IRS’s Business Systems Modernization program, which began in 1999, is a multibillion-dollar, high-risk, highly complex effort that involves the development and delivery of a number of modernized tax administration and internal management systems, as well as core infrastructure projects, which are intended to replace the agency’s aging business and tax processing systems and provide improved and expanded service to taxpayers and internal business efficiencies for IRS. CADE, one of the core systems of the Business Systems Modernization program, was intended to provide a modernized system of taxpayer accounts, with the ultimate goal of eventually replacing the Individual Master File (IMF), a 1960s legacy tax master file that maintains all taxpayer records for individual taxpayers. The IMF is the authoritative data source for individual tax account data. Tax data and related information pertaining to individual taxpayers are posted to the IMF, and the IMF is updated annually to incorporate new tax law procedures and changes. The IMF is a critical component of IRS’s ability to process tax returns, as all the other IRS information system applications use data from this source. According to IRS, the IMF is a complex computer system that maintains all individual taxpayer records but has inherent limitations that significantly constrain IRS’s ability to achieve its mission. The delays in weekly updates of taxpayer accounts, the lack of synchronization of taxpayer data across dozens of systems, the complexity of the data, the large volumes of data, and the ongoing need to embed new tax laws and business rules contribute to IRS systems storing, sharing, and processing data that is often incomplete, untimely, or inaccurate. With CADE, IRS started establishing a database and related functionality for posting, settlement, maintenance, refund processing, and issue detection for taxpayer account and return data for relatively simple tax returns for individual taxpayers. Since 2005, CADE has processed and recorded tax return and tax account information for increasing numbers of individual taxpayers. IRS reported that, in 2010, CADE processed about 41 million relatively simple returns (about 30 percent of the total individual income tax returns received); and issued about 36 million refunds that totaled in excess of $66 billion (approximately 14 percent of total refunds), and processed over 7 million taxpayer payments amounting to approximately $90 billion—with zero defects in balancing. In addition, IRS reported that it issues refunds with CADE approximately 5 days faster than refunds processed by the IMF. Although IRS made progress in processing individual taxpayer returns with CADE, IRS found that each successive release of the system was far more difficult as more complex accounts were to be supported, raising concerns about the effort required to address these increasing complexities. Also, since the CADE system operates concurrently with IMF processing, work must be done across the two environments, increasing the complexity of filing season operations and resulting in a greater risk for errors in processing taxpayer account information. IRS was concerned that, without a significant change in approach, CADE would not be completed until at least 2020. These challenges led the IRS Commissioner to form a team of senior IRS technologists and external advisers to review CADE and IRS’s modernization strategy for individual taxpayer accounts. The review identified six risks with the CADE strategy. As a result of the review, in August 2008, IRS began defining a new strategy to address the challenges confronting CADE and deliver improved individual tax processing capabilities sooner. Specifically, the new strategy called for accelerating completion of a modernized database and converting to a single processing system sooner than the current approach would allow. The new strategy is referred to as CADE 2. Table 1 describes the CADE risks reported by IRS and how CADE 2 intends to address them. As noted in the table, IRS used prototypes to test and prove complex technical and performance concepts early and provide guidance and information needed for detailed design. These prototypes were completed in 2010, although some remaining tasks in one of them—the Database Performance Test Prototype—will be completed later. CADE 2 is expected to deliver its functionality incrementally through three phases known as transition states. Table 2 shows the target completion dates and key characteristics for transition state 1 (TS1), transition state 2 (TS2), and the target state. TS1 consists of the following two projects: Daily Processing: According to IRS, this project is to enable IRS to process and post all individual taxpayer returns filed and other transactions by updating and settling individual taxpayer accounts in 24-48 hours with current, complete, and authoritative data, and provide employees with timely access. More specifically, through the Daily Processing project, IRS is expected to modify the IMF to run daily, i.e., modify current transaction processing to occur daily versus weekly; make changes to the Integrated Data Retrieval System (IDRS) and the notice generation process to support the daily vs. weekly processing cycle; and prepare daily “loads” to update the CADE 2 database for IDRS and other downstream systems as they are able to support daily processing. Database Implementation: According to IRS, this project is to establish the CADE 2 database, a relational database that will house data on individual taxpayers and their accounts; develop a capability to transfer data from IMF to the database; and provide for the transfer of data from the database to downstream IRS financial, customer service and compliance systems. Specifically, the project is expected to enable IRS to perform a one-time initialization of the database when TS1 begins (this will involve loading all taxpayer account data from IMF and the CADE database into the CADE 2 database and then validating it); perform daily updates to the database after TS1 begins by extracting, transforming, and loading daily processing changes to IMF data; and utilize the database to provide individual taxpayer account information to selected downstream systems to assist IRS service and compliance personnel. For example, the CADE 2 database is intended to provide daily updates to IDRS, as well as weekly updates to the Integrated Production Model (IPM)—a downstream data repository designed to support IRS compliance functions that house IMF and Business Master File data, information returns, and other data. IPM is expected to include current individual taxpayer data from the CADE 2 database. Regarding the status of these two projects, IRS completed efforts to define the TS1 projects’ logical design in December 2010 and began the detailed design phase, which includes activities such as documenting the physical design of the solution. IRS expects to complete this phase by April 2011. IRS has also defined overall objectives for TS2 and the target state, but detailed planning of TS2 is in the early stages, with the formation of a planning team that expects to define a high-level approach by early May 2011. In December 2009, the Treasury Inspector General for Tax Administration (TIGTA) identified several challenges that IRS needed to address to effectively manage identified CADE 2 risks, including, among other things, implementing a governance structure for the PMO to provide oversight and direction for the implementation of CADE 2 and developing contingency plans in the event that CADE 2 cannot be fully implemented. IRS officials completed a contingency strategy in November 2010. In May 2010, we reported that, while much had been done to define CADE 2’s transition states, IRS had not identified time frames for completing key planning activities for TS2. Consequently, we recommended IRS establish these time frames. In response, IRS stated that it would develop a plan for launching TS2 activities that will outline the approach and a high-level plan for the transition state. IRS also noted that business requirements would be completed in parallel with the development of the plan. In December 2010, IRS initiated TS2 planning activities and set a target of May 2011 for agreeing on the scope and plan for the transition state. In November 2010, TIGTA reported on the prototypes undertaken by IRS to gain confidence in the CADE 2 solution. TIGTA found that the five prototype teams that were established generally managed their objectives effectively, and that the teams also identified risks that faced the successful execution of the prototype plans and took steps to overcome the barriers. TIGTA recommended that IRS take several actions to reemphasize compliance with the elements of the CADE 2 Prototype Process. In its response, IRS agreed with TIGTA’s recommendations and described steps to address them. While the MITS organization has primary responsibility for developing, managing, and delivering the CADE 2 program, IRS has established a new governance approach for the program, including the CADE 2 PMO that is to manage the program and the relationship with the program’s stakeholders, define the solution specifications to meet the requirements and the delivery of the program scope, and specify the roles and responsibilities of all parties. The new governance approach is intended to foster rapid decision-making and proactive risk management and issue resolution, as well as ensure that the appropriate stakeholders are involved, engaged, and collaborating as a unified team in making CADE 2 decisions. The CADE 2 PMO is headed by an Associate Chief Information Officer and made up of several groups, each responsible for a different aspect of the program. These groups include Delivery Management. Responsible for overseeing and coordinating activities across the projects that are implementing the solution for each of the transition states. Program Management and Control. Responsible for executing the program management processes, CADE 2 solution planning, and governance and control activities. Chief Architect. Responsible for setting the overall technical direction in alignment with IRS’s business and technical architecture, as defined in the enterprise architecture. Chief Engineer. Responsible for reviewing detailed design and interfaces to ensure the CADE 2 solution will work, is secure, and integrates with other systems and infrastructure. Business Operations. Responsible for providing the administrative support for all branches of the PMO.