June 24 (Bloomberg) -- A long-awaited modernization of the Internal Revenue Service’s computer system for processing individual tax returns has evaded lawmakers’ efforts to slice the agency’s budget by $600 million.
The upgrade, which will allow the IRS to process the returns on a daily instead of a weekly cycle during the 2012 filing season, is part of a business systems modernization program, begun 12 years ago, that also includes overhauls of the agency’s electronic tax filing and data retrieval systems.
The plan suffered expensive glitches a decade ago and so far has cost $3.7 billion. Contractors on the project include Computer Sciences Corp., based in Falls Church, Virginia; New York-based Deloitte Consulting LLP; and Lockheed Martin Corp., based in Bethesda, Maryland, according to Bloomberg Government data.
The heart of the modernization effort involves building a database, known internally as CADE2 and projected to cost at least $1.3 billion through 2024. So far, the IRS has spent about $172 million on what some in the Government Accountability Office and the tax agency call a crown-jewel database, with $66 million going to CSC.
IRS Commissioner Douglas Shulman has augmented congressionally authorized funding for the project with $89 million in IRS user fees from private legal rulings, installment agreements and other sources.
“It’s an incredibly important project for the agency,” Shulman said in a brief telephone interview.
Lawmakers so far have spared the database and other technology improvements from cuts.
The House Appropriations Committee approved yesterday an IRS budget plan for fiscal 2012 that preserves the Obama administration’s request for $333 million for the business systems upgrades, even as it cut $600 million from the rest of the agency’s proposed budget.
Representative Jo Ann Emerson, a Missouri Republican who chairs an Appropriations subcommittee that oversees the IRS, said in a statement June 22 that “outdated systems substantially reduce the quality of services the IRS is able to provide tax filers.”
“The technology improvements are on schedule and on budget, according to the IRS, and this will also speed delivery of tax refunds to taxpayers, which is a worthwhile goal,” Emerson said.
The database project has received mostly positive marks from outside overseers, including the GAO and the Treasury Inspector General for Tax Administration. By 2014, the IRS hopes to retire its mainframe.
History of Bungling
The agency has a history of problems with information technology projects. Since 1995, the IRS’s systems modernization efforts have been designated “high risk” and subject to extra scrutiny by the GAO.
In the late 1990s the IRS abandoned a technology upgrade, called the Tax System Modernization plan, after spending $2.5 billion, according to congressional testimony by J. Russell George, the Treasury Department’s inspector general for tax administration.
Early efforts to build a database in the current modernization program were plagued by delays, prompting sharp criticism of CSC, the main contractor at the time. In 2003 Commissioner Mark Everson, disturbed by missed deadlines, ordered an outside review of the contract.
A year later, the delays led the IRS to pull a $40 million chunk of the contract from CSC.
‘Lots of Challenges’
“There were lots of challenges and I think IRS and CSC have taken those on, resolved them and moved on,” said Kevin Kelley, a CSC vice president who has been involved in the modernization project since its early days.
A key shift for the IRS came in 2004, when officials began developing in-house expertise that allowed them to handle such elements of the upgrade as systems integration and project management. That change enabled the IRS to improve quality and cost control.
“There’s just been a huge improvement,” David Powner, director of information technology management issues at the GAO, said in a telephone interview. “The IRS is now an organization that does a lot internally. There’s less reliance on outside contractors.”
In 2008 the agency simplified the project, sidelining plans to include retirement plan and business tax records in the database and focusing on a new master file geared to individual taxpayers.
A preliminary version of the database has been in use for several years. For the 2010 filing season, according to a March 2011 GAO report, it processed 41 million “relatively simple” returns -- about 30 percent of total individual returns received.
The database also issued about 36 million refunds totaling more than $66 billion, the GAO said.
IRS officials have used technology funding to bolster the agency’s capacity to handle returns filed electronically -- an option selected this year by more than 100 million taxpayers. It costs the IRS 17 cents to process an electronic tax return compared with $3.66 for a paper return, according to the agency.
For the 2012 tax season, the IRS expects for the first time to process all individual returns on a daily cycle, using a version of the new database with assistance from the agency’s 1960s-era mainframe system modified to run on a daily basis.
That means that once a return has been processed, refunds can be sent within a day or two “instead of having to wait until the end of the week or two weeks,” Shulman said. IRS employees and filers also will have more up-to-date information on individual accounts, he said.
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