IRS admits its $4 billion modernizing is a failure Official says computers don't work; agency wants to contract out tax returns

WASHINGTON — WASHINGTON -- The IRS conceded yesterday that it had spent $4 billion developing modern computer systems that a top official said "do not work in the real world," and proposed contracting out the processing of paper tax returns filed by individuals.

That would allow nongovernment workers to see confidential information about the incomes of individual Americans.


Arthur Gross, an assistant commissioner of internal revenue who was appointed 10 months ago to rescue the agency's efforts, said customer service representatives must use as many as nine different computer terminals, each of which connects to several different databases, to resolve problems.

"Dysfunctional as some of these systems may be today," Gross said, the IRS "is wholly dependent on them" to bring in the $1.4 trillion in taxes that finance the government. He expressed doubt that the agency could develop modern computer systems, saying it lacked the "intellectual capital" for the job.


The proposal to contract out the processing of paper tax returns would save little money because it costs only $34 million for clerks to extract information from 200 million paper tax returns and enter it into IRS computers. But such a move is sure to arouse protests from taxpayers concerned about who can see how much money they make and how much they pay in income taxes.

The Government Accounting Office has sharply criticized the IRS' administration of the modernization project, and the agency has previously acknowledged problems with the effort. But Gross' comments marked the first time that the agency said it would have to scrap the project altogether and start over.

Gross' admission that the Tax Systems Modernization effort has failed came in testimony before the National Commission on Restructuring the IRS, a bipartisan panel created by Congress to examine the agency's operations.

The panel is expected to press for a different approach to developing modern computer systems and to recommend innovative ways to persuade more Americans to file their tax returns electronically.

Gross said the IRS had already killed one modernization project, a plan to turn paper tax returns into electronic images, after paying $284 million to Lockheed Martin, the nation's largest defense contractor.

A spokesman for the commission said the cost of shutting down the project "will be astronomical." He said 12 other systems were under review to determine if they also should be killed.

The failure of the modernization effort will mean years of frustration for taxpayers who get into a dispute with the IRS, especially one that involves records kept on two or more of its computer systems.

Gross said that for the foreseeable future the IRS must continue to work with dozens of antiquated computer systems that cannot trade information with one another.


As the IRS starts over, Gross said, it must abandon the "big bang" theory of integrating all of its computers at once and instead improve operations piecemeal. "We have to move and build off what exists today," he said in an interview.

Several witnesses criticized the IRS for not actively marketing the filing of tax returns electronically. Last year only 180,000 people filed returns through intermediaries after preparing them with software on personal computers, and overall only 10 percent of tax returns were filed electronically or by telephone.

Tax returns prepared with commercial software and then filed electronically are virtually error-free, the commission was told. In contrast, when IRS clerks extract data from paper tax returns and enter the information into the agency's computers, the error rate is 22 percent, with the clerks causing half the errors.

Pub Date: 1/31/97