U.S.

Internal Revenue Service: Failure in Information Technology Management Its Worse Than You Think However badly run you think the IRS is, its worse. The agency that processes 209 million of the most complicated forms known to humankind uses computer systems mostly designed in the 1950s, built in the 1960s, and jerry-rigged ever since. Some still bear the frontier-days emblem of Sperry Univac. A large chunk of the IRSs 62 million lines of computer code is so ancient that young technicians cant read it; the agency has to pay incentives to retain programmers who can. Charles Rossotti, the new IRS commissioner, told Fortune magazine that upgrading his vacuum tube-era technology will be like rebuilding Manhattan (New York City) while were still living in it. The $7 billion agency is Washingtons biggest basket case. It has attempted the same gargantuan task of modernizing its computers for 25 years running and failed every time, at a cost in the past decade alone of nearly $4 billion. For example, 13 years ago, some minor tinkering by the IRSs Philadelphia service center led to the filing season from hell. One could argue that every filing season is from hell (and back again), but tax time 1985 truly stands out. Clerks shoved dozens of unprocessed returns into ceiling ducts and wastebaskets jus to get them off their desks. Afterward, a consulting firm concluded that it was no surprise the IRS had trouble working its computers; the surprise was that they worked at all. Heres another surprise: many of the same machines still process your returns today. The system is a tangle of 80 mainframes, 1,335 minicomputers, and 130,000 desktop boxes that are largely unable to communicate with each other. We go all over working with Third World countries, and weve never seen a system thats this Rube Goldberg and this old, a computer expert told former IRS commissioner Lawrence Gibbs. Change in Management Rossotti, the ex-chairman of the computer consulting firm American Management Systems, was brought in with great fanfare to make the IRS, if not respectable, at least reliable. Insiders believe that if anyone can do it, Rossotti can. The 57-year old former U.S. Defense Department whiz kid is the first commissioner with experience in management and computers; his predecessors were tax lawyers. He has the backing of U.S. Treasury secretary Robert Rubin and key lawmakers. It will be many, many years before the IRS is where we want it to be, concedes Rubin. But with Rossotti in charge, he predicts, youll see steady progress. Dramatic turnarounds are possible in government. Who would have imagined that Marvin Runyon could deliver on his mandate to remake the U.S. Postal Service? Yet at the IRS, doubts abound. Not long after Rossotti arrived last November, the IRSs

respected chief technology officer, Arthur Gross, who had spent nearly two years drafting the latest modernization blueprint, resigned in frustration. Gross worried that pressure on Rossott to make showy, customer-friendly changes abusing taxpayers less often, answering the phones more often might keep him from solving the agencys computer ills, especially the desperate need for a central database. The IRSs chief financial officer (CFO) Tony Musick, also resigned to become deputy CFO at the U.S. Commerce Dept., and a third top slot, the taxpayer advocate, will soon be vacant. Says Rossotti, bravely: I was prepared for some pretty significant problems. See Figure A.10. Figure A.10: The numbers tell the tale of the mismanagement of information technology by the IRS. $150 billion $5 billion 100 million 19 million 1 million 7,500 40% the IRS lost in 1995 because of mistakes, unreported income, or improper deductions. amount by which the IRS overbills taxpayers each year. returns the IRS in 1992 predicted would be filed electronically by the year 2000 actual returns filed electronically in 1997 people who received tax forms with erroneous mailing labels this year. IRS employees in the Washington, D.C. area who do something other than process tax forms. percentage of information on your return that actually gets entered into the IRSs database

(Source: adapted from Jeffrey H. Birnbaum, Unbelievable! The Mess at the IRS is Worse Than You Think, Fortune, April 13, 1998, p.100, by Time Inc.) The IRS and U.S. Politics Disdain for the IRS is at an all-time high. Sensing electoral advantage, Republican leaders have made the agency their favorite post-cold war bogeyman. Senate majority leader Trent Lott calls it a necessary evil and has suggested we might be better off without it. A recent poll by the Pew Research Center for the People and the Press reports that the IRS is viewed favorably by only 38 percent of Americans, dead last among federal agencies. The second least popular department, the CIA, has a favorable rating 13 points higher. But as everybody knows deep down, the IRS isnt about to fade away. Despite its flaws, it remains the most pervasive, least dispensable civilian agency in Washington, D.C. Its 102,000 employees collect $1.5 trillion annually, the lifeblood of government. It also distributes its own brand of largess refunds which last year totaled an eyepopping $107 billion to 68 percent of taxpayers. Never mind that everyone who gets a refund is giving Uncle Sam an interest-free loan (the bigger the refund, the bigger the loan); most taxpayers rely on refunds as a forced means of saving. Few want to jeopardize their annual good fortune by overhauling the system.

So its computers may be Ice Age. Its agents may be rude. But the IRS isnt about to implode. Barring a calamity, our taxes this year will be processed slowly and clumsily but, for the most part, accurately; three-quarters of the money collected by the IRS, after all, comes from wages, which are subject to withholding. Whats at stake in the short term is not the IRS but tax policy. Democrats like Secretary Rubin see partisan criticism of the IRS as a stalking horse for Republican proposals to undermine the progressive income tax, which levies stiffer taxes as incomes rise. Some people attack the IRS as an instrument for advocating one form or another of reform, like a flat tax, Rubin warns. His passion to salvage the agency is partly motivated by that fear. For the longer term, he legitimately frets about the IRSs rickety infrastructure and the all-too-real reports of rampant taxpayer abuse. The Role of the U.S. Congress Congress must share the blame for these failings. Because of changes it has made almost every other year for two decades, the tax code is out of control. What began in 1913 with a 14-page law and a one-page form, is now so complicated that the nations 121.6 million individual taxpayers spend $8 billion a year to get help preparing their returns. The tax code is 9,541 pages long, 820 pages of which were added because of last years tax bill. The IRSs simplest form 1040 EZ, has a 28-page instruction book. To complete the regular 1040, a taxpayer must spend an average of nearly 10 hours. Own a small business? Add another 10 hours for the dreaded Schedule C. Investment income? Get ready for a blizzard of capital gains rates on Schedule D. If youve got time to kill, you could settle down with the IRSs roughly 230 other forms. Congress has made matters worse by giving the IRS mixed signals about its role. In the 1980s, when budget deficits weighed heavily, lawmakers pressed the agency to squeeze taxpayers for money. Then, after hearing horror stories of taxpayer abuse, Congress reversed itself and decided the IRS should become a service organization. Margaret Richardson, who preceded Rossotti as commissioner, remembers dashing from one congressional committee, where she was admonished for not collecting more revenue, to another, at which she was berated for not being kinder to her customers. Says Richardson, They wanted us to collect every nickel, but they wanted us to be warm and fuzzy too. It was schizophrenic. The Code of the IRS Bureaucracy To cope with the whipsaw, the IRS bureaucracy developed its own unofficial code of conduct. Basically, it came down to us versus them. In her book, Unbridled Power, Shelly L. Davis, the IRSs official historian from 1988 to 1995, describes the agency as secretive, paranoid, and arrogant. She also asserts, despite IRS denials, that it keeps an enemies list of people whose political activities might have offended someone at the IRS. Certainly the organization is insular. It has its own security force, which critics say spends as much time muzzling internal dissidents as protecting the agency from outsiders. About 350 IRS employees use pseudonyms because theyre afraid of being

threatened or assaulted. And who could fault them? In fiscal 1996 the IRS collected nearly $29 billion in delinquencies, issued 750,000 liens, and seized 10,000 properties. Until recently, some revenue agents had a quota of taxes to collect from alleged deadbeats. One account from the San Francisco (California) office put the figures at $1,000 an hour from personal audits and $2,200 an hour from business audits. The easiest way to meet those goals was to target poor people and small-business owners because they were less likely and less financially able - to fight back. According to the Transactional Records Access Clearinghouse at Syracuse University (New York), IRS audit rates for people with annual incomes over $100,000 declined by a factor of four between 1988 and 1995, to 2.7 % from 11.41 %. The IRS audit rates for individuals with incomes less than $25,000 nearly doubled, to 1.96 % from 1.03 %. Taxpayers Abuse Tales of taxpayer abuse poured in: there was the New York priest hounded for thousands of dollars on his mothers estate because he had once filed the wrong form. The Virginia restaurant raided by IRS agents and closed for five months over what turned out to be a false tip about tax fraud. The California woman who fought the IRS for 17 years over a debt owed not by her, but by someone with a name similar to her husbands. The six-year-old whose bank account was seized to help pay her parents overdue tax bill (the IRS got $26). Hearings by the U.S. Senate Finance Committee continue to disclose other hair-curling stories. To address similar abuses, Congress this year will pass the grandly titled Taxpayer Bill of Rights. The legislation will make some improvements, such as shielding divorced taxpayers from their ex-spouses tax liabilities; reducing penalties and interest on overdue taxes; and in court cases, reversing the burden of proof so that the IRS will have to show that the taxpayer did wrong, not the other way around. But even the bills advocates on Capital Hill call it a Band-Aid on a festering wound. An oversight board created by the legislation will provide an independent eye on the agency, but board members wont be able to look at individual tax returns and thus wont deal directly with taxpayer complaints. Furthermore, representatives from the IRSs labor union will be on the oversight board, making it as difficult as ever to fire incompetent workers. And the burden-of-proof change wont have much effect since so few tax cases actually go to court. Failure in Information Technology Anyway, Congress cant legislate away the IRSs most nagging deficiency, lame technology. Even Rossotti is awed by what he faces. I have never seen a worse situation in a large corporation. He says. The technology is just remarkable for how backward it is. Believe it or not, things werent always so. In the mid-1960s, the IRS was on the cutting edge of automation. When corporate executives wanted to glimpse the state of the art in post-punched card computerization, they visited the U.S. taxman. The Dark Ages descended during Watergate, when President Nixon tried to harass his enemies with

audits. Congress didnt like that, and when the time came in the mid-1970s to begin revamping IRS computers, lawmakers couldnt bring themselves to appropriate funds. Only 1985s filing season from hell got their attention. Washington being Washington, however, it took a while for new plans to be laid. By 1989 the IRS had scheduled more than 30 modernization projects, with a goal of processing 80 million tax returns electronically by 2001. The centerpiece was a machine that could scan returns right into a computer. No more hand-to-hand combat with Form 1040s, the IRS pledged, just digitized information directly from form to floppy disk. Not exactly. The volume and variety of tax returns overwhelmed the technology. One of the main shortcomings was that the scanners couldnt decipher taxpayers handwriting. Service Center Recognition/Image Processing System, or SCRIPS in IRS jargon, was a $200 million failure. A system that was supposed to save $17 million by eliminating keypunch jobs ended up costing more than the manual method. Undaunted, the IRS attempted a second scanner project. This one, called Document Processing System (DPS), had a projected price of $1.3 billion. Besides the extra cost, the system had another special quality: it was incredibly complicated. IRS employees began to mock DPS by calling it the Bubble Machine, because it looked great but was completely ineffectual. Even when some computer systems were successfully upgraded, they were never integrated. Each branch of the IRS redid its technology without regard to the others. For instance, the part of the agency that informs taxpayers that their returns are late rejiggered its computers separately from the division that keeps tabs on whether taxpayers report all the income that their W2s and 1099s say theyve earned. In all, the IRS developed nine disparate databases, derided as stovepipe systems, most of which cant communicate with the others. In other words, after spending millions of dollars to get data from here to there, there often turned out to be the wrong place. How could this have happened? Obsessed with privacy considerations, the IRS foolishly tried to manage the massive effort in-house, rather than emulate its federal brethren, which had long relied on outside experts to keep them up-to-date. Former Iowa Congressman Jim Lightfoot termed the missteps a $4 billion fiasco, and he wasnt far from wrong. Time For A Change The IRS learned an expensive lesson: it had to reach beyond its own bureaucracy to develop an overarching strategy. Nothing piecemeal would do. As it faced one of the biggest crises of its 136-year history, the IRS publicly admitted that it needed to make a sharp turn. To the rescue rode Art Gross, 53, a veteran of the New York State revenue department. Gross, the new chief information officer, said publicly that the IRSs computers didnt work in the real world and that its employees lacked the intellectual capital to transform them. In 1996, when Gross arrived, the IRSs year 2000 conversion project had a budget of $20 million and a staff of three; now its a $900 million project with 600 workers,

many of them consultants. Theres at least a chance the whole tax system wont shut down on January 1, 2000, which was distinctly possible before Grosss arrival. Grosss major challenge was to try, once again, to fix the big machines. First he did triage. He popped the Bubble Machine and a couple dozen other wayward projects, including a hastily drafted program to allow taxpayers to file over the Internet. Then, with help from TRW, he devised a new top-to-bottom computer architecture. At its heart was a centralized database that would make the IRS more like American Express and less like the Pony Express. Gross wanted to give to any taxpayer who called a status report on his or her account, something all but impossible now. He also was determined, at last, to start entering tax return information electronically. The Politics of Change But then it all went wrong again. The U.S. Treasury Department, in its zeal to overhaul the most broken arm of government, brought in a new IRS commissioner Rossotti who was an expert in the same field as Gross. A clash was inevitable. As farreaching as Grosss plans were, Rossottis were even more ambitious. On top of year 2000 changes, computer updates from the 1997 tax law, and the overall modernization, Rossotti proposed to restructure the entire organization. The combination was too much for Gross. With evident exasperation, he says, I chose to move on with my life. To conceal Grosss discontent, a Clinton official whispered that his decision was purely personal, that he had a girlfriend in another city, and that he wanted to be closer to her. Grosss significant other in fact, lives in Florida. But his new job, at a medical center in Albany, New York, is 300 miles farther from her. Gross told Fortune that he was proud of the modernization he championed. But there is reason to worry that the job he started might never be completed. Gross believes the creation of a centralized database requires a situation in which the chief information officer is invested with all the authority and resources to make it happen. And that, he says, is not a certainty. Gross and others also argue that by planning to restructure later, Rossotti is putting the proverbial cart before the horse. Currently the IRS is organized geographically into 33 districts that report to 10 regional offices. Rossotti contemplates a radical change to a system organized by business units. The IRS would have separate divisions for individual taxpayers, big businesses, tax-exempt entities, and small businesses. Experts question the wisdom of beginning a technological conversion before the organization is set. An effective information-systems architecture is designed around the business it supports, not the other way around, says Jim Woldbarsht, ex-chief information officer (CIO) of the Pension Benefit Guaranty Corporation, now a software executive. For his part, Rossotti says the computer blueprint as it stands can be adapted to his plans. Grosss other doubts stem from the way Washington works. This is a great town for policy, he says. Policy entails wonderful debate and negotiation and brokering and all that. But once you commit to a technology direction, the key to success is very aggressive, unremitting management, without a lot of room for ongoing debate. In the two years Ive been here, it appears that this town is not always conducive to that kind of management.

Gross and other observers say the relatively low government pay scale (he earned $125,900) could prevent Rossotti from bringing in the talent he needs. There are enormous opportunities in the [information technology] industry to make large personal fortunes, Gross says. Its an exception when you can obtain very senior technologymanagement people to commit to this kind of effort in government. Gross sees himself as that kind of exception, and is clearly leaving with regrets. Im a finisher, he says wistfully, knowing well that he hasnt finished much. The Future of Information Technology (IT) at the IRS Rossotti is more upbeat. He is hopeful that Congress will let him hire eight or more managers at an annual income of $172,000 including bonuses. That ought to be enough to lure capable employees. But the IRS needs more than a dozen good men and women. Even under the best of circumstances, modernizing its computers could take as long as 15 years. Longtime IRS employees have come to view computer plans with skepticism. In Philadelphia, Pennsylvania, section chief Robert Davis describes one mainframe as ancient and another as a hodgepodge and shakes his head when he asserts, Everything you see is obsolete and is going to be replaced. But then he adds, If everything goes well I always have to add the if. At the IRS theyve heard it all before. So what happens if nothing happens? What happens if the machines cant be fixed? One possibility is system-wide collapse due to sheer obsolescence. Another more likely outcome is a replay, perhaps on a bigger scale, of the 1985 Philadelphia meltdown. Unfortunately, thats probably what it will take for Washington to drag the IRS into the modern age. (Source: adapted from Jeffrey H. Birnbaum, Unbelievable! The Mess at the IRS is Worse Than You Think, Fortune, April 13, 1998, pp. 98-110, by Time Inc.)