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Nov 1990

Modernizing the IRS.

by Philcox, Henry H.

    Abstract- The IRS has already experienced positive effects from the modernization of its information system. The objectives of the system include the ability to process documents electronically and provide immediate access to relevant data. The accomplishments of the system include the elimination of discrepancies between income reports of third parties and taxpayers, the ability to verify information about taxpayers more quickly, and electronic filing of over four million tax returns.

The processing of information is probably our nation's largest commercial activity, but few realize that the IRS may be the biggest unit in this industry. The size and complexity of the IRS's work boggles one's imagination. The author describes the massive current effort to deal with the IRS's task, which has increased exponentially with new tax laws, complex investment vehicles and information returns. In so doing, the IRS is seeking input from its constituency and must convince other branches of the government to support and provide funds for its modernization.

A February 1990 General Accounting Office report described the task of managing the federal government's information technology as "monumental." And is it any wonder? According to the report:

* Each day more than 53,000 government computer and telecommunications systems touch the lives of Americans; * Past attempts to modernize the government's information systems have produced few successes and many costly failures; * Despite a $20 billion price tag each year for modernization efforts, the progress is painfully slow; and * With forecasts of tighter budgets and a shrinking workforce, information technology becomes an ever more critical factor in keeping government running.

The urgency is--do it right and do it now. It is an awesome challenge for all government agencies. But for us at the IRS, with the added distinction of touching the lives of more Americans than any other agency and having the responsibility of raising the tax dollars to run the nation's government, it is a challenge that must be met.


Thirty years ago, we were in the forefront of the age of automatic data processing and the computer revolution. And despite constant changes in the tax code and incredible business growth, for a quarter of a century we held our ground.

About five years ago, however, the pace of change started gaining on an outdated system. In an electronic age of instantaneous transmission and communication, our system was caught in a time warp--trucking and flying tapes of tax information around the country, drowning in an ocean of paper, and unable to provide employees timely access to information to answer taxpayers' questions and to resolve tax account problems.

Tax systems modernization, our effort to reconfigure IRS information systems, is fundamentally changing the way we conduct business. That fact raises a double imperative--first, that we be clear in our own minds about where we are headed and second, that we articulate our plans to stakeholders and prove we are serious about incorporating their ideas.


For us, modernization definitely has moved beyond the planning stage. It is here and now. And the unmistakable evidence of that? Here it is-- an approved systems design whose major characteristics include:

* Paper-free processing. The processing of tax forms, schedules, third- party documents, and payments with electronic filing as the first major step of a paperless processing operation. Paper documents are scanned and imaged at point-of-entry and then electronically processed. * On- line processing. It now requires six to eight weeks to move returns through our processing pipeline, convert data to magnetic tape, and fly tapes around the country for posting at our master file of tax accounts in Martinsburg, West Virginia. In the future virtually all information on a paper return will be processed in less than half that time. Processing time for an electronically filed return will be a matter of minutes. * Immediate access to pertinent data. Service centers--much changed from today--will be a base of operations that maintain taxpayer accounts for a particular region of the country. By accessing a new national database of account information via wide area networks, other service centers and our offices will overcome the current system's geographical and capacity limits. In answering account-related or technical tax law questions, access will be immediate, and information up-to-date. Electronic management of compliance cases will usher in a new, more professional and timely era of tax enforcement.

And the result? The system's technology and configuration will minimize the risk of mishaps. Instead of waiting 24 hours, a week or months for an answer or explanation from us, you will be able to obtain it in a matter of seconds. Predictability will replace uncertainty. The same expectations you have for transacting business with any of today's leading-edge private companies you will have with us.

While our modernization effort will not roll out completely until the end of this decade, specific milestones and clear objectives already direct us every step along the way. Already, more than 40 major modernization projects have been identified.


Let me identify the areas where we already have proven accomplishments:

* Clearing up discrepancies between third party and taxpayer reports of income. Systems now being tested provide IRS assistors with far more detailed background information about taxpayer accounts so that they can determine at a glance what prompted a taxpayer's receiving a notice of discrepancy. * Taxpayer service integrated system. The first successful leg of this service is an expert system tested last year in Boston that uses computer prompts to guide one of our taxpayer service representatives to the correct tax law or procedural answer. Consider the difference in Boston's accuracy from one filing season to the next-- in 1989, 59%; in 1990, 77%. Next, expect the expert system to take effect in Philadelphia, then Atlanta, Dallas, and Los Angeles with an eventual roll-out to the rest of the country. Eventually, the system's tie-in with taxpayer account and notice information will make it a one- stop service for taxpayers. * On-line double-checking of taxpayer information. We have a new and quicker way to verify basic taxpayer information. All IRS files, names and addresses, taxpayer identification numbers, filing requirements, employee plan information, and a cross- reference to information about spouses are subject to verification. It gives us the edge that private companies have long enjoyed. We can prevent processing glitches and respond to certain taxpayer requests in record time. * Electronic filing. More than four million tax returns were electronically filed this year. This reduces errors to a fraction of paper-processed returns, acknowledges receipt of the returns, and moves refunds out much faster. * Connectivity. We are accessing a number of databases from one terminal. In Boston, a collection prototype proved that accessing two systems from one terminal results in major improvements in quality of service. In Buffalo, New York, a demonstration of newer and better technology proved that nationwide implementation costs can be made up in about one year. Prior to our work on connectivity, if a taxpayer claimed he or she made a payment but we didn't show a record of that payment, on average it took about seven minutes for an employee to put a taxpayer on hold, get up from a desk, and check the account information on another terminal. Giving employees on-line access to information about all of a taxpayer's active accounts- -debits, credits, missing returns--greatly upgrades our ability to see if a payment has been made and credited to the correct period and then communicate the facts to the taxpayer.


A legitimate question to ask is, considering the modernization effort's vast scope and decade-long time frame, what happens if leadership changes? Will the planning and execution process begin all over again? The answer, categorically, is no. First and foremost, the direction we are taking is not the brainchild of any individual IRS Commissioner or Chief Information Officer. Yes, our current approach enjoys an unqualified endorsement by Commissioner Fred Goldberg and myself as the organization's first Chief Information Officer. But our approach also represents the accumulated wisdom of outside experts-- private sector information technology specialists, members of Congress with IRS oversight responsibility, General Accounting Office government- wide directives, and an independent review by the National Academy of Sciences.

There is another important point to underscore. Having created the position of Chief Information Officer, we now have a high-level, institutional bridge that will help ensure that the current course of action will outlive the tenure of today's top executives.


Rounding out the issue of continuity of vision is our decision to establish long-term relationships with technology contractors, who will help us build and manage the system, not just for a few years but for the decade-long life of the modernization effort itself. The challenge is great--on a number of different levels. Articulating a vision, selling that vision, winding our way through the government procurement process, and measuring everything we do against one important standard-- reducing the burden on American taxpayers.


I have described the good news we can already associate with tax systems modernization and some of the positive changes we can expect for the rest of this decade and beyond. But let me close by mentioning some difficult issues we're wrestling with, issues over which we have limited and in some cases no control, but nonetheless may predetermine how successful the modernization effort will be.

Federal Procurement Procedures

Rules that dictate how and when technology is procured were designed to meet the needs of a vastly different time--a computer technology age, not an information systems age. The result is a costly focus on complying with an incredible number of complex regulations rather than a focus on ensuring that technology is acquired and used in a way that really gets the business of government done most effectively, and in a timely fashion.

Annual Federal Budget Cycles

Multi-billion dollar investments in multi-year projects don't fit easily or well within the framework of a short-term federal budget cycle.

Federal Pay Scales

First-rate system planners, engineers, designers, managers and workers must earn competitive salaries.

We look to practitioners to help us raise these and other tough issues with the right people. If we expect to keep the modernization effort on track, we need consensus. We need it now.

CPAs have much to gain from a modernized tax system. We encourage you to lend your expertise, experience and credibility to the task of building one. We are justifiably proud of how far we have come thus far in the modernization effort. But real progress in producing this new system can only be achieved if we work together, as partners in tax administration.

PHOTO : Income tax time--Crowds standing in line to pay their Federal Income Tax in 1915.

PHOTO : IRS office before computerization. Pool of 250 stenographers who are typing out reports by auditors, in 1920.

Henry H. Philcox has held many responsible positions within the Internal Revenue Service. Currently, he is the agency's first Chief Information Officer. In this position, he is responsible for maintaining and improving existing systems and programs, and for the tax system modernization effort.

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