Modernizing tax processing is key to IRS’ vision of a virtually paper-free work environment in which taxpayer information is readily available to IRS employees to update taxpayer accounts and respond to taxpayer inquiries. In our July 1995 report, we emphasized the need for IRS to have in place sound management and technical practices to increase the likelihood that TSM’s objectives will be cost-effectively and expeditiously met. A 1996 National Research Council report on TSM has a similar message. Its recommendations parallel the recommendations we made involving IRS’ (1) business strategy to reduce reliance on paper, (2) strategic information management practices, (3) software development capabilities, (4) technical infrastructures, and (5) organizational controls. The Treasury, Postal Service and General Government Appropriations Act, 1996 “fences” $100 million in TSM funding for fiscal year 1996 until the Secretary of the Treasury reports to the Senate and House Appropriations Committees on the progress IRS has made in responding to our recommendations with a schedule for successfully mitigating deficiencies we reported. The conference report on the act directed that GAO assess for the Committee the status of IRS’ corrective actions. As of March 22, 1996, the Secretary of the Treasury had not submitted a report responding to our recommendations to the Committees. In our July report, we analyzed IRS’ strategic information management practices, drawing heavily from our research on the best practices of private and public sector organizations that have been successful in improving their performance through strategic information management and technology. These fundamental best practices are discussed in our report Executive Guide: Improving Mission Performance Through Strategic Information Management and Technology (GAO/AIMD-94-115, May 1994), and our Strategic Information Management (SIM) Self-Assessment Toolkit (GAO/Version 1.0, October 28, 1994, exposure draft). In this regard, our work in this area has been of particular interest to this Committee in its recent efforts to reauthorize the Paperwork Reduction Act and initiate the Information Technology Management Reform Act to require federal agencies to use these modern management practices to improve the federal government’s efforts to successfully use information technology to enhance its performance and reduce costs. To evaluate IRS’ software development capability, we validated IRS’ August 1993 assessment of its software development maturity based on the Capability Maturity Model (CMM) developed in 1984 by Carnegie Mellon University’s Software Engineering Institute, a nationally recognized authority in the area. This model establishes standards in key software development processing areas (i.e., requirements management, project planning, project tracking and oversight, configuration management, quality assurance, and subcontractor management) and provides a framework to evaluate a software organization’s capability to consistently and predictably produce high-quality products. When we briefed the IRS Commissioner in April 1995 and issued our report documenting its weaknesses in July 1995, IRS agreed with our recommendations to make corrections expeditiously. At that time, we considered IRS’ response to be a commitment to correct its management and technical weaknesses. In September 1995, IRS submitted an action plan to the Congress explaining how it planned to address our recommendations. However, this plan, follow-up meetings with senior IRS officials, and other draft and “preliminary draft” documents received through early March 1996 have provided little tangible evidence that actions being taken will correct the pervasive management and technical weaknesses that continue to place TSM, and the huge investment it represents, at risk. Our ongoing assessment has found that IRS has initiated a number of activities and made some progress in addressing our recommendations to improve management of information systems; enhance its software development capability; and better define, perform, and manage TSM’s technical activities. However, none of these steps has fully satisfied any of our recommendations. Consequently, IRS today is not in an appreciably better position than it was a year ago to ensure the Congress that it will spend its 1996 and future TSM appropriations judiciously and effectively. We reported that IRS was drowning in paper—a serious problem IRS can mitigate only through electronic tax filings. We noted that IRS would not achieve the full benefits that electronic filing can provide because it did 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 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 not willing to pay a fee to a third party to file a return electronically. We concluded that, without a strategy that also targets these taxpayers, IRS would not meet its electronic filing goals or realize its paperless tax processing vision. 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. IRS agreed with this recommendation and said that it had convened a working group to develop a detailed, comprehensive strategy to broaden public access to electronic filing, while also providing more incentives for practitioners and the public to file electronically. It said that the strategy would include approaches for taxpayers who are unwilling to pay for tax preparer and transmitter services, who owe IRS for balances due, and/or who file complex tax returns. IRS said further that the strategy would address that segment of the taxpaying population that would prefer to file from home, using personal computers. Since then, IRS has performed an electronic filing marketing analysis at local levels; developed a marketing plan to promote electronic filing; consolidated 21 electronic filing initiatives into its Electronic Filing Strategies portfolio; and initiated a reengineering project to begin this month with a goal to reduce paper tax return filings to 20 percent or less of the total volume by 2000. These initiatives could result in future progress toward increasing electronic filings. However, these initiatives have yet to culminate in a comprehensive strategy that identifies how IRS plans to target those sectors of the taxpaying population that can file electronically most cost-beneficially, and what efforts it will make to develop requisite supporting systems. We reported that IRS did not have strategic information management practices in place. We found, for example, that, despite the billions of dollars at stake, information systems were not managed as investments. To overcome this, and provide the Congress with insight needed to assess IRS’ priorities and rationalization for TSM projects, we recommended that the IRS Commissioner take immediate action to implement a complete process for selecting, prioritizing, controlling, and evaluating the progress and performance of all major information systems investments, both new and ongoing, including explicit decision criteria, and using these criteria, to review all planned and ongoing systems investments by June 30, 1995. In agreeing with these recommendations, IRS said it would take a number of actions to provide the underpinning it needs for strategic information management. IRS said, for example, that it was developing and implementing a process to select, prioritize, control, and evaluate information technology investments to achieve reengineered program missions. Since then, IRS has taken steps towards putting into place a process for managing its extensive investments in information systems. For example, IRS has created the executive-level Investment Review Board for selecting, controlling, and evaluating all information technology investments; developed initial and revised sets of decision criteria that it used last summer to rank and prioritize TSM projects and used it in November 1995 to recommend additional changes to information systems resource allocations, respectively; developed its Investment Evaluation Handbook and Business Case Handbook to strengthen management decision-making on systems investments; and is using the Investment Evaluation Handbook to review operational TSM projects. Although these steps represent some progress in responding to our concerns, IRS has not demonstrated that it is following a well-defined, consistent, and repeatable information technology investment decision-making process for selecting, controlling, and evaluating its information technology initiatives and projects. In particular, working procedures, required decision documents, decision criteria, and reliable cost, benefit and return data needed for an investment process are not complete. IRS has not provided evidence to demonstrate how analyses are being conducted on all systems investments using such data as expected improvement in mission performance, costs to date, technical soundness, or pilot performance. Instead, IRS operates on the assumption that it will receive a specified funding ceiling for systems development and technology, and then determines how much funding can be eliminated from projects in order to lower overall modernization costs to that level. Over the last few months, we have communicated several concerns to IRS about weaknesses with its current investment process that continue to raise risks and erode confidence in the quality of decisions being made about TSM investments.