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. Because of the seriousness of the weaknesses, we placed the modernization on our 1995 list of high-risk federal programs. In June 1996, we reported that IRS had made progress in implementing our recommendations. 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 appropriations 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. 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, (2) business requirements, (3) functional and technical architectures, and (4) a sequencing plan. 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, 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. 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 adequately justified and suggested that the Congress not provide the funds until IRS provided the support. 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. 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 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. 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. 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. 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 IRS- unique needs such as key investment decision points. 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, 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 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. If properly implemented, the ELC that IRS’ initial expenditure plan is to establish and selectively implement, should meet OMB information system investment guidelines. These guidelines call for agencies to adopt a data- driven, 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.