IRS works to finesse $80 million cut

Officials learn to cope with bad news

Lawmakers' $80 million cut to the Internal Revenue Service's modernization budget for fiscal 2005 has forced tax agency officials to tap management reserve funds and reduce their reliance on services from Computer Sciences Corp.

The agency will use up to $11 million in reserve funds to keep tax processing modernization projects on track, said W. Todd Grams, the IRS' chief information officer. They still expect to electronically process 2 million returns this year and 4 million in 2006.

Programwide activities such as architecture, integration and program management will be reduced and become the job of IRS staff rather than contractors, Grams said. "We're trying to minimize the effect on any given project," he said.

Vendor testing of modernization applications will not be affected. But, the agency faces higher risk levels, Grams said. IRS officials requested $285 million for fiscal 2005. Lawmakers approved $205 million.

Most of the work will be transferred to the Business Systems Modernization program office by February, said Jim Sheaffer, a CSC vice president. "The pressure of the budget means that we are having to do that quickly," he said.

Gradually relocating programwide duties away from vendors and into the IRS as projects mature has been a long-standing objective, said Stephen Holden, a former IRS modernization program director. "I was surprised that the time is now," he said.

A detailed transition plan will guide IRS officials, Grams said. "We've got to make sure we have our people identified by name and identified by skills," he said.

Officials will also halt work on internal modernization, although some cutbacks were part of the IRS' original fiscal 2005 budget request, which was $144 million less than the fiscal 2004 amount. Modernization critics have long charged the agency with trying to do too much too quickly. In response, agency officials decided to focus on completing fewer tasks.

"This is a good time to get small, get good, prove to people that we can run an effective modernization program," Grams said.

As a result, work on further releases of the Integrated Financial System, an internal financial accounting system, and the Custodial Account Project, a data repository of taxpayer accounts, will stop for now, he said.

"If we had more money, could we do more? Sure," Grams said.

The agency remains on track to deliver two semiannual updates of the Customer Account Data Engine (CADE), he said. CADE is the database replacement for the decades-old magnetic tape system that IRS officials use to process tax returns. In July, the system will be able to process 1040EZ forms submitted by taxpayers who have changed their addresses since last year. Address changes add a level of complexity because several systems have address functions in them "and we need to make sure they interface," Grams said.

The winter edition will update the system for tax law changes. Modernization staff will also focus on changing CADE's programming language, Grams said. CADE uses the Business Rule Engine, software that will contain the entire tax code and instructions about processing individual returns.

IRS officials' response to the funding shortfall shows they are abandoning their immature ways, Holden said. "The fact that they were able to make those hard decisions to me shows there is more discipline in how they make their [information technology] decisions," he said.

"We are coming off the best year ever in modernization," Grams said. "My intent is to keep us focused so that [2005] builds upon that."

How IRS officials will manage

As a result of a scaled-down fiscal 2005 budget request and a subsequent $80 million cut by

lawmakers, systems modernization officials at the Internal Revenue Service said they intend to:

* Tap $11 million in reserve funds.

* Make activities such as architecture, integration and program management the responsibility of IRS staff, not private-sector vendors.

* Cancel expansion of online services.

* Freeze work on the Custodial Account Project and not issue updates of the Integrated Financial System.

* Stay on track to deliver two semiannual updates of the Customer Account Data Engine.

— David Perera

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