We found that IRS’ selection of the Department of the Commerce’s National Technical Information Service (NTIS) to develop Cyberfile was not based on sound analysis. IRS did not adequately analyze requirements, consider alternatives, or assess NTIS’ capabilities to develop and operate an electronic filing system, even though the need for these critical prerequisites was brought to management’s attention as early as July 1995. Instead, IRS selected NTIS because it was expedient and because NTIS promised IRS, without any objective support, that it could develop Cyberfile in less than 6 months and have it operating by February 1996. In an attempt to meet these self-imposed time constraints, the Cyberfile project was hastily initiated. Development and acquisition were undisciplined, and the project was poorly managed and overseen. As a result, it was not delivered on time, and after advancing $17.1 million to NTIS, IRS has suspended Cyberfile’s development and is reevaluating the project. We also found that IRS and NTIS did not follow all applicable procurement laws and regulations in developing Cyberfile. IRS cited the Brooks ADP Act (40 U.S.C. 759) for its authority to procure Cyberfile. However, IRS did not perform requirements and alternatives analyses as required by the Federal Information Resources Management Regulation which implemented the Brooks ADP Act. NTIS also violated applicable procurement laws and regulations in developing Cyberfile. To obtain contractor services quickly, NTIS modified an existing sole source contract awarded through the Small Business Administration’s (SBA) small and disadvantaged businesses program, referred to as the “Section 8(a)” program. The modification provided $3.3 million for Cyberfile and increased the total contract value to $4.3 million. NTIS did not submit this modification to SBA for review as required under the Section 8(a) program. Further, this modification circumvented SBA rules requiring that contracts over $3.0 million be competed among eligible Section 8(a) firms rather than being issued on a sole source basis. In addition, at the time of modification, the contractor was not an eligible 8(a) firm under SBA regulations, and had NTIS submitted the modification to SBA as required, responsible officials at SBA said they would have rejected it. Our review of Cyberfile obligations and costs found that they were not accounted for properly. IRS (1) significantly understated the obligations related to the project and (2) improperly accounted for the $17.1 million advanced to NTIS. In addition, NTIS did not promptly and accurately account for Cyberfile obligations and costs. Specifically, significant financial transactions were not properly documented and obligations and costs were not recorded promptly and accurately. Finally, we found that adequate financial and program management controls were not implemented to ensure that Cyberfile was acquired cost-effectively. As a result, excess costs were incurred. For example, the interagency agreement between IRS and NTIS was not structured to minimize costs, and Cyberfile costs continued to be incurred after the project was suspended. Specifically, the agreement allowed NTIS to assess a 10 percent management fee for (1) costs associated with NTIS’ failure to follow preferred management practices, such as late payment penalties and (2) items which IRS could have readily obtained directly and provided to NTIS, such as computer equipment acquired under existing government contracts. In this regard, IRS incurred about $89,000 in NTIS management fees for purchasing items costing over $886,000 under an existing Department of the Treasury contract which is administered by IRS. If IRS had purchased these items directly and provided them to NTIS, it could have avoided NTIS’ $89,000 management fee. In light of the severity of acquisition and financial problems identified during our review, we recommended, inter alia, that before resuming work on Cyberfile, IRS and the Department of Commerce each submit a report to the Committee detailing the (1) weaknesses in IRS’ and NTIS’ acquisition and financial management processes and controls that permitted Cyberfile mismanagement and (2) actions that have been taken to ensure that these weaknesses in processes and controls have been corrected and that resulting mismanagement does not recur. In commenting on our Cyberfile report, Treasury agreed with our findings and recommendations. It stated that it shared our concerns regarding IRS’ management of the Cyberfile project, and that the experience with the project underscores the importance of IRS implementing our recommendations. IRS did not disagree with any of our findings or recommendations. It said that Cyberfile was not successful and encountered problems and explained that it is conducting an internal review of Cyberfile to identify a full range of corrective action. The Department of the Treasury, in its May 1996 report to the Senate and House Appropriations Committees, provides a candid assessment of TSM progress and future redirection, and a description of ongoing and planned actions intended to respond to our July 1995 recommendations to correct management and technical weaknesses. Treasury found that despite some qualified success, IRS has not made progress on TSM as planned because systems development efforts have taken longer than expected, cost more than originally estimated, and delivered less functionality than originally envisioned. It concluded that significant changes are needed in IRS’ management approach and that it is beyond the scope of IRS’ current ability to develop and integrate TSM without expanded use of external expertise. The report notes that work has been done to rethink, scale back, and change the direction of TSM. Additional changes are still in progress with actions underway to restructure the management of TSM and expand the use of contractors. Agreeing that our July 1995 recommendations are valid, the report notes that more work has to be done to respond effectively to our recommendations. It states that progress in IRS’ management and technical areas can only be achieved by institutionalizing improved practices and monitoring projects for conformance to mandated standards and practices. However, the report does not address the basic problem of continuing to invest hundreds of millions of dollars in TSM before the requisite management and technical disciplines are in place. Nor does it address the risk inherent in shifting hundreds of millions of dollars to additional contractual efforts when the evidence, as demonstrated with IRS’ Cyberfile project, is clear that IRS does not have the disciplined processes in place to manage all of its current contractual efforts effectively. IRS has initiated a number of actions to address management and technical weaknesses that continue to impede successful systems modernization. However, ongoing efforts do not correct the weaknesses and do not provide enough evidence to determine when they will be corrected and what steps if any are being taken in the interim to mitigate the risks associated with ongoing TSM spending. IRS has identified increasing electronic filings as critical to achieving its modernization vision. In our July 1995 report, we said that IRS did not have a comprehensive business strategy to reach or exceed its goal of 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 unwilling 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. 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. Further, IRS said that the strategy would address that segment of the taxpaying population that would prefer to file from home using personal computers. To date, 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 re-engineering project with a goal to reduce paper tax return filings to 20 percent or less of the total volume by the year 2000. It plans to complete its electronic filing strategy in October 1996. These initiatives could result in future progress toward increasing electronic filings. However, our review found that these initiatives are not far enough along to determine whether they will 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. It also is not clear how the reengineering project will impact the strategy or how these initiatives will impact TSM systems that are being developed. In our July 1995 report, we said 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.