to be putting out a little education program for some of the people to make sure that-they are Americans, they are expected to file, they are expected to pay income tax like everybody else. We have lots of people that have language problems in this country, but we don't say if you have a language problem that exempts you from responsibility under income tax payment. Mr. STREET. Indeed, that is one of our primary goals, is to provide this kind of education to rural fishermen, as well as other rural residents, to make them aware of this need and to educate them in the way to go about this. Senator GLENN. Thank you, Mr. Chairman. Chairman STEVENS. Well, Senator Glenn, this is not dissimilar from our problem-we had a similar problem with the reindeer herders. These are subsistence economy people. Over a period of several years, he ends up having a tax liability of $28,000, including, as I understand it, the fines and interest that are due. The difficulty is that most of them who are living in the subsistence economy really aren't subject to the Internal Revenue Service laws, except for the filing. They are required to file. We are dealing with a situation where people are living in villages of up to several hundred, but mainly the income producers are very few and they share their income. Obviously, that is what crew shares are. They share their income on every trip, so it has been a very difficult thing to transition them into the cash economy to start with and to then bring about the filing of forms. Most of them would never have to file a form on anything, John, in their lifetimes, except for IRS and the State tax. We don't have a State income tax, too, besides that. You should know that. We do not have a State income tax. Senator GLENN. I was just thinking, though, that here is a businessman. He is an employer; he has to hire six people on a regular basis. Whether they are paid on shares or not, he is in business. He buys a boat. Boats are not inexpensive. So he is a businessman; he knows how to conduct business. I would think if they don't know that they are supposed to pay income tax, somebody would be very well advised to inform them that they are. I have been through this with a couple of cases in Ohio. That is the reason why I may be a bit more hard-nosed than I would be otherwise. Chairman STEVENS. But that is the problem. I am not sure that you really realize that the organizations that these two people represent the organizations, together with the State and the IRS, had an education program going on whereby they were teaching in high schools how to file returns and why you have to file them. Now, this gentleman raised in this village of Hydaburg is not exactly the kind of businessman you think he is. He has a boat and all his business is conducted on the boat. He doesn't have an office and he doesn't have a secretary and he doesn't probably even have a phone, except at his home. The difficulty we have is-and we are not trying to make the case that they don't have to file. Don't misunderstand us. That is not our point. Our point is that as a result of the reorganization-that is why I asked them to come in-this is what is happening now in rural Alaska. The machines are picking up this gross income indication and the machines are sending out notices of taxes that are due based upon a gross analysis of the value of the fish that were caught, and these people are faced with the proposition of fighting the IRS over the concept of a gross assessment of taxes that is absurd. This was more than 10 times the final amount of taxes that were owed, and the final cost to the State and to these people and to Mr. Carle to fight that is just overwhelming, but he has been fighting machines, John. That is the problem. I hope that through this hearing, we understand that through the modernization program, the individual American is going to be fighting machines. The IRS is closing down its manned operations in rural America. Now, that is the problem that I am trying to highlight by these people being here, and I hope that as we go through the rest of this testimony people understand its application right down to an individual. Sure, he was wrong not to file his tax returns, and once he had knowledge of it, as I understand it, he tried very hard to do that, but he is fighting the IRS because the machine said he owed a lot more taxes than he did and it has put him in a place where he almost lost he did lose his permit, didn't he, but you all have gotten it back for him? Mr. STREET. I hope that we have that restored for him. It is still yet to be completed, but we think we have that resolved. Chairman STEVENS. If that permit is sold to a person who lives outside of the region, the other six people are out of a job. Mr. STREET. That is correct. Chairman STEVENS. Thank you very much. Do you have any further questions? Senator GLENN. No. Chairman STEVENS. I appreciate your coming. It is a long way to come to try and make a point of what we are going into now. Mr. STREET. Thank you. Chairman STEVENS. Now, we are going to turn to the Assistant Comptroller General for Accounting and Information Management of the GAO, Gene Dodaro, who has appeared before us many times, accompanied by Dr. Rona Stillman, Chief Scientist for Computers and Telecommunications, of GAO; Gregory Holloway, the Director of Government-Wide Audits; and Lynda Willis, Director of Tax Policy and Administrative Issues of GÃO. Mr. Dodaro, I assume you are going to make the statement for GAO and I see you have some charts here. It would be nice if we could put them up so the public can see them. Mr. DODARO. I am going to use them in a few minutes. TESTIMONY OF GENE L. DODARO, ASSISTANT COMPTROLLER Mr. DODARO. Good morning, Mr. Chairman and Senator Glenn. We are pleased to be here today to talk about the tax system mod ernization effort at the Internal Revenue Service. As you pointed out, this is a critical effort to get IRS fully into the information age, and also represents a huge investment on the part of the taxpayers' money. We have over the years become increasingly concerned about IRS' management of the program and, as a result, in February 1995 put the tax system modernization effort on GAO's high-risk list. Additionally, last spring we undertook a comprehensive assessment to try to find out exactly what the full range of problems was with the modernization effort and to make some recommendations to get it on track. In undertaking this evaluation, we used the best practices of leading organizations in the private sector and public sector that have successfully managed information technology initiatives. In fact, through the efforts of this Committee, many of these best practices from our research have been embedded into law with recent changes under the Paperwork Reduction Act, and also the recently passed Information Technology Management Reform Act. We also used some industry standards. For example, we used the computer maturity model developed by the Software Engineering Institute (SEI) at Carnegie Mellon University. So using these criteria and standards, we took a good look at IRS' tax system modernization effort and, in July 1995, issued a report. In that report, we talked about the fact that IRS had some actions underway in many of these categories, but they had serious, pervasive management and technical problems with their modernization effort that really were impeding their ability to make substantive progress. In that report, we outlined over a dozen recommendations to IRS to try to put the effort on a good track. For example, we recommended that they revamp their business strategy for electronic filing. One of the concerns that we had is, according to IRS' estimates, even by the year 2001 only about 17 percent of the 224 million tax returns that are filed would be filed electronically, and this would be after the expenditure of about $8 billion if everything would follow through. We were concerned that most of the effort was directed toward filing through third-party preparers and there wasn't enough attention given to allowing people individually to file directly to the IRS. Additionally, we recommended that IRS put in place a disciplined investment control process whereby they would use that to select modernization projects, monitor and control their use, and evaluate whether or not they were actually producing the benefits that were intended. We found that the IRS had not had good cost data or benefit data to really make informed decisions about the investments, and so we made recommendations to enhance their ability to do that. We also recommended that the IRS put in place an intensive effort to improve their software development capability. When we assessed them against the computer maturity model of the Software Engineering Institute-in that model there are five levels of maturity-IRS was at the first level, the bottom level, the initial level. This meant that their ability to develop software was immature, and that level is characterized by ad hoc and chaotic attempts, whereas the success of the individual modernization efforts relies on the individuals involved and there was not a process in place that was a repeatable process that IRS could guarantee they would deliver a quality software product, systems to run the machines, and also within cost and on time. Now, what I want to illustrate through the use of these charts is the recent experience IRS has had with the Cyberfile project. We believe this project is indicative of the types of problems that IRS has had in the past with their modernization effort, and also illustrates what can happen when you don't have a disciplined process in place. The Cyberfile initiative was an initiative to move the Internal Revenue Service-put them in a position to allow taxpayers to file their returns directly from their homes via file transfers through the telephone systems or through the Internet. Now, what one would expect to see when we would go in and look at these projects is a disciplined process according to this first chart, which shows that you define your requirements, you assess your risk, you design the effort to address those risks, develop your architecture. You develop it. You go through a testing process that is rigorous. Particularly in the case of IRS when there is concern about security of taxpayer data, this is a very important part of the equation. Also, then, you put it into operation. In December we came across the Cyberfile initiative as part of our ongoing effort to monitor the tax system modernization effort. What we found is something very different than this disciplined process. For example, IRS had launched into the development stages. They had not had requirements definitions in place. They did not have a security policy and some of the architecture that would be needed. In fact, many of those specific prerequisites to a good development effort were not going to be prepared until after the system was actually in operation. IRS had planned to use this system in an operational test during this filing season and we were concerned that they were not ready to do so-particular concerns about the adequacy of their plans to protect the taxpayer data, particularly using the Internet option. We also were concerned that in our prior report we had recommended that if IRS used contractors that they be at least at a Level 2 stage, according to the SEI criteria, so that we would have more guarantee that would produce a good product on time. That did not happen in this case, as well. So you basically have a process now where IRS had planned to go into operational use of this option during the filing season without having a lot of the necessary planning in place. Where are we now with the Cyberfile project? We are basically in March. We still do not have a lot of the basis requirements fulfilled through this effort. IRS has postponed implementation of this. Our understanding is that it won't be put in place and a decision made until after April 15 this year, but we also uncovered some other issues that emanated from the fact that a good management discipline was not put in place. Two weeks ago, we walked through the Cyberfile data center, which was the center that would be used to process this informa tion, and we found quite a bit of problems with that center ranging from the physical security-as you mentioned, locks were not in place, mechanisms were not there. You could flip the lock open with your finger. Hinges were not on the doors. There were a lot of hazards in the facility, a lot of combustible materials around. There was a lot of dust from construction around at a time when you had expensive equipment in place. We were concerned that some of the sprinklers in the system could be inadvertently set off, causing a flood in the facility. There was no backup plan should the power be put out in the facility. Basically, what we found were 49 specific violations of normal, good security practice in a 1-hour visit through the data center, and this again illustrates the problems that can occur when efforts are made to put systems in place that are schedule-driven, trying to get it in place without going through the discipline process. These are the types of experiences that have led us to make the recommendations in our July report that basically IRS put in place an adequate technical and managerial foundation to manage this effort successfully. Unless that foundation is put in place, tax system modernization will not succeed. That concludes my summary comments and we would be pleased to take any questions. [The prepared statement of Mr. Dodaro follows:] PREPARED STATEMENT OF GENE L. DODARO Mr. Chairman and Members of the Subcommittee [sic]: I am pleased to have this opportunity to assist in your review of the Internal Revenue Service's (IRS) Tax Systems Modernization (TSM). Over the past decade, GAO has issued several reports and testified before congressional committees on IRS' costs and difficulties in modernizing its information systems. As a critical information systems project that is vulnerable to schedule delays, cost over-runs, and potential failure to meet mission goals, in February 1995, TSM was added to our list of high-risk areas.1 IRS invested about $2.5 billion in TSM from 1986 through the end of fiscal year 1995. In addition, it plans to spend an additional $695 million for fiscal year 1996 for this effort, and through 2001, it is expected to spend up to $8 billion on TSM. By any measure, this is a world-class information systems development effort, much larger than most other organizations will ever undertake. TSM is key to IRS' vision of a virtually paper-free work environment where taxpayer account updates are rapid, and taxpayer information is readily available to IRS employees to respond to taxpayer inquiries. IRS recognizes the criticality to future efficient and effective operations of attaining its vision of modernized tax processing, and has worked for almost a decade, with substantial investment, to reach this goal. In doing so, IRS has progressed in many actions that were initiated to improve management of information systems; enhance its software development capability; and better define, perform, and manage TSM's technical activities. However, this effort to modernize tax processing is jeopardized by persistent and pervasive management and technical weaknesses. In July 1995, we reported on these weaknesses and made over a dozen specific recommendations which were intended to correct many of these weaknesses by December 31, 1995.2 IRS has initiated some activities to address these weaknesses. However, as we reported earlier this month, none of these activities, either individually or in the aggregate, has fully satisfied any of our recommendations.3 Further, ongoing efforts do not provide enough evidence that weaknesses will soon be corrected. As a result, IRS continues with plans to spend billions more on TSM with 1 High-Risk Series: An Overview (GAO/HR-95–1, February 1995). 2 Tax Systems Modernization: Management and Technical Weaknesses Must Be Corrected If Modernization Is To Succeed (GAO/AIMD-95-156, July 26, 1995). 3 Status of Tax Systems Modernization, Tax Delinquencies, and the Potential for Return-free Filing (GAÓ/T-GGD/AIMD-96-88, March 14, 1996). |