The Internal Revenue Service continues to make progress in the modernization of its business systems, but budget shortfalls and inconsistent project management oversight could derail the program, according to an annual assessment by the Treasury Department’s inspector general for tax administration.

Comment on this article in The Forum.The IRS launched its Business Systems Modernization program in 1999 to replace within 15 years its aging computer systems. Delays in the program and cost overruns led the agency in 2005 to take over as the project’s primary systems integrator, replacing Computer Sciences Corp. The IRS created a strategy to use legacy systems where it can deploy modernized systems on an incremental basis.

The modernization program has improved since the IRS took over, the inspector general reported. The agency deployed new releases for the Customer Account Data Engine, its tax processing system. Between March and August 2007, the IRS processed about 11 million individual tax returns through CADE and sent out $11.6 billion in refunds. The agency also modernized e-File and deployed the first release of the Account Management Services system, which supports an instant address change application in CADE and enables the agency to notify taxpayers more quickly if their returns have mathematical errors.

But the inspector general warned that reductions in funding could jeopardize the program. In fiscal 2000, Congress gave the IRS $436 million for its modernization program. In fiscal 2008, the budget dropped to $267 million, and for fiscal 2009, the agency has requested $222.6 million, a 16.6 percent reduction from fiscal 2008. The budget decreases have caused the IRS to adjust the program's scope and release schedules, and in some instances, defer or eliminate project capabilities.

Under its original plan, the IRS estimated the modernization program would be halfway completed in 2008 and that it would have to pay about $8 billion to contractors. So far, the agency has spent $2.5 billion for contractor services and $310 million on the program.

The report also stated that program and processes have not progressed enough to eliminate a material weakness designation, which implies the IRS needs to correct the weaknesses. The designation specifically applies to a failure by the IRS to ensure “orderly and controlled initiation, planning, execution and implementation of [the] project,” the IG noted. For example, CADE project requirements from each release have been deferred, and the project has missed target dates because the IRS and its contractor agreed to an unrealistic scope of work, according to the report.

"We have taken additional steps to improve our performance," said IRS Chief Information Officer Arthur Gonzalez in a written response to the inspector general's report. Those steps include developing mitigation strategies to confront risks that may potentially surface with the release of systems, efforts to address staffing challenges and implementing a methodology for measuring and reporting on project scope.

"We have also begun developing specific time frames for implementing our human capital initiatives, expanding requirements development and management policies, procedures and tools to a wider range of projects, and developing programwide reusable requirements," he said.