The Committee met, pursuant to notice, at 10:05 a.m., in room SD-342, Dirksen Senate Office Building, Hon. Ted Stevens, Chairman of the Committee, presiding.

Present: Senators Stevens and Glenn.

OPENING STATEMENT OF CHAIRMAN STEVENS

Chairman STEVENS. Today we are going to continue the Committee's review of the Internal Revenue Service modernization efforts. At our first hearing on this subject, which was held on March 26, we heard testimony on the status of the technological component of the Tax Systems Modernization program. We also heard how problems in the technical area and plans for their resolution can affect the Internal Revenue system business area. Now today's hearing expands our review to three main IRS program areas: Submissions processing, customer service, and compliance. In 1992, the IRS adopted a business vision to guide modernization efforts. This Committee is interested in how this business vision has redefined traditional elements of each program area, and we would like to try to understand if this TSM, this Tax Systems Modernization program, is delayed until these technical problems are fixed, will the IRS be able to meet the needs of taxpayers in the 21st Century as envisioned by the program?

Now, today we are going to start off with Lynda Willis, Director of Tax Policy and Administration Issues in the General Government Division of the GAO. Good morning, Ms. Willis.

Ms. WILLIS. Good morning.

Chairman STEVENS. And Dr. Rona Stillman, Chief Scientist, of the Office of Computers and Telecommunications in the Accounting and Information Management Division of the GAO.

Do you have an opening statement, Senator?

OPENING STATEMENT OF SENATOR JOHN GLENN Senator GLENN. Just very short, Mr. Chairman. Thank you. Today's hearing focuses on a fundamental problem that GAO has reported on again and again. IRS quite properly and rightfully wants to modernize and move to a less costly and more efficient paperless system as much as possible. And to do that need to decide a lot of things along the way, a lot of steps and many procedures on how

(85)

Fourth, significantly increase the scope, level of effort, management attention, and tools devoted to security development.

Fifth, implement an overall process improvement plan. I won't really go through it. It is the same idea you have just heard from GAO, to bring their internal capability up to Level 2 and then go from there. That includes, of course, training, assessment of where they are today, and so forth.

Sixth, focus efforts on the integrated case processing project. We picked that one because it is key to all of TSM. What we were trying to do was tell them once again, as we have before, in the other reports, pick one, do it well, test it, get it into the field, and then go from there. Furthermore, I think, and we state in there, TSM funding for projects that do not support such a focused effort should be reduced until definite improvement is shown.

Absent follow-through, new approaches to TSM may be necessary, in our opinion. One possibility, of course, would be to assess, justify, and fund each component project individually. Another might be to out-source, as Senator Glenn says-that is, to contract. The committee believes, however, that correcting the deficiencies as identified and strengthening its management is the best course of action for IRS and the country, again just as GAO said.

Our committee has expressed concern that the problems raised here, like some of the specific recommendations, have been raised previously and, in fact, for quite a few years. We therefore suggest that some ongoing mechanism be established that can both advise the commissioner and foster constructive interaction between the IRS and its oversight organizations to assure the best possible focused decisionmaking and communication.

With that, I thank you. Mr. Irvine and I will be glad to try to answer any questions you have.

Chairman STEVENS. Well, I do thank you very much. Your recommendations are quite similar to GAO, which you heard, and I am sure you have worked with them, too.

Mr. CLAGETT. No, we haven't worked with them very much.
Chairman STEVENS. You haven't?

Mr. CLAGETT. They have been independent assessments.

Chairman STEVENS. That is very good. They are quite concise and similar and point in the same direction as far as the concepts of developing the plan.

Do you think we are at the situation where we ought to say, well, let's go back and start all over again and start it from the beginning as you indicated it should have been started in the first place?

Mr. CLAGETT. Well, let me start by saying it is pretty late to do that. On the other hand, after 5 years I have to tell you that the committee is not very optimistic that IRS will or can implement all the recommendations that we have made.

Chairman STEVENS. Have you analyzed why that is the case, Mr. Clagett? Is it, as the other gentleman said

Mr. CLAGETT. I will be glad to give you my speculation. It certainly is somewhat different than the answer you got from GAO. Chairman STEVENS. Is it civil service restrictions?

Mr. CLAGETT. I don't know if it is civil service restrictions so much as it is the way in which the Federal agencies work. This is my own experience now. We have not addressed that specifically in

the committee, so I will give it as my opinion. I have served on other committees looking at similar modernizations. DLA-I earlier chaired that one, similar kinds of problems, and that is the approach that was taken.

Most private organizations, when they have such a problem-I know CEOs of several companies that have done large projects, and I have asked them how they go about it. The first question, of course, is what is it we want done; what kinds of things do we want to accomplish when we finish. So the very first thing is an overview, a vision of what it is they want done. It took the committee a couple of years to convince IRS that that is the first thing that ought to be done, and that was well after they were into development.

Second, then, usually the private firm is just like IRS and would say, well, we don't have the wherewithal, the technical knowledge, the leadership to do such a job, and they will go out and find a top person to lead such an effort. Certainly, if it were the size of TSM, they would do that. Instead, of course, IRS started from within, had a CIO, and apparently decided they could develop TSM internally.

Yes, there are civil service problems in hiring a first-rate person who has had large-development experience and has technical training, but that is the way it would be done outside. That person would then bring in some key people who had good technical experience, good large-project management experience, and then draw from that people to work with them. That was not done. Therefore, the planning wasn't done in that way. There was not the same thing you saw on the board with GAO; there wasn't a full plan set out, from which metrics could be developed. That said, now we will know when it is we have achieved success, then work back in the project to set milestones to get there.

Absent all that, I believe the only thing to do now is what you have heard earlier, and that is to back off from TSM, put TSM as a whole concept on the shelf, and have IRS propose specific projects-we picked ICP and proposed that they throw all of their efforts on to completing that, doing it well, upgrading their software people at the same time, learning from it, testing it, and then putting it into the field, and then make a proposal to move to the next project. That would also give them time to do the two things we still think are urgently needed; that is, a system architecture overview so that you have a complete picture of the whole project, and also time to develop the standards for interfaces.

One of the things that I worry about when they are doing all of these projects simultaneously without standards is that they are not going to achieve the goals of TSM, because the different developments are not going to be able to fully communicate with each other.

So, that is a long-winded answer to your question. I think it is a serious problem and I don't think IRS is alone in the problem. Chairman STEVENS. What you are really saying is you question whether the IRS is capable of implementing TSM as it is now structured.

Mr. CLAGETT. That is very right.

Do you want to add anything, Mr. Irvine?

Mr. IRVINE. Well, I think everybody needs to understand that software is still among the most difficult things we try to put together. I have been in the business 40 years, and look anywhereprivate industry, government, anywhere and you will discover that we don't perform as well in terms of meeting schedule, meeting budget, and providing capability in software as we do anywhere else. That is because it is really complicated. These are among the most intellectually complicated things that people try to put together.

If you think about a software project that is several billion dollars, then that needs to be approached-the process by which you are going to carry that out must be careful, controlled, disciplined. As was said earlier today, you have to use the very best practices available if you are going to tackle a project that size because even smaller projects, a couple-of-hundred-thousand-dollar projects, are quite risky in the software game.

Chairman STEVENS. Have you gentlemen been through developments in the private sector in terms of the transition to a new solution of this type? What I am going to get to is whether or not it is acceptable in this period that we are only getting 51 percent of the telephone calls answered.

How does private business handle the transition from the old way of doing things to the new way of doing things? Do they go through this period we are going through of just absolute customer rejection of the concept of the transition?

Mr. IRVINE. I think they manage that very carefully. You have to look in some sense at return on investment, and what the return is is often customer satisfaction and all of that sort of stuff. It is not clear to me-and this is my own personal opinion; I am not speaking for the committee now-that I know how to apply those kinds of measures to what the IRS does. How happy can I be as a customer? If they return me three times my refund, I am really happy. We don't want to do that, so it is not clear to me how to apply those kinds of measures to this circumstance.

Mr. CLAGETT. Well, I would add that in most industry efforts that I have seen, the first thing that is done after they decide what it is they want to do and what the end result will be is then to assess whether or not they can do it; that is, how much resources they have, and so forth. The last thing they do is attempt to develop the whole thing simultaneously and start developing all the systems simultaneously.

So I would say that what I would have hoped would have been done was, having set that out and set the plan out, to then pick the most important thing that was doable first and get started on that while they continued to do a better job on serving the current public. Most firms, as you said earlier about your own situation, couldn't afford to only answer half of their customers' inquiries. They wouldn't have enough money or wouldn't be in business long enough to develop the new system. So you can't let the current operation in any way deteriorate while you are developing a better system.

So I would say, in retrospect, now having spent this time looking at them, that it would have been much more preferable to have done it in smaller pieces and be able to manage it better.