Beat the clock

IRS responds to a pressing need for services, online filing

The mounting pressure the IRS faces to modernize how corporations, nonprofits and, eventually, individuals file tax returns isn’t coming from Congress or from impatient taxpayers. It’s coming from Father Time.

Officials are racing against the clock, so to speak, to move to a modern electronic filing system from a 40-year-old mainframe system running Cobol before they lose the services of long-time programmers.

“We run 40-year-old code faster than anyone else,” said Bert DuMars, director of the IRS’ tax administration. “We have more than a few 70-year-old programmers, and our concern is that they will retire or die before we finish. We’ve had several attempts over the years that didn’t work out but now have no choice but to finish this.”

Additionally, lawmakers became frustrated with the slow and sometimes nonexistent progress of the agency’s modernization work and mandated in the 1998 Restructuring and Reform Act that the IRS receive at least 80 percent of all tax returns electronically by 2007.

These two mounting demands compelled officials to make online filing a reality once and for all.
So in January 2005, the IRS launched the first iteration of the Modernized E-File system to accept corporate 1120 forms and nonprofit 990 tax forms. The IRS eventually will expand the system to accept individual 1040, 1041 and 1065 tax forms, as well as employment tax filings.

“If we are to reach the congressional goal, the legacy environment could not meet our needs,” said Darius Taylor, director of the development services division that is in charge of the Modernized E-File system. “We knew we needed a Web platform with the least costly solutions.”
In addition to the e-filing system, the IRS also launched seven online services for ac- countants and other tax preparers as incentives to file electronically.

“One of our strategic priorities has been to increase the number of electronic options for our customers,” said Rob Bedoya, the IRS’ chief business strategist and architect. “The goal is for easier access to the IRS and the ability for tax practitioners to do transactions online.”

Agency workers and tax preparers saw the impact of the Modernized E-File system and the new suite of e-services immediately. From a reduction in the number of errors to quicker processing times to decreased costs, officials believe they have moved into a new era and gotten past the problems of previous attempts.

The new e-file system has lowered the cost to process corporate tax returns by 79 percent, to 52 cents each from $2.45. It also has lowered the error rate to 1 percent from as high as 36 percent.

Saving money

Meanwhile, e-services have saved the IRS more than $7.9 million, including $7.3 million from the Taxpayer Identification Number matching system. There were 31 million TIN matches in the first eight months of 2005, up from 12 million in all of 2004. The services also reduced the cost of paper processing and diminished the time it takes to process requests and provide responses anywhere from instantaneously to a few days, instead of two days to 30 days.

“There has been a lot of pent-up demand outside the IRS,” Du-Mars said. “Tax preparers and citizens want more from us, and other companies want access to the services as well.”
The IRS had been offering a version of electronic filing since 1986 over a dedicated T1 line, usually for large tax preparers such as H&R Block of Kansas City, Mo., or Jackson Hewitt Tax Service Inc. of Parsippany, N.J.

But as the Internet grew and the federal budget remained flat, lawmakers and bureau officials saw an opportunity to offer electronic filing to many more people, and cut costs in the process.

The IRS hired IBM Corp. in 2001 to develop the Modernized E-File system through a $12 million task order under the Treasury Information Processing Support Services-2 contract. The IRS later increased the size of the contract to $26 million and awarded IBM a follow-on contract that could be worth $45 million if all the options are exercised, said Bob Matarozza, IBM’s executive project manager for Modernized E-File.

The system has three components: the front-end acceptance of tax forms, the back-end storage and the middle validation of the information.

Tax preparers connect to the system either through an existing T1 line or through Registered User Application—one of the seven e-services. Most large firms continue to use T1, while small and midsize preparation companies use the RUP.

Preparers using the registered application submit data into the system using the real-time Internet Filing Application. The information is converted into Extensible Markup Language sent via a Simple Object Access Protocol Web Services messaging wrapper, Matarozza said.

Through the T1 line, preparers submit data to the legacy Electronic Management System, which is then converted to XML with the SOAP wrapper.

All the data is then put through an IBM-developed rules engine that runs on Java to make sure the preparer provided all the correct information. Those that are ac- cepted are stored on an IBM mainframe system running DB2.

The entire front and middle parts of the system run on Sun Solaris servers.

If the tax return is not validated, it is stored on an Oracle9i database. Preparers are notified if the tax forms are validated, or what errors must be fixed.

The final piece to the e-file system is an internal dashboard called the Return, Request and Display application. Matarozza said IRS employees such as help desk workers, examiners or auditors use it to review returns.

“Large companies have the most complicated tax forms and can attach spreadsheets or other files,” Taylor said. “They used to send large three-ring binders.”

While the modernized e-file system is built to handle the more than 100 million returns, officials had to figure out how to make it easier for preparers to use the system. That’s where the E-Services come in.

The E-Services run on a PeopleSoft platform with custom coding, including C++, Cobol, XML and Java to connect the applications. The IRS uses eTrust Siteminder security software from Computer Associates International Inc.

Computer Sciences Corp. is the prime contractor under the IRS’ $5 billion modernization contract.

Bedoya said more E-Services are planned, including a status check on a citizen’s refund, the ability to request a tax return and account transcript, and the ability to change your address online.

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