To provide the requested overview of what we see as opportunities to improve IRS business operations, we synthesized several of our most recently issued products. These reports and testimony evaluate IRS’ performance in achieving major mission objectives to process returns more efficiently, improve service to taxpayers, and increase taxpayer compliance; accountability for revenues designated for the general fund and a wide spectrum of trust funds as well as its appropriations for salaries and expenses; and initiatives to modernize by modifying business processes and incorporating information technology to enhance mission and financial accountability and productivity. Each of these products is grounded in large bodies of work performed over several years in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Department of the Treasury, the Internal Revenue Service, and the Office of Management and Budget. IRS provided us with written comments on August 16, 1996. Treasury officials concurred with IRS’ comments. A representative from the Office of Management and Budget provided us with oral comments on August 19, 1996. Comments are discussed in the Agency Comments and Our Evaluation section. In its May 6, 1996, report on the status of TSM to the Senate and House Appropriations Committees, the Department of the Treasury candidly assessed TSM progress and future redirection. It described ongoing and planned actions intended to respond to our July 1995 recommendations to correct management and technical weaknesses. It concluded that despite some qualified success, IRS had not made progress on TSM as planned because systems development efforts had taken longer than expected, cost more than originally estimated, and delivered less functionality than originally envisioned. It further stated that significant changes were needed in IRS’ management approach and that IRS did not currently have the capability to develop and integrate TSM without expanded use of external expertise. Treasury’s report delineates, and we verified, that IRS has initiated a number of actions and is making some progress in addressing our recommendations. For example, IRS (1) is preparing a comprehensive strategy to maximize electronic filing, (2) has created an investment review board to select, control, and evaluate its information technology investments, (3) has updated its systems engineering process, is updating its systems life cycle methodology, and is working across various IRS organizations to define disciplined processes for software requirements management, quality assurance, configuration management, and project planning and tracking, and (4) has completed a descriptive overview of an integrated, three-tier, distributed systems architecture. However, as we reported in June 1996, many of these actions are still incomplete and do not respond fully to any of our recommendations.Examples include the following: The comprehensive business strategy for electronic filing is not scheduled for completion until early fall 1996. Completing this strategy is central to maximizing electronic filings and achieving IRS’ business vision of significantly reducing the volume of paper returns. IRS does not yet have a complete and repeatable process for selecting, controlling, and evaluating its technology investments. Implementing such a process is necessary to make sound investment decisions on planned and ongoing systems. The procedures for requirements management, quality assurance, configuration management, and project planning and tracking are being developed, but are still incomplete. Overcoming these weaknesses is critical to successful systems modernization. IRS has not completed its integrated systems architecture or its security and data architectures, and has no schedule for doing so. Completing these architectures is fundamental to designing and building TSM systems. As a result, IRS has not made adequate progress in correcting its management and technical weaknesses, and none of our recommendations have been fully implemented. IRS expects to improve the accountability for and probability of TSM success by increasing its reliance on contractors. However, IRS has not addressed the risk inherent in shifting hundreds of millions of dollars to additional contractual efforts before it has the disciplined processes in place to manage all of its current contractual efforts effectively. As we reported, until IRS’ weaknesses are corrected and our recommendations are fully implemented, we believe the Congress should consider limiting TSM spending to only cost-effective modernization efforts that support ongoing operations and maintenance; correct IRS’ pervasive management and technical weaknesses; are small, represent low technical risk, and can be delivered in a relatively short time frame; and involve deploying already developed systems that have been fully tested, are not premature given the lack of a completed architecture, and produce a proven, verifiable business value. As the Congress gains confidence in IRS’ ability to successfully develop these smaller, cheaper, quicker projects, it could consider approving larger, more complex, more expensive projects in future years. In 1986, IRS initiated TSM primarily to replace the computers that it was using to process and store the information on tax returns. IRS planned to introduce the new technology without changing its existing organizational and operating structure, which included 10 service centers that processed tax returns, over 70 telephone call sites that provided various types of service to taxpayers, and 63 district offices that were responsible for many of IRS’ compliance activities. In 1992, in response to recommendations by GAO and others, IRS began to analyze how it might use new technology to change its business operations. As a result, IRS developed a vision for 2001 that called for organizational, technological, and operational changes affecting the way it processes tax returns, provides customer service, and ensures compliance. Specifically, IRS’ vision calls for moving from a paper-laden, labor-intensive tax return processing environment to a modern electronic environment; providing better service to taxpayers through wider use of the telephone, better access to data, and new information systems; and improving compliance through access to accurate, up-to-date data, earlier identification of noncompliant taxpayers, and increased efficiencies in its field enforcement functions. Since 1992, IRS has made some progress in modernizing its operations, but the differences between IRS’ current operations and those proposed in its vision are great. Part of the reason IRS has not been more successful in significantly changing its business operations is that it does not have a well-defined business strategy for achieving its vision. As discussed in the following sections, IRS is, for example, revisiting its electronic filing strategy and looking for alternative ways for improving customer service. The Government Performance and Results Act (GPRA) provides an excellent vehicle for IRS to reach agreement with the Congress on a business strategy and for the Congress to assess IRS’ performance in implementing an agreed upon strategy. Under GPRA, each agency is to develop strategic plans for its program activities, laying out the organization’s fundamental mission and long-term goals and objectives for accomplishing that mission. GPRA requires that these plans be submitted to OMB and the Congress by September 30, 1997. Recognizing the value of such plans, OMB has accelerated the legislative schedule and is currently working with agencies in developing key elements of their strategic plans. One of the biggest problems facing IRS is its inefficient system for processing most tax returns. IRS has made little progress either in reducing the number of paper returns it processes or in delivering the new systems needed to better process paper. IRS’ strategy for receiving and capturing data from tax returns was and still is a critical component of IRS’ business vision. Initially, IRS’ strategy focused on replacing computers in its 10 service centers with more efficient ones. However, in 1992, IRS began examining other processing options. As a part of that analysis, IRS concluded that it had to make various organizational and business changes. One of the most important business changes was IRS’ decision to significantly increase, by the year 2001, the number of tax returns received electronically. Compared with IRS’ current procedures for processing paper returns, electronic filing has several benefits for IRS. These benefits include reduced processing, storage, and retrieval costs; and faster, more accurate processing of returns and refunds. Although IRS has implemented some initiatives that have increased the number of electronic returns since 1993, IRS does not have a comprehensive business strategy to reach or exceed its electronic filing goal, which was 80 million electronic filings by 2001. IRS’ estimates and projections for individual and business returns suggested that, by 2001, as few as 39 million returns may be submitted electronically, less than half of IRS’ goal and only about 17 percent of all returns expected to be filed. We have reported that IRS’ business strategy would not maximize electronic filings because it primarily targeted taxpayers who use a third party to prepare and/or transmit simple returns, are willing to pay a fee to file their returns electronically, and are expecting refunds. Focusing on this limited taxpaying population overlooked most taxpayers, including those who prepare their own tax returns using personal computers, have more complicated returns, owe tax balances, and/or are unwilling to pay a fee to a third party to file a return electronically. To date, most of the returns filed electronically are ones that, if filed on paper, could be filed on forms (like the 1040EZ) that are among the least costly paper returns to process. With that in mind, we recommended, in October 1995, that IRS identify those groups of taxpayers that offer the greatest opportunity to reduce IRS’ paper processing workload and operating costs if they filed electronically and develop strategies that focus on eliminating or alleviating impediments that inhibit those groups from participating in the program. Some of IRS’ 21 electronic filing initiatives have realized some positive results. For example, certain taxpayers who are eligible to file a Form 1040EZ are now allowed to file electronically using a toll-free number on touch-tone phones. This year, about 2.8 million taxpayers used that filing method, known as TeleFile. Also, IRS has not yet successfully addressed one of the major impediments to the expansion of electronic filing—its cost to taxpayers. We concluded that, without a strategy that also targets these taxpayers, IRS would not meet its electronic filing goals. In addition, if, in the future, taxpayers file more paper returns than IRS expects, added stress will be placed on IRS’ paper-based systems. Accordingly, we recommended that IRS refocus its electronic filing business strategy to target, through aggressive marketing and education, those sectors of the taxpaying population that can file electronically most cost-beneficially.