We reviewed the Department of the Treasury’s report, interviewed senior IRS officials responsible for the actions being taken to correct the management and technical weaknesses, and reviewed documentation. On June 4, 1996, we briefed senior Treasury and IRS officials, including the Deputy Secretary of the Treasury and the Commissioner of the IRS, on the results of our review. We performed our work at IRS headquarters in Washington, D.C., between May 9, 1996 and June 4, 1996 in accordance with generally accepted government auditing standards. The Department of the Treasury and IRS provided comments on a draft of this report, which are discussed in the “Agency Comments and Our Evaluation” section and are reprinted in appendix I. IRS envisions a modernized tax processing environment which is virtually paper free and 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 had a similar message. Its recommendations parallel the over a dozen recommendations we made in July 1995 to improve 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. In the July 1995 report, we described our methodology for analyzing 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). To evaluate IRS’ software development capability, we validated IRS’ September 1993 assessment of its software development maturity based on the Capability Maturity Model (CMM) developed by Carnegie Mellon University’s Software Engineering Institute, a nationally recognized authority in the area. This model establishes standards in key software development process 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. In our March 1996 testimony to the House Appropriation Committee’s Subcommittee on Treasury, Postal Service, and General Government, we noted that this plan, follow-up meetings with senior IRS officials, and other draft and “preliminary draft” documents received through early March 1996 provided little tangible evidence that actions being taken would correct the pervasive management and technical weaknesses that continued to place TSM, and the huge investment it represents, at risk. This interim status report on IRS’ efforts to respond to our July 1995 recommendations noted that IRS had 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, we reported that none of these steps had fully satisfied any of our recommendations. Consequently, IRS was not in an appreciably better position in March 1996 than it was in April 1995 to assure the Congress that it would spend its fiscal year 1996 and future TSM appropriations judiciously and effectively. In a subsequent testimony before the Senate Committee on Governmental Affairs, we reiterated our concerns that IRS’ effort to modernize tax processing was jeopardized by persistent and pervasive management and technical weaknesses, and that ongoing efforts did not include milestones or provide enough evidence to conclude that weaknesses will soon be corrected. We also addressed analogous technical weaknesses in an electronic filing system project called Cyberfile which substantiated our concerns that IRS was continuing to risk millions of dollars in undisciplined systems development in fiscal year 1996. In addition, we identified physical security risks at the planned Cyberfile data center. 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 recommendations to correct management and technical weaknesses. It finds 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 concludes 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 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. 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. Neither does it address the risk inherent in shifting hundreds of millions of dollars to additional contractual efforts when the evidence is clear that IRS does not have the disciplined processes in place to manage all of its current contractual efforts (e.g., Cyberfile) 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. We noted that IRS 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 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. IRS said further 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 reengineering 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 August 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. 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.