s Assistant Secretary for Management and Chief 

Financial Officer, IRS’ Chief Information Officer, the Chief Operating 
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Officer, key operating division heads, the PRIME contractor, and other key 

business officials. The Executive Steering Committee meets at least 

monthly to review modernization progress and direct future work. Under 

this process, projects are not initiated and do not progress to the next 

phase without the Steering Committee’s approval, thus mitigating the risk 

of modernization missteps and failures. 

IRS Has Yet to Adequately 

Define Modernization 

“Partnership” Roles and 

Responsibilities

Effective program/project and contract management requires a clear 

delineation of the respective roles and responsibilities of the agency 

management team and the contractors supporting the agency. In the case 

of IRS and its tax systems modernization program, this is particularly 

important because IRS’ stated intention in its solicitation and award 

documentation is to “partner” with the PRIME contractor and the 

supporting contractors. However, the nature of such a “partnership” is not 

defined in federal acquisition regulations, and thus is an ambiguous 

concept to implement and requires clear definition by IRS.

In its efforts to date, however, IRS has yet to adequately define the 

respective roles of the service and its contractors. In January 1999, IRS 

tasked the PRIME contractor with (1) defining the roles and 

responsibilities of IRS, itself, and the other contractors and (2) explaining 

the structure and processes for managing the “partnership” between the 

service and itself. This task was to be completed by April 30, 1999. 

According to IRS officials, this task was not adequately completed for 

several reasons. First, the PRIME contractor’s tasking was not adequately 

defined and thus resulted in a deliverable that was too narrow in scope. 

Second, IRS subsequently became concerned that the PRIME contractor 

was not sufficiently independent enough to be defining roles and 

responsibilities for itself and IRS. Last, funding for the PRIME contractor 

began to run low. Consequently, IRS recently tasked one of its other 

support contractors to develop a “Concept of Operations document by July 

1999 that defines the roles, responsibilities, authorities, structure, and rules 

of engagement for the PRIME contractor, IRS, and other IRS support 

contractors.” 

IRS Should Disclose 

Progress and Results in 

Subsequent Expenditure 

Plans

When employing an incremental approach to investing in systems 

modernization efforts, leading public and private sector organizations track 

and monitor whether each increment is producing promised benefits and 

meeting cost and schedule baselines, and report this information to 

executive decisionmakers. By doing so, these organizations can address 
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variances from expectations incrementally, before significant dollars are 

expended. This is a proven way to effectively manage investment risks.

To effectively employ incremental investment management on its 

modernization, IRS recognizes that it needs to incrementally measure and 

track progress and results. Accordingly, its governance structure and its 

ELC provide for doing so. In particular, its ELC is to incorporate SEI 

process maturity model requirements that, among other things, define key 

processes and approaches for measurement, analysis, and verification of 

activities. However, IRS has yet to define whether its planned future 

expenditure plans will provide for disclosure of this information. Such 

disclosure would provide the Congress with the kind of regular and 

valuable information that is needed to effectively oversee IRS’ 

modernization efforts.

Conclusions IRS’ initial expenditure plan lays the foundation for successful systems 

modernization; satisfies, for this $35 million increment, the conditions that 

the Congress placed on the use of ITIA funds; and is consistent with our 

past recommendations. IRS’ stated intention is to fully implement this 

expenditure plan and to submit to the Congress for approval future 

expenditure plans that incrementally build on this modernization 

foundation. Such an incremental approach to investing in modernized 

systems is an effective way to minimize the inherent risk in large, complex, 

multiyear modernization programs. The next step for IRS is to effectively 

implement the plan and fulfill its commitment to incrementally request and 

expend future modernization funds. A key factor in implementing its plans 

will be IRS’ success in establishing mature and disciplined measurement 

and tracking capabilities so that it can effectively analyze progress against 

incremental goals, deliverables, and benefit expectations and reliably 

report this information to congressional decisionmakers. By including this 

information in future expenditure plans submitted to the Congress, IRS can 

strengthen modernization management and oversight.

Recommendations Accordingly, we recommend that the Commissioner of Internal Revenue 

ensure that future expenditure plans fully disclose IRS’ progress against 

incremental goals, deliverables, and benefit expectations and that the 

expenditure plan that IRS plans to submit in October 1999 fully explain the 

nature and functioning of IRS’ “partnership” with its contractors, including 

the respective roles and responsibilities of IRS and its contractors.
B-282877.1

Page 15 GAO/AIMD/GGD-99-206 IRS’ Initial Expenditure Plan

Agency Comments In commenting on a draft of this report, IRS agreed with our findings and 

recommendations and stated that it would ensure that future expenditure 

plans would address progress against expectations established in previous 

requests. IRS also commented on the effectiveness of our evaluation 

efforts and stated that our timely observations and comments have allowed 

IRS to move quickly to implement our recommendations.

We are sending copies of this report to Senator Ted Stevens, Senator

Robert C. Byrd, Senator William V. Roth, Jr., Senator Daniel Patrick 

Moynihan, Senator Orrin G. Hatch, Senator Max Baucus, Senator Fred 

Thompson, Senator Joseph I. Lieberman, Representative C.W. Bill Young, 

Representative David R. Obey, Representative Bill Archer, Representative 

Charles B. Rangel, Representative Amo Houghton, Representative

William J. Coyne, Representative Dan Burton, Representative Henry A. 

Waxman, Representative Stephen Horn, and Representative Jim Turner in 

their capacities as Chairmen or Ranking Minority Members of Senate and 

House Committees and Subcommittees. We are also sending copies to 

Honorable Charles O. Rossotti, Commissioner of Internal Revenue, 

Honorable Robert E. Rubin, Secretary of the Treasury, Honorable

Lawrence H. Summers, Deputy Secretary of the Treasury, and the 

Honorable Jacob J. Lew, Director of the Office of Management and Budget. 

Copies will also be made available to others upon request. 

If you or your staff have any questions about this report please contact me 

at (202) 512-6240 or by e-mail at hiter.aimd@gao.gov. Other key 

contributors to this report are listed in appendix III.

Randolph C. Hite

Associate Director

Governmentwide and Defense

 Information Systems
Page 16 GAO/AIMD/GGD-99-206 IRS’ Initial Expenditure Plan

Contents

Letter 1

Appendix I

Objectives, Scope, and 

Methodology

18

Appendix II

Comments From the 

Internal Revenue 

Service

20

Appendix III

GAO Contact and Staff 

Acknowledgements

21

Abbreviations

ELC Enterprise Life Cycle

IRS Internal Revenue Service

IT information technology

ITIA Information Technology Investments Account

OMB Office of Management and Budget

PRIME Prime Systems Integration Services

SEI Software Engineering Institute
Page 17 GAO/AIMD/GGD-99-206 IRS’ Initial Expenditure Plan
Page 18 GAO/AIMD/GGD-99-206 IRS’ Initial Expenditure Plan

Appendix I

Objectives, Scope, and Methodology ApIenxdi

Pursuant to the Department of the Treasury’s fiscal year 1998 and 1999 

appropriations acts, the Congress limited IRS’ ability to obligate ITIA funds 

until the service and Treasury submitted to the Congress for approval an 

expenditure plan that per the acts, (1) implements the IRS Modernization 

Blueprint, (2) meets OMB’s investment guidelines for information systems, 

(3) is reviewed and approved by IRS’ Investment Review Board, OMB, and 

Treasury’s IRS Management Board and is reviewed by GAO, (4) meets the 

requirements of IRS system life cycle management program, and (5) is in 

compliance with acquisition rules, requirements, guidelines, and system 

acquisition management practices of the federal government. Accordingly, 

IRS provided us with the expenditure plan that it submitted to the Congress 

(i.e., the Senate on May 25, 1999, and the House on June 2, 1999). We 

reviewed the plan to determine whether (1) the plan satisfied the 

conditions specified in the acts, (2) the plan was consistent with our past 

modernization recommendations, and (3) we had any other observations 

on IRS’ systems modernization efforts.

To determine whether IRS’ expenditure plan satisfied the conditions 

specified in appropriations acts,1

 we first identified and reviewed the 

relevant IRS and federal documents referenced in the statutory conditions, 

such as the Modernization Blueprint, OMB information systems investment 

guidelines (e.g., Raines Rules), and the Federal Acquisition Regulation. We 

then documented IRS’ completed, ongoing, and planned modernization 

initiatives. To do this, we reviewed IRS’ ITIA Expenditure Plan; Initial 

Request for Funds; and other supporting documentation, such as the 

individual initiatives’ project plans and descriptions, briefing presentations 

(e.g., expenditure plan briefing to IRS Management Board), the PRIME 

contract and associated task orders, and Executive Steering Committee 

agendas and decision papers proposing courses of action. We also 

interviewed IRS’ Chief Information Officer and other service officials 

working on the modernization program to gain an understanding of what 

IRS is doing to satisfy the legislative conditions. This included receiving 

weekly briefings and reports on how IRS and contractor teams were 

progressing on ongoing initiatives, such as efforts to improve customer 

service, build capability to effectively acquire systems, establish a new 

system development life cycle methodology (i.e., ELC), and define IRS and 

contractor roles and responsibilities. We also reviewed the business and 

systems development life cycle methodology that IRS is modifying to 

1Public Law 105-61, Treasury and General Government Appropriations Act, 1998, and Public Law 105-

277, Omnibus Consolidated and Emergency Supplemental Appropriations Act, 1999.
Appendix I

Objectives, Scope, and Methodology

Page 19 GAO/AIMD/GGD-99-206 IRS’ Initial Expenditure Plan

develop its ELC and were briefed by IRS and its contractors involved in this 

effort. We also attended IRS’ Executive Steering Committee meetings to 

observe how IRS top management was directing and controlling the 

modernization program and to understand IRS’ strategic modernization 

approach and progress. Last, we analyzed each of IRS’ modernization 

initiatives vis-à-vis the statutory conditions to identify any variances or 

inconsistencies.

To determine whether IRS’ expenditure plan is consistent with our past 

recommendations on the tax systems modernization, we extracted from 

our inventory of open recommendations those pertaining to IRS’ 

modernization and grouped them into the following three categories:

(1) completing the Modernization Blueprint, (2) developing the 

management and engineering capability to effectively modernize systems, 

and (3) limiting modernization spending to certain small, cost-effective, 

low-risk efforts until the first two recommendations are implemented. We 

then compared IRS’ efforts on its completed, ongoing, and planned 

initiatives with the intent of our open recommendations to identify any 

variances or inconsistencies. 

To develop other observations on IRS’ systems modernization efforts, we 

analyzed IRS’ overall modernization governance structure to determine 

whether it provided for top management involvement and analyzed 

contractor deliverables against task order requirements and the

December 9, 1998, contract awarded to the PRIME contractor. We also 

attended Executive Steering Committee meetings to observe how the 

Commissioner and committee members functioned with respect to 

established structures and processes, and to understand IRS’ plans for 

submitting future expenditure plans. In addition, we met with and 

interviewed the Chief Information Officer and IRS officials responsible for 

the day-to-day management and control of the program and the PRIME 

contractor, for development of the expenditure plan, and for definition of 

IRS and contractor roles and responsibilities. 

We performed our work at IRS headquarters in Washington, D.C., and its 

facility in Lanham, Maryland, from January 1999 through May 1999 in 

accordance with generally accepted government auditing standards.
Page 20 GAO/AIMD/GGD-99-206 IRS’ Initial Expenditure Plan

Appendix II

Comments From the Internal Revenue ServiceApxIendi
Page 21 GAO/AIMD/GGD-99-206 IRS’ Initial Expenditure Plan

Appendix III

GAO Contact and Staff Acknowledgements ApIenxdi

GAO Contact Gary Mountjoy, 512-6367

Acknowledgments In addition to the above contact, Keith Rhodes, Agnes Spruill, Karen 

Richey, Lorne Dold, Sherrie Russ, Charles Roney, and Frank Maguire made 

key contributions to this report.

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