In August 1995, IRS signed a $22 million interagency agreement with NTIS. To date, $17.1 million has been advanced to NTIS ($10 million in August 1995 and $7.1 million in December 1995). The agreement stipulated that NTIS would develop and operate Cyberfile, a tax systems modernization (TSM) project that would allow taxpayers to prepare and electronically submit their tax returns using their personal computers. Electronic returns would be submitted via the public switch telephone network or the Internet, accepted at a new NTIS data center, and then forwarded to designated IRS Service Centers. Taxpayers would not be charged a fee to file their returns using Cyberfile. To obtain contractor support to develop Cyberfile, NTIS modified an existing technical services contract awarded on a sole source basis through SBA’s Section 8(a) program for small and disadvantaged businesses. This program permits the award of a contract to the SBA, which then subcontracts with a firm owned by economically and socially disadvantaged individuals. After award, SBA requires the agency to manage the contract and ensure goods and services are received for dollars expended. Further, SBA officials told us that the procuring agency is supposed to obtain SBA approval before modifying the contract. NTIS also acquired systems hardware and services via existing Department of the Navy, Treasury, and General Services Administration (GSA) contracts and other sources. Because NTIS did not have a contracting activity with the authority to make purchases over $50,000, the agency used contracting officers from two other Commerce Department activities to support the Cyberfile procurement. Initially, the Office of Acquisition Management provided a contracting officer. In late November 1995, the Cyberfile procurement was transferred to a contracting officer at the National Institute of Standards and Technology. In December 1995, we briefed the IRS Commissioner on the risks associated with proceeding with Cyberfile as planned. We explained that Cyberfile was not being developed using disciplined systems development processes and that adequate steps were not being taken to protect taxpayer data on the Internet. At that time, Cyberfile development was scheduled for limited operational use by a selected population of taxpayers in February 1996. In March 1996 testimony, we noted that Cyberfile development reflected many of the same management and technical weaknesses we found in TSM systems and delineated in our July 1995 report. We also reported that Cyberfile contractual issues warranted further review. IRS’ Chief Inspector reviewed the Cyberfile acquisition and in an April 1996 briefing to management concluded that IRS did not follow internal procurement procedures, failed to sufficiently oversee the project, and was vulnerable to outside criticism. The Chief Inspector is also performing a physical inventory of equipment purchased by NTIS, which is scheduled to be completed in late August 1996. The Commerce Department’s Inspector General is reviewing NTIS’ operations, including its contracting efforts. Inspector General officials told us they have serious concerns about how NTIS and the department contracted for Cyberfile as well as other projects. These officials said they expect to issue a report in late August 1996. In March 1996, IRS decided to delay Cyberfile operations until after April 15, 1996. Because milestones for delivering Cyberfile kept slipping, IRS contracted with its Federally Funded Research and Development Center on April 16, 1996, to provide options available to IRS for delivering the system for the 1997 or 1998 tax filing seasons. NTIS continued to work on Cyberfile until the $17.1 million advanced from IRS had been obligated. NTIS then requested an additional advance from IRS to fund the $22 million obligation incurred by IRS. IRS did not provide the advance. Instead, it directed NTIS on May 10, 1996, to stop work on Cyberfile. The contractor reported to IRS in July 1996 with options for proceeding with Cyberfile. However, IRS is awaiting the completion of its Electronic Commerce Strategic Plan before deciding on the future course of Cyberfile. IRS has not yet established a completion date for the plan. IRS did not use disciplined processes to manage and control the Cyberfile acquisition. IRS did not perform the necessary requirements analysis for Cyberfile or identify alternative ways to satisfy these requirements. Neither did it prepare an acquisition strategy documenting how it would acquire the most cost-effective alternative. Further, IRS selected NTIS without evaluating its (1) capabilities to build such a system, (2) experience in building similar systems, or (3) ability to deliver cost-effectively as compared with private-sector and other government sources. Federal information management and acquisition regulations and IRS’ own policies and procedures require the use of disciplined, decision-making processes for planning, managing, and controlling the acquisition of information systems and services. These regulations and policies direct that prior to initiating system procurements, such as Cyberfile, IRS (1) identify its information needs, (2) perform a requirements analysis to determine how to support agency needs, (3) identify alternative ways to meet requirements, including the costs and benefits of each alternative, and (4) prepare an acquisition strategy that demonstrates how the agency plans to acquire the most cost-beneficial alternative. These processes would have mitigated the risks of acquiring a system that has yet to be delivered, is over budget, and failed to meet IRS’ objectives. IRS dispensed with disciplined analyses because IRS officials believed that NTIS had the capabilities to deliver Cyberfile by February 1996. They said this belief was based on (1) the fact that NTIS had provided taxpayers access to tax forms via NTIS’ FedWorld Network and (2) briefings by NTIS officials in which they claimed that NTIS could complete Cyberfile by February 1996, in time for the 1996 tax filing season. However, the technical challenge of providing tax forms is not comparable to the much more complex Cyberfile system. Further, NTIS offered no convincing analytical support for its claim that it could deliver Cyberfile by February 1996. For example, it provided no detailed task definitions, work breakdown structures, or interim schedules. IRS top management did not heed warnings, dating back to July 1995, from its acquisitions support staff that IRS’ Cyberfile procurement approach would lead to failure and jeopardize TSM. Our December 1995 briefing to the IRS Commissioner and Deputy Secretary of Commerce, on the risks of continuing with Cyberfile as planned, also did not dissuade IRS from its goal to field Cyberfile for the 1996 tax filing season. Only after NTIS informed IRS in April 1996 that the $17.1 million had been obligated and that the system still was not finished, did IRS stop to reconsider the project. In procuring Cyberfile, IRS did not fully comply with federal acquisition regulations which are designed to help agencies develop and acquire automated systems that meet agency needs and are delivered on time and within budget. IRS cited the Brooks ADP Act, rather than the Economy Act,for its authority to enter into its interagency agreement with NTIS. In this regard, IRS concluded that the Economy Act was not applicable to its agreement with NTIS and, therefore, IRS did not attempt to comply with the requirements of that act. IRS’ position is supported by a recent amendment to the Federal Information Resources Management Regulation, which formalizes GSA’s position that the Economy Act is not applicable to information technology procurements subject to the Brooks ADP Act. Congress may not have contemplated the exemption of such a large portion of federal procurements from the requirements of the Economy Act. Nonetheless, the amendment was not unreasonable and was issued pursuant to GSA’s authority to implement the Brooks ADP Act. Accordingly, we have no basis to object to it. Because section 5101 of the National Defense Authorization Act for Fiscal Year 1996, Public Law No. 104-106, (1996), repealed the Brooks ADP Act, effective August 8, 1996, any authority to initiate interagency agreements under the Brooks ADP Act has expired. However, the Brooks ADP Act was in effect when IRS initiated the interagency agreement with NTIS. Although it cited the Brooks ADP Act as its authority in acquiring Cyberfile, IRS did not follow the Federal Information Resources Management Regulation that implements this law. Specifically, the regulations require agencies to conduct requirements and alternatives analyses prior to procuring information technology. IRS did not conduct either analysis. Without these analyses, IRS could neither define the software capabilities and features needed for Cyberfile nor determine which acquisition and technical options were most advantageous to the government. Further, the Federal Information Resources Management Regulation also requires agencies acquiring information systems and services to obtain a delegation of procurement authority from GSA. Treasury had a delegation from GSA, and in turn required IRS to obtain a delegation of procurement authority from the department for information system initiatives over $15 million. When IRS signed the $22 million interagency agreement with NTIS, it did not obtain the required approval from Treasury. In procuring Cyberfile, NTIS did not fully comply with federal acquisition laws and regulations, which are intended to encourage full and open competition and help agencies develop and acquire information systems that meet their needs and are delivered on time and within budget. Specifically, NTIS (1) awarded a Section 8(a) contract on a sole source basis without making a reasonable determination that the value of the contract was below SBA competition thresholds, (2) improperly modified the contract to add a requirement to develop Cyberfile, and (3) did not effectively hold the contractor accountable for specific deliverable dates, attributes, and quality. According to SBA regulations, Section 8(a) procurements with an estimated award value over certain dollar thresholds must be competed among eligible 8(a) firms, while procurements under the threshold can be awarded on a sole source basis. For procurements such as NTIS’ technical services support contract, the threshold is $3 million. In determining whether this threshold is met, the agency is required to make a reasonable estimate of the contract value. In September 1995, NTIS awarded a sole source contract for $2.3 million to an 8(a) firm to provide technical support services for its FedWorld and other related tasks.