GAO-01-444R IRS’ Custodial Accounting Project

United States General Accounting Office

Washington, DC 20548

March 16, 2001

The Honorable Ben Nighthorse Campbell

Chairman

The Honorable Byron L. Dorgan

Ranking Member

Subcommittee on Treasury and General Government

Committee on Appropriations

United States Senate

The Honorable Ernest J. Istook, Jr.

Chairman

Subcommittee on Treasury,

 Postal Service and General Government

Committee on Appropriations

House of Representatives

Subject: Business Systems Modernization: IRS Has Satisfied Congressional Direction

on the Custodial Accounting Project

As part of its business systems modernization program,1 IRS is acquiring a system

known as the Custodial Accounting Project (CAP). It is intended to provide IRS with

a single, corporate data repository of taxpayer accounts and related tax revenue

accounting and reporting capabilities.

In September 28, 2000, correspondence to IRS, you directed the agency to limit

further spending on CAP until IRS (1) provided a compelling business case for

investing in this project and (2) started managing CAP as an integrated part of the

business systems modernization program. You subsequently requested that we

assess IRS’ actions to satisfy your direction. As agreed with your offices, our

objectives were to determine whether (1) the CAP business case that IRS submitted

to your offices on November 14, 2000, adequately justifies IRS’ plans for investing in

the system and (2) IRS has implemented management controls for integrating CAP

into its business systems modernization program.

In sum, IRS has satisfied both of your directives. IRS can, however, improve its

business case guidance in light of its experience in justifying its investment in CAP,

and we are making recommendations to the Commissioner of Internal Revenue for

doing so. (See the enclosure for details on our scope and methodology.) In its oral

1

Formerly called tax systems modernization.
Page 2 GAO-01-444R IRS’ Custodial Accounting Project

comments on a draft of this letter, which are discussed in the “Agency Comments”

section, IRS agreed with our conclusions and recommendations.

Background

IRS’ business systems modernization program includes three major categories of

projects--(1) tax administration systems (i.e., systems that are to support IRS’

prefiling, filing, and postfiling taxpayer service core business areas),

(2) administrative/internal management systems (i.e., systems that are to support IRS

functions such as financial management and human capital management), and

(3) infrastructure systems (i.e., operating platforms, system software, network

management, and security).

IRS is in the process of reengineering its administrative/internal management

processes, such as how it manages (1) taxpayer accounts and tax payments

(including reconciling taxpayer account files with tax payment files), (2) internal IRS

assets (e.g., property and facilities), and (3) human capital. Of these three efforts,

IRS is further along with the first, which includes the processes that CAP is to

automate and support. The definition of the full complement of reengineered

administrative/internal management functions is to be completed in April 2001.

CAP is expected to provide a single data repository of taxpayer accounts and tax

payments. IRS also plans for CAP to, among other things, automatically reconcile

accounts and payments, post updates to IRS’ general ledger, and produce revenue

accounting reports. To do so, CAP is being designed to receive taxpayer account and

payment information from either IRS legacy or modernized tax administration

database systems as well as from four systems operated by federal agencies, such as

Treasury’s Financial Management Service, that collect tax payments on IRS’ behalf.

This information will form IRS’ taxpayer account subledger and its collections

(taxpayer payments ) subledger and, once processed by CAP, will be posted to IRS’

general ledger. (See figure 1 for a simplified diagram of CAP functions.)

Currently, CAP is in the detailed system design and development phase and is to be

deployed starting in spring 2003. According to IRS, the cost of acquiring CAP and

operating and maintaining the system over its expected 10-year life is estimated to be

$150 million. As of December 31, 2000, IRS reports it has spent almost $9 million on

CAP.2

 When other IRS projects that have evolved into CAP are included, however,

the total is about $24 million.3

2

Per IRS, the source of CAP funding is the Information Technology Investments Account.

3

The other projects are the Financial Reporting Release project and the Payment Information Database

project. IRS reported that during fiscal years 1998, 1999, and 2000, it spent approximately $14.8 million

from its information systems budget on these projects.
Page 3 GAO-01-444R IRS’ Custodial Accounting Project

Figure 1: Simplified Diagram of CAP

*CFO = Chief Financial Officer

In September 22, 2000, briefings and a subsequent report,4 we provided your offices

with the results of our review of IRS’ August 2000 interim modernization spending

plan. This interim plan requested about $33 million from IRS’ Information

Technology Investments Account5

 as a “stopgap” measure until IRS could submit its

third expenditure plan.6

 Of the $33 million requested, about $4 million was for CAP.

4

Tax Systems Modernization: Results of Review of IRS’ August 2000 Interim Spending Plan (GAO-01-91,

November 8, 2000).

5

The Information Technology Investments Account is a multiyear capital account--established by the

Congress via the Department of the Treasury’s fiscal year 1998 and 1999 appropriations acts (Public

Laws 105-61 and 105-277, respectively)--to fund the replacement of IRS’ inefficient and antiquated

information technology systems and ultimately improve service to taxpayers. The obligation of

account funds is limited by the acts until IRS and Treasury submit to the Congress for approval a

proposal for expenditures that, among other things, (1) implements IRS’ enterprise architecture,

(2) meets system investment requirements, (3) is reviewed and approved by IRS’ Management Board

and the Office of Management and Budget, and (4) is reviewed by us.

6

In October 2000, IRS submitted the third plan requesting approximately $200 million of which

$44 million was for CAP. We reviewed the plan and on November 9, 2000, briefed IRS’ Senate and

House appropriations subcommittees on our results and issued a subsequent report in January 2001

(see Tax Systems Modernization: Results of Review of IRS’ Third Expenditure Plan (GAO-01-227,

January 22, 2001)).

Non-IRS

tax payment

systems

IRS

tax payment

systems

IRS

tax account

systems Collections

Subledger

Taxpayer

Account

Subledger

CAP

Major function

•Extracts and stores data from tax receipt and

account systems

•Serves as collections subledger and taxpayer

subledger

CFO*

Database

Major function

•Consolidates taxpayer and

collections data to support

Agency performance

management

•Serves as input into IRS’

Standard General Ledger

IRS’

Standard

General

Ledger

Reports

Major function

•Provide information on

revenue activities for internal

and external reporting

purposes (CFO uses input

from the CFO database,

standard general ledger, and

subledgers to produce

reports)
Page 4 GAO-01-444R IRS’ Custodial Accounting Project

As part of our briefings and report on this interim plan, we concluded, among other

things, that IRS (1) had prematurely begun to acquire CAP (i.e., begun detailed design

and development) before it had developed a compelling business case for doing so

and (2) had not effectively integrated CAP with other modernization projects.

Accordingly, we recommended that the Commissioner of Internal Revenue limit

further investment in CAP until IRS (1) demonstrated sufficient business value for

investing in CAP and (2) reported to its Senate and House appropriations

subcommittees on how the risks associated with CAP not being managed as an

integrated part of the modernization were being mitigated. IRS agreed with these

recommendations.

In September 28, 2000, correspondence to IRS, you subsequently restricted CAP

funding until IRS’ Chief Financial Officer and Chief Information Officer (1) certified

to you that sufficient business value existed for pursuing CAP and (2) reported to you

on how the lack of CAP integration was being mitigated. In response, IRS’ business

systems modernization executive directed that the CAP project halt further detailed

design and development work, and on November 14, 2000, IRS’ Chief Financial

Officer and Chief Information Officer provided the subcommittees with the

certification and associated business case and reported on steps taken to integrate

CAP into the modernization program.

Business Case Provides Sufficient

Basis for Planned CAP Investment

Business cases are an essential tool for disciplined investment management,

providing the quantitative and qualitative analytical basis for making informed

investment selection and control decisions and for evaluating whether investments

actually deliver promised business value. Accordingly, both the Clinger-Cohen Act of

19967 and the Office of Management and Budget8 (OMB) require business cases for

information technology investments. Moreover, IRS’ Enterprise Life Cycle9

management program also requires business case justifications at certain project

milestones and includes guidance on their preparation and use. This guidance,

developed and managed by the office of the Chief Financial Officer, specifies that

business cases are to define the benefits and costs of each investment so

decisionmakers can discern which ones deliver benefits that exceed costs. IRS’

business system modernization executive had staff members involved in acquiring

modernized systems trained in the guidance as part of their training on how to use

the Enterprise Life Cycle.

7

Public Law 104-106, February 10, 1996.

8

OMB Circular A-94, Guidelines and Discount Rates for Benefit–Cost Analysis of Federal Programs

(October 29, 1992) and OMB Circular A-130, Management of Federal Information Resources (revised

November 30, 2000).

9

The Enterprise Life Cycle is IRS’ system life cycle management program that includes the policies,

processes, and products for managing information technology investments from conception,

development, and deployment through maintenance and support.
Page 5 GAO-01-444R IRS’ Custodial Accounting Project

In August 2000, IRS decided to proceed with its CAP acquisition and in doing so

relied on the CAP business case developed at that time. However, as we briefed your

offices in September 2000 and subsequently reported,10 this business case did not

provide a compelling justification for investing in CAP. In particular, the business

case reported that the proposed CAP solution provided a negative net present value.

Under IRS' definition, this meant that the estimated budgetary costs of this system

over its expected 10-year life (i.e., costs to acquire, deploy, operate, and maintain)

exceeded the budgetary benefits over the same period by about $110 million (in

present-value terms).11 In addition, the business case did not provide an adequate

explanation of how CAP was to support IRS operations.

To assist IRS in responding to your direction, we met with IRS modernization and

CAP officials on October 25, 2000, and discussed the CAP business case. At that time,

we stated that IRS’ approach of economically justifying CAP with a business case that

was based on a cost/benefit analysis was not the most appropriate approach.

Specifically, OMB has defined two approaches to developing cost/benefit business

cases--one based on analyzing the costs and benefits of a proposed solution and the

other based on analyzing the relative cost-effectiveness of alternative solutions.

According to OMB, cost-effectiveness analyses are to be used when a policy decision

has been made to perform a given business function or deliver a given service. This is

precisely the impetus for CAP--namely, to comply with federal financial management

mandates and other requirements. In the case of CAP, IRS’ original business case did

not employ a cost-effectiveness approach because IRS wanted to justify all projects

using the cost/benefit approach, and its guidance did not explicitly define when and

how to use the cost-effectiveness approach.

Subsequently, IRS revised the CAP business case and transmitted it to you on

November 14, 2000. We reviewed this revised business case and found that it

complied with OMB cost-effectiveness analysis requirements. For example, OMB

requires that cost-effectiveness analyses specify (1) a clear investment rationale,

(2) alternative investment options for addressing the problem, (3) life cycle costs for

each alternative, and (4) process and decision criteria for selecting among the

competing investment options. The revised CAP business case met all these criteria.

In short, IRS described the necessity to address long-standing financial management

weaknesses and showed how CAP was both an incremental means to this long-term

goal and an essential near-term tool for producing auditable end-of-year custodial

financial statements. IRS also comparatively analyzed CAP against three alternative

system solutions and demonstrated, using such criteria as life cycle cost, technical

risk, and scalability, that no compelling reason existed to select one of the alternative

system solutions.

10GAO-01-91, November 8, 2000.

11IRS' computation of net present value takes into account only those benefits and costs that affect IRS'

budget. The most significant benefits of CAP are nonbudgetary and, therefore, not counted in the net

present value.
Page 6 GAO-01-444R IRS’ Custodial Accounting Project

IRS Is Now Applying Systems Modernization

Management Controls to CAP

IRS’ business systems modernization is a program to acquire a system of multiple

interrelated and interdependent systems. Thus, for the modernization to be

successful, acquisition of these systems must be managed in an integrated manner.

As we reported in November 2000,12 CAP was being managed separately from other

modernization projects. For example, CAP was not incorporated into the

modernization’s integrated master schedule, which specifies the projects’ acquisition

schedules and other dependencies and serves as a control for ensuring that related

systems interoperate effectively and efficiently and are delivered in the proper

sequence to satisfy system interdependencies. In addition, CAP was not included in

monthly program management review meetings, which are designed to inform

management of, among other things, how each project is progressing, including how

it is managing its dependencies with other projects.

IRS has since taken steps to align CAP with other modernization projects and to

manage it as an integrated part of the modernization program. For example, IRS

is in the process of incorporating CAP in the modernization’s integrated master

schedule,

is planning to include CAP in monthly program management review meetings

starting in March 2001, and

has conducted meetings between CAP staff and those of related modernization

projects to plan for integration among these systems.

Conclusions

IRS has satisfied November 2000 congressional direction on the CAP project.

However, its business case guidance does not explicitly specify cost-effectiveness

analyses as a means for economically justifying proposed investments and define

when and how these analyses should be prepared. As a result, IRS runs the risk of

spending time and money developing future business cases for proposed system

solutions that, like CAP, cannot be adequately justified on the basis of costs and

benefits alone.

Recommendations

We recommend that the Commissioner of Internal Revenue direct the Chief Financial

Officer to revise, consistent with OMB requirements, IRS’ business case guidance to

explicitly specify cost-effectiveness analyses as a method of justifying system

investments that meet prescribed criteria.

12GAO-01-91, November 8, 2000.
Page 7 GAO-01-444R IRS’ Custodial Accounting Project

Further, to ensure that the revised guidance is applied appropriately, we recommend

that the Commissioner direct the Business Systems Modernization Executive to train

modernization staff in its use.

Agency Comments

In oral comments on a draft of this report, the Business Systems Modernization

Deputy Associate Commissioner for Program Planning and Control stated that IRS

concurred with our conclusions and recommendations. This official also said that

IRS plans to revise its business case guidance to explicitly define when and how to

use the cost-effectiveness approach.

- - - - -

We are sending copies of this report to Senator Max Baucus, Senator Robert C. Byrd,

Senator Kent Conrad, Senator Charles E. Grassley, Senator Joseph I. Lieberman,

Senator Don Nickles, Senator Ted Stevens, and Senator Fred Thompson, and to

Representative Dan Burton, Representative William J. Coyne, Representative Amo

Houghton, Representative David R. Obey, Representative Charles B. Rangel,

Representative William M. Thomas, Representative Henry A. Waxman, and

Representative C.W. Bill Young, in their capacities as Chairmen, Ranking Members,

or Ranking Minority Members of Senate and House Committees and Subcommittees.

We are also sending copies to the Honorable Charles O. Rossotti, Commissioner of

Internal Revenue; the Honorable Paul H. O’Neill, Secretary of the Treasury; the

Honorable Larry R. Levitan, Chairman of the IRS Oversight Board; and the Honorable

Mitchell E. Daniels Jr., Director of the Office of Management and Budget. The letter

will also be available on GAO’s home page at www.gao.gov.

Should you or your staff have questions on matters discussed in this report, please

contact us at (202) 512-3439 or (202) 512-9110, respectively, or by e-mail at

hiter@gao.gov or whitej@gao.gov. Major contributors to this report included Harold

Brumm, Gary Mountjoy, Madhav Panwar, Sabine Paul, Steve Sebastian, Aaron

Thorne, Tuyet Quan Thai, and James Wozny.

Randolph C. Hite

Director, Information Technology

 Systems Issues

James R. White

Director, Tax Issues

Enclosure
Enclosure

Page 8 GAO-01-444R IRS’ Custodial Accounting Project

Scope and Methodology

To assess whether IRS’ November 9, 2000, business case provided adequate basis for

investing in CAP, we reviewed applicable OMB criteria—specifically OMB Circular

A-94, Guidelines and Discount Rates for Benefit–Cost Analysis of Federal Programs,

which defines key elements of cost-effectiveness analyses, and OMB Circular A-130,

Management of Federal Information Resources, which specifies guidelines for

effectively managing information technology investments.1 We then analyzed the

subject CAP business case against IRS’ business case guidance and OMB

requirements to identify any significant variances. To augment this analysis, we

interviewed senior IRS officials, including the Director of IRS’ Business Systems

Modernization Office and the CAP project manager, to determine rationale and

justification behind certain decisions central to the business case, such as the

identification of alternative system solutions. We did not independently validate the

cost data cited in the business case.

To assess IRS efforts to implement management controls for integrating CAP with

business system modernization, we focused on the following systems modernization

management controls: IRS’ integrated master schedule, program management review

meetings, and the use of Enterprise Life Cycle requirements for CAP. Specifically, we

reviewed an updated integrated master schedule, attended program management

review meetings to witness the integration of CAP into modernization program

decisionmaking, and reviewed CAP life cycle documentation and compared it to

Enterprise Life Cycle requirements.

We performed our work in Washington, D.C., from November 2000 through February

2001, in accordance with generally accepted government auditing standards.

(512005)

1

OMB Circular A-94, Guidelines and Discount Rates for Benefit–Cost Analysis of Federal Programs

(October 29, 1992) and OMB Circular A-130, Management of Federal Information Resources (revised

November 30, 2000).