IRS initiated the IRDM program, in part, to implement new information reporting requirements, but more generally to increase voluntary compliance with tax laws by expanding and maximizing IRS’s ability to match existing and future information returns with tax return data and establishing a new business information matching program. Previously, IRS had only matched information returns to individuals’ and sole proprietors’ tax returns. Under IRDM, IRS plans to build several new IT systems and enhance some existing systems as well as implement numerous organizational and process changes. IRS plans for IRDM to use information returns to identify individual and business tax returns that are likely sources of revenue, which the current individual tax return matching system is not designed to identify. IRDM implementation is led by IRS’s Small Business/Self Employed division and MITS, which is leading the IRDM IT system development. Cost estimates are a vital factor for sound management decision making and they aid in the formation of a project’s budget. IRS uses cost estimates, in part, to justify budget requests and prioritize the selection of IT projects for possible funding. After an IT project is approved, the cost estimate is later used as a starting point for developing the performance measurement baseline for EVM, a project management approach that, if implemented appropriately, provides management important tools such as objective reports of project status and early warning signs of impending schedule delays and cost overruns. Data from a reliable performance management system, such as EVM, are necessary inputs for an updated cost estimate, among other things. OMB issued guidance on managing IT projects, which discusses cost estimation and refers to our cost guide for how to meet cost estimating requirements.continuously updated based on the latest information available to ensure that they are current, accurate, and valid. According to our cost guide, effective program and cost control requires ongoing revisions to the cost estimate, budget, and projected estimates at completion. Specifically, our guide states that estimates should be continuously updated with actual costs incurred to that point so that significant cost, schedule, or performance variances can be examined. In addition, it says that cost estimates should be updated to reflect significant changes to a project’s OMB guidelines state that cost estimates should be scope or specifications and when certain projects approach key milestones. Within MITS, project managers and EPO are involved in estimating program costs. EPO is an independent group of cost estimation experts that assists project teams by developing and updating cost estimates using a standard documented process. Project managers are responsible for maintaining a program’s cost estimate. EPO only becomes involved in updating a program’s cost estimate at the request of project managers, according to EPO officials. IRS procedures for developing, using, and updating cost estimates and EVM are described in several guidance documents, specifically: EPO’s Estimator’s Reference Guide, which is used by EPO staff, is the general resource on the processes and procedures for developing and delivering IT cost estimates. It discusses the technical aspects of updating cost estimates, such as what documents are used in cost modeling once a project has begun. IRS’s Information Technology Investment Planning and Management Guide (Investment Guide) outlines the framework for selecting, managing, and evaluating IRS IT projects. The Investment Guide includes discussions of how IT projects are selected using cost information, and how managers should use cost information to monitor a project. Project managers are responsible for managing cost, schedule, and performance for a project. MITS’s Estimation Procedures document describes IRS’s organizational approach to cost estimation, applicable to all IRS projects. The document is directed at project managers and it includes discussions of the steps and staff roles necessary to develop an estimate, and the circumstances when EPO typically becomes involved with updating a cost estimate. The document states that project managers are responsible for monitoring project progress and suggests initiating assistance from EPO if a project meets certain thresholds. The Department of the Treasury’s Earned Value Management Guide provides guidance for implementing EVM on major IRS projects. Program or project managers have the ultimate responsibility for implementing and monitoring the EVM system for their program or project. IRS developed two cost estimates for IRDM early in the program. In 2007, IRS developed a preliminary cost estimate for budgetary purposes when very little program information was available (referred to in this report as the 2007 preliminary cost estimate). As shown in table 1, in 2007, IRDM system development was estimated to cost about $5 million in fiscal year 2009 and about $23 million per year thereafter. In 2009, EPO developed a solution concept-based estimate (SCBE, referred to in this report as the 2009 SCBE), which was more rigorous than the 2007 preliminary estimate. The 2009 SCBE was developed before program implementation began, when MITS had more information than it did in 2007, but system design plans were still under development. The 2009 SCBE was about $36 million less through the first 4 years of the project than the 2007 preliminary estimate. IRS used the 2007 preliminary estimate to justify the initial IRDM budget. According to a MITS official, the 2009 SCBE was not used for budgetary purposes because program specifications were undergoing modification in fiscal year 2010, requiring the full $23-million per-year funding. For example, in 2010, IRS made several changes to the complexity of the IRDM program, which included dividing it into four projects. One of the projects required restructuring as a separate development effort, using different resources and technologies. Changes also necessitated using new software development methods not previously used within IRS, and additional contracting support. According to MITS officials, such changes increased IRDM funding needs above the amounts supported by the 2009 SCBE. As a result, IRS did not revise its initial funding request for future fiscal years using the SCBE and instead relied on the 2007 preliminary estimate. From fiscal years 2009 through 2011, IRS received about $52 million in total funding for IRDM, of which the IRS had spent $46 million (when accounting for $2.6 million carried over from fiscal year 2009 funds and $5.8 million carried over from fiscal year 2010), through fiscal year 2011, as shown in table 2. In our May 2011 report,the most rigorous IRDM cost estimate available at the time and the 2007 preliminary estimate lacked documentation for a complete review. We found that the 2009 SCBE did not fully follow best practices. We recommended that if IRS updated the cost estimate, it should follow best practices from our cost guide. In response to our report, IRS said it would update the 2009 SCBE. IRS subsequently decided not to revise the estimate because, according to officials, they already have a plan, schedule and funding, the program is not over-budget, and the risks associated with IRDM, and the program’s size, do not warrant an update. we assessed the 2009 SCBE because it was Over the summer of 2011, MITS provided us with additional cost information. Officials referred to these documents as IRDM’s new cost estimate, and they were used in supporting IRS’s fiscal year 2012 IRDM budget. Consequently, in this report, we refer to the materials provided to us as the 2011 cost estimate. This estimate was not a SCBE or developed by EPO. The 2011 cost estimate was based on several data sources, including IRDM’s Exhibit 300, EVM data, spend plans, and schedule with work breakdown structures (WBS). MITS projects IRDM to cost $115 million for fiscal years 2012 through 2016, or about $23 million per year. According to best practices established by our cost guide, a cost estimate We should be comprehensive, well documented, accurate, and credible.assessed the 2011 cost estimate against cost estimation best practices because IRS told us the estimate was used to support its budget requests for fiscal year 2012 and beyond. While the 2011 IRDM cost estimate shows some characteristics of a reliable cost estimate, it does not fully meet best practices. The estimate partially meets best practices for a comprehensive cost estimate, as shown in figure 1. It reflects the current program schedule and contains information about the program’s technical characteristics. The estimate provided some details about costs for IRDM’s fiscal year 2012 budget request, but the cost estimate does not cover the program’s entire life-cycle. Without fully accounting for life-cycle costs, management may have difficulty successfully planning program resource requirements and making informed resource-planning decisions. IRS defined assumptions used to estimate some IRDM costs, but did not provide the assumptions used to estimate labor or program operations costs. Furthermore, IRS did not include ground rules used to develop the estimate. Unless ground rules and assumptions are clearly defined, the cost estimate will not have a basis to identify and mitigate areas of potential risk. The estimate minimally meets best practices for a well documented cost estimate, as shown in figure 2. IRS provided supporting information for some staff resources, but detailed data for the staffing level requested for fiscal year 2012 was missing. The cost estimate documentation says that the labor cost justification was captured in the resource loaded project schedules, but we found that these schedules only justified about 6 out of the 86 requested full-time equivalent (FTE) staff for IRDM. Furthermore, although IRS officials cited the WBS as the basis for cost projections, we found no evidence linking the WBS to cost. Multiple documents linked software and hardware specifications to cost, but they did not provide consistent cost information. As a best practice, documentation should describe the source data used, the estimating methodology, and show step-by-step how the estimate was developed. Without a well documented cost estimate, the program’s credibility may suffer because the documentation cannot explain the rationale of the methodology or the calculations underlying the cost elements. The estimate minimally meets best practices for an accurate cost estimate, as shown in figure 3. Calculations in the estimate are mathematically correct. However, documentation that IRS provided to support estimated costs for IRDM hardware and software’s estimated costs did not match estimates in IRDM’s spend plans.