Hey, I Owe 99 Years In Back Taxes!

The IRS is in a desperate race to fix the Year 2000 glitch

It's hard to imagine how things could get much worse for the IRS. It is taking a beating on Capitol Hill, it's struggling to keep up with an ever more complicated tax code, its aging computers are falling apart, and it will soon launch a top-to-bottom management overhaul. Now, the Internal Revenue Service faces a potential calamity: a meltdown triggered by the Year 2000 computer glitch --and the guy in charge of keeping the data systems running just quit.

The prospect that IRS computers will read "00" as 1900 instead of 2000 induces nightmares at an agency where nearly every document has a date on it. Returns would go unprocessed. Refunds would lie unsent. Taxpayers would be told they owed 99 years' interest on a disputed deduction. Says one former top agency official: "It would shut down the entire system--everything from collections to compliance would just stop."

CONTINGENCY PLAN. To avoid such a catastrophe, IRS techies are poring through 88,000 programs containing 60 million lines of computer code--some of it three decades old. They must patch up 80 mainframes, 1,000 midsize computers, and 130,000 PCs. The cost: $1 billion.

Will the fix be ready in time? "That's our goal," says John Yost, director of the Year 2000 project. "[But] I'm not making any promises just yet." In fact, BUSINESS WEEK has learned that the General Accounting Office is urging the IRS to set up a contingency plan to prevent a "systemwide failure" in 2000. In the worst case, that could mean shifting some processing to computers outside the agency. And IRS officials concede that at least some of its computers won't be updated on time.

The best-case scenario: Most taxpayers will still be able to file their returns, especially if they do so electronically. The latest tax software has addressed the problem and may be able to bypass the worst of the IRS troublespots. But there could be hitches, depending on the complexity of the return. The rule of thumb for 2000 is that the more paper you file, the more trouble you may run into. Small businesses--which generate huge amounts of paperwork for their size--could face the worst woes.

Other functions--from investigations to customer service--may be hampered, too. Already, efforts to ensure taxpayer compliance through audit letters are a mess. Come 2000, the trouble will multiply. Says Robert J. Carver, a former top IRS official who consults for software companies: "It will look like it's fixed to the outside world. But it will affect compliance, criminal, and audit potential."

The White House is clearly concerned. At a January Cabinet meeting, both President Clinton and Vice-President Gore demanded that agencies get cracking on the problem. And Budget Director Franklin D. Raines, who oversees the Administration's Year 2000 program, says the IRS and the Federal Aviation Administration "are getting the most attention."

It's not that the IRS hasn't been taking the problem seriously. It put together a good team of top managers and has made Year 2000 readiness its top priority. Yost is a highly regarded 25-year veteran of the agency. And Commissioner Charles O. Rossotti, the former CEO of American Management Systems Inc., a computer systems outfit in Fairfax, Va., is focusing much of his attention on the problem.

But the effort is likely to be slowed by the unexpected departure of Arthur A. Gross, the agency's chief information officer and the architect of its Year 2000 strategy. Gross announced his resignation in early February, following a dispute with Rossotti over computer modernization plans. Insiders say that if Gross isn't replaced soon, the Year 2000 project could suffer badly.

In practical terms, Jan. 1, 2000, will arrive sooner than the calendar date. Computer specialists say the IRS really has less than a year to get its fixes in place. That's because it will take at least one full filing season to test the repairs and work out the inevitable bugs. "It's a Year 1999 problem for them," says Jeffrey S. Trinca, former chief of staff at the Commission to Restructure the IRS, a bipartisan congressional panel whose 1997 recommendations led to an IRS reform bill about to pass Congress.

But it may be too late for the IRS to make the 1999 deadline. Like many businesses and government agencies, it got a late start. As of mid-November, just 10% of the needed repairs had been done. Yost says serious work began only 14 months ago. "We would have been better off if we had started two years before that and had everything in place by January, 1998," he concedes.

"SPAGHETTI BOWL." The good news is that the huge mainframes that are the backbone of the agency's data system should be ready a year from now. Located mostly in Martinsburg, W.Va., they hold the master files of every tax return. Those computers are among the agency's oldest, but the software that runs them was written by in-house programmers. So the bugs have been easy to find. Midsize computers and PCs are a different matter. They are scattered in offices throughout the nation and run by a mind-numbing jumble of commercial software and in-house code. "It's a spaghetti bowl of systems," says one congressional aide. "The thing doesn't make any sense."

The IRS has decided simply to jettison as many as 13,000 programs. It's easier to pitch them than to patch them, Yost says. But the rest must be painstakingly repaired, line by line. Commercial fixes can handle some of the work. For the others, the IRS must rely on in-house programmers and compete for the services of outside consultants. In the face of enormous demand for techies, the IRS is having trouble finding--and keeping--knowledgeable programmers. Says a government computer specialist: "You're getting low pay, working long hours, and dealing with junk people wrote 30 years ago--and you say: `What am I doing here?"'

Efforts to solve the Year 2000 conundrum are complicated by other agency problems. The IRS has had to reassign staff who had been working on replacing its aging computer systems. At the same time, programmers have had to split time between the Year 2000 mess and updating computers to handle massive changes in the 1997 tax law. A probable 1998 bill will bring another unwanted diversion.

Despite all these headaches, the IRS gamely predicts that, while there will surely be glitches come 2000, there won't be chaos. But outside experts are hedging their bets. Trinca, for instance, jokes that even getting a refund could be a challenge. "I'm adjusting my withholding so the IRS doesn't owe me," he says. After all, there's no telling what date will be on the check.