audit." And, we are quite concerned as well. But it is important that we all understand what is not meant and what is meant by that remark. It does not mean that the money the IRS is supposed to be collecting or spending has simply disappeared or somehow been misappropriated. This has not occurred.

The Service has two separate financial processes to track funds: the administrative system that handles our appropriated funds and our revenue accounting system that tracks tax collections. It is important to understand these two different systems in order to understand the GAO's audit findings and what we are doing to improve both systems to comply with the CFO Act.

Results of Fiscal Year 1994 Audit

The IRS' first financial statement audit by the GAO was for fiscal year 1992. In the 1994 financial statement audit, GAO recognized the progress we had made since 1992 in implementing a new administrative accounting system, in transferring our payroll processing to the Department of Agriculture's National Finance Center, and in improving the accounting for federal revenues. But GAO also listed five primary reasons why they were unable to express an opinion on the financial statements: (1) They could not reconcile the amount of total revenue of $1.3 trillion reported in the financial statements to accounting records maintained for individual taxpayers.

(2) They could not substantiate amounts reported for various types of taxes collected, for example, social security, income and excise taxes.

(3) They could not determine the reliability of our estimates of accounts receivable.

(4) They could not substantiate a significant portion of our $2.1 billion in nonpayroll expenses, primarily due to lack of documentation, and

(5) IRS could not reconcile its fund balances with Treasury accounts.

While our goal is a clean financial statement audit opinion at the earliest possible time, and I reaffirm that commitment today, I would also like to highlight some of the progress we have made since fiscal year 1994 in addressing some of the GAO's concerns. The fiscal year 1995 financial statement audit is currently underway but GAO has not given us any indication when it will be completed.

Accounting for the Appropriated Funds that the IRS Spends

We are very proud of the significant improvements we have made in our Administrative Accounting System. Just 5 years ago, we had eight separate systems. Now we have a single corporate data base for our over $7 billion in appropriated funds. In addition, in the last 2 years we have made measurable improvements. For instance,

• We implemented our integrated financial system, transferred payroll to the National Finance Center, and integrated other administrative systems to capture data at the source and transmit this data electronically to our corporate financial database.

• Our travel vouchers and payments to contractors have been automated nationwide. The traveler keys the travel information into the system, certifies the electronic voucher, and sends it to the supervisor. Once the supervisor approves, the traveler will receive payment in 5 to 7 days. Over 80 percent of our travel vouchers were processed this way in fiscal year 1995.

• We implemented commitment accounting procedures, so that we will have timely information about how money is being spent and so that we can manage our expenditures more carefully.

• We linked the procurement system with the administrative accounting system to enable obligations to be transferred electronically.

To show the progress we have made in improving our administrative finance operations, the GAO was unable to audit our administrative accounting systems for fiscal year 1992. In fiscal year 1993, our system was auditable, but we were unable to provide supporting information for among other things the reconciliation of budgeted amounts to actual expenditures. For fiscal year 1994, the GAO audit report focused on just two administrative accounting issues in this area-failure to reconcile our accounts with Treasury and the lack of receipt and acceptance documentation for non-payroll payments, such as rent payments to GSA and printing payments to GPO.

Regarding these two issues, we are reconciling our cash balances to Treasury's records through fiscal year 1995 and will ensure these balances are reconciled on a monthly basis. On the non-payroll payments, the concern of GAO was that we were not adequately verifying the payments being made for us by GSA and GPO.

We are reviewing the processes involved and working to improve them, but the solution requires the assistance of GSA and GPO.

Improving Financial Information Systems

A significant example of the effectiveness of our improved administrative financial systems was our ability to track one of our major programs. In fiscal year 1995, we received funding for a Compliance Initiative, a 5-year plan with the monies raised going directly to deficit reduction. (Ironically, because of budget cuts, it was not funded for fiscal year 1996.)

In order to meet our commitment to Congress to account for the Initiative so that we could verify the money raised by the FTEs hired under the Initiative, we developed comprehensive tracking procedures that enabled us to provide a clear and verifiable picture of the results. Using our Enforcement Revenue Information System (ERIS), we were able to produce reports showing resource and revenue plans and results in far greater detail than ever before.

The results have been impressive. Because of the information produced by our tracking system, I can tell you that our Compliance Initiative yielded over $800 million in revenue in fiscal year 1995, far exceeding the $331 million we promised. Regrettably, much of the progress we have made in improving our collection efforts that I will be discussing with you today, is because of the Compliance Initiative and may be jeopardized by its abandonment.

Accounting for the Revenue that the IRS Collects

The Revenue Accounting and Control System (RACS), which was implemented during 1984, was not designed to provide the detailed information required by the CFO Act for financial statement presentations. Most of the problems with the revenue accounting procedures that have been raised by GAO concern summary data produced by RACS that is difficult to reconcile on a transaction by transaction basis with our Masterfile.

While we can and do reconcile gross amounts collected, we have been unable to give GAO auditors the information that they would like to have to tie individual transactions to their sources. Because the revenue systems were not designed to meet the CFO Act audit requirements, our real challenge is to alter our revenue accounting system to provide the necessary data to meet the new standards, so that our revenue accounting systems can also get a clean audit opinion.

To immediately address this issue, for the fiscal year 1995 audit, the Service is providing detailed revenue receipt information from the individual taxpayer accounts contained in the Masterfile. Also, we are installing a short-term system solution, the Interim Revenue Accounting Control System or IRACS. By July, IRACS should be implemented nationwide so that the network will connect the database located at our Detroit Computing Center with our 10 service centers. The system will:

• improve balancing routines and validity checks,

• provide additional information on-line,

• retain 3 years worth of data instead of the 1 month that we currently retain, and

⚫ interact electronically with and extract data from other tax processing systems. With these efforts our ability to account for the revenue we collect will continue to improve.

CONCLUSION

I have tried to demonstrate to you and the Members of the Subcommittee [sic] the priority and significance that we attach to both our efforts to modernize the tax administration system and to satisfy our financial management responsibilities under the Chief Financial Officers' Act. We have worked hard to improve in both areas and I am pleased to report progress. But despite that progress, we recognize that we still have much more to do.

Chairman STEVENS. We have one last series of witnesses, Mr. Clagett and Mr. Irvine-Robert P. Clagett and C.A. Irvine, of the Computer Science and Telecommunications Board of the National Research Council. I am sorry to keep you waiting, gentlemen. We appreciate your courtesy in being willing to appear today and comment upon the review you have made of this problem. Who is going to go first?

Mr. CLAGETT. I am, Senator.

Chairman STEVENS. Thank you very much, sir.

TESTIMONY OF ROBERT P. CLAGETT, CHAIRMAN, COMMITTEE ON CONTINUED REVIEW OF THE TAX SYSTEMS MODERNIZATION OF THE INTERNAL REVENUE SERVICE, NATIONAL RESEARCH COUNCIL; ACCOMPANIED BY C.A. IRVINE, MEMBER, COMMITTEE ON CONTINUED REVIEW OF THE TAX SYSTEMS MODERNIZATION OF THE INTERNAL REVENUE SERVICE, NATIONAL RESEARCH COUNCIL

Mr. CLAGETT. Yes, sir. In fact, I will make the only statement and then we can go into questions.

Chairman STEVENS. Yes, sir.

Mr. CLAGETT. Good morning. I am Robert P. Clagett. I am a lecturer at the University of Rhode Island and I am Chairman of the National Research Council's Committee on Continued Review of the Tax Systems Modernization of the IRS. I am also a member of the National Academy of Engineering.

The National Research Council is the operating arm of the National Academy of Sciences, the National Academy of Engineering and the Institute of Medicine. They were chartered in 1863 to advise the government on matters of science and technology. With me today, as you know, is Al Irvine, who is a member of the committee, and he is president of Eclectic Solutions Corporation.

The project I chaired involved an original committee, followed by an extension of some of the membership plus some new members. It produced 6 reports over a period of 5 years. My remarks today will draw on our last report, the February 1996 publication. That publication is entitled "Continuing Review of the Tax Systems Modernization of the IRS." It was released to the IRS in December of 1995. The IRS was the sponsor of the project, but, consistent with NRC policy, did not preview the findings or the recommendations.

The committee-the original and the extension-which I chaired was rich in private sector experience with large systems development and management, as well as technological expertise. My committee and I strongly believe that modernization of the information systems of the IRS is very important. The Service still has a lot of old computer equipment, which is difficult to maintain. Only part of the returns processing today is computerized, with taxpayer paper files the main mode of operations still. Modernization would enable better customer service and better agency and government performance.

In the course of our work, we focused on the ability of the IRS to modernize, while monitoring its progress. We made several recommendations relating to IRS structure and management that have been implemented. Among them, for example, was the establishment of focused units to address needs in architecture and privacy, elevation of positions with responsibility for human resources and for management of the tax systems modernization; that is, the modernization executive position that is now an Associate Commissioner. Through such actions, the IRS has improved its organization.

A central concern of the committee was management, running across the spectrum from a vision statement through planning and implementation. Quoting from our last report, the 1996 report, "The committee believes that success starts with a concise business vision, a well-organized modernization process, a clear systems architecture, a complete development plan, and a strong set of metrics to determine progress," quite similar to what the GAO showed you earlier.

The IRS has created a vision statement, and it has begun a process of reengineering its business processes. However, these efforts remain somewhat disjoint from TSM. Of greatest concern are the enduring deficiencies in technical management. It is in this area that progress must be made if TSM is to succeed. Those deficiencies show up in the IRS' own software and system development organization, its lack of a concise statement of system architecture, its approach to and slow rate of improvement in development processes, and its incomplete attention to system and data security.

The committee frequently expressed concern about the lack of experience in large systems development and implementation within IRS management. This deficiency shows up in the rate of internal progress and in the nature and effectiveness of interactions with contractors involved in TSM development. I would say here, as I have said repeatedly to the IRS, that the Service should not have had the in-house capability to take on such a large project when it started. That condition was no embarrassment, but it should have assessed the complexity of developing such a large project and then acquired the trained, experienced management team needed to direct it.

Instead, it relied on competent in-house managers who were and are generalists who have advanced within IRS for many years. These are good people who know how to run the IRS as it exists today. At the same time, they have not grasped our recommendations as to what it takes to develop a huge information system such as TSM.

Quoting again from our report, "The IRS must implement the following recommendations immediately and forcefully. Otherwise, the goals of the TSM effort are in serious jeopardy." I am going to run through them. The first recommendation is to acquire technical management expertise through both hiring and contracting, starting with a highly qualified CIO to fill the vacant position. Of course, I am pleased to note that position has now been filled, and I sincerely hope the new CIO has the background and experience to help make TSM effective. In addition, I need to add, though, that other qualified, trained, and experienced managers are needed at other levels as well.

The second recommendation is to effectively integrate operational and technical goals by developing a set of metrics to measure performance; that is, what do you want to have happen when it is complete?

Third, develop an adequate architectural definition design, led by the systems architect's office that they have created, and enforced by a strong set of interface specifications for key applications of systems and a process for maintaining them properly.

Fourth, significantly increase the scope, level of effort, management attention, and tools devoted to security development.

Fifth, implement an overall process improvement plan. I won't really go through it. It is the same idea you have just heard from GAO, to bring their internal capability up to Level 2 and then go from there. That includes, of course, training, assessment of where they are today, and so forth.

Sixth, focus efforts on the integrated case processing project. We picked that one because it is key to all of TSM. What we were trying to do was tell them once again, as we have before, in the other reports, pick one, do it well, test it, get it into the field, and then go from there. Furthermore, I think, and we state in there, TSM funding for projects that do not support such a focused effort should be reduced until definite improvement is shown.

Absent follow-through, new approaches to TSM may be necessary, in our opinion. One possibility, of course, would be to assess, justify, and fund each component project individually. Another might be to out-source, as Senator Glenn says-that is, to contract. The committee believes, however, that correcting the deficiencies as identified and strengthening its management is the best course of action for IRS and the country, again just as GAO said.

Our committee has expressed concern that the problems raised here, like some of the specific recommendations, have been raised previously and, in fact, for quite a few years. We therefore suggest that some ongoing mechanism be established that can both advise the commissioner and foster constructive interaction between the IRS and its oversight organizations to assure the best possible focused decisionmaking and communication.

With that, I thank you. Mr. Irvine and I will be glad to try to answer any questions you have.

Chairman STEVENS. Well, I do thank you very much. Your recommendations are quite similar to GAO, which you heard, and I am sure you have worked with them, too.

Mr. CLAGETT. No, we haven't worked with them very much.
Chairman STEVENS. You haven't?

Mr. CLAGETT. They have been independent assessments.

Chairman STEVENS. That is very good. They are quite concise and similar and point in the same direction as far as the concepts of developing the plan.

Do you think we are at the situation where we ought to say, well, let's go back and start all over again and start it from the beginning as you indicated it should have been started in the first place?

Mr. CLAGETT. Well, let me start by saying it is pretty late to do that. On the other hand, after 5 years I have to tell you that the committee is not very optimistic that IRS will or can implement all the recommendations that we have made.

Chairman STEVENS. Have you analyzed why that is the case, Mr. Clagett? Is it, as the other gentleman said

Mr. CLAGETT. I will be glad to give you my speculation. It certainly is somewhat different than the answer you got from GAO. Chairman STEVENS. Is it civil service restrictions?

Mr. CLAGETT. I don't know if it is civil service restrictions so much as it is the way in which the Federal agencies work. This is my own experience now. We have not addressed that specifically in