As a result of the review, in  August 2008, IRS began defining a new strategy to address the challenges  confronting CADE and deliver improved individual tax processing  capabilities sooner. CADE 2 Is Expected to Deliver Functionality in Three Phases (Transition States)

CADE 2 is expected to deliver its functionality incrementally through three  phases known as transition states. IRS Has Established a New Management Structure for the CADE 2 Program

While the MITS organization has primary responsibility for developing,  managing, and delivering the CADE 2 program, IRS has established a new  governance approach for the program, including the CADE 2 PMO that is  to manage the program and the relationship with the program’s  stakeholders, define the solution specifications to meet the requirements  and the delivery of the program scope, and specify the roles and  responsibilities of all parties. IRS Has Identified Benefits and Set Most Related Targets for the First Phase but Has Yet to Do So for the Second Phase

For TS1, IRS has identified 20 benefits. These benefits span three  categories: service; compliance; and other benefits, including reduced  system costs and improved security benefits. Our past work at IRS established that quantitative targets can be useful for  tracking program performance. While it may not always be possible to  quantify targets, doing so helps to objectively measure the extent to which  expected benefits have been realized. According to IRS, committing  to what can be delivered in TS2 is contingent upon a number of decisions  yet to be made. IRS’s Estimates the First Two Phases of CADE 2 Will Total About $1.3 Billion; Process for Developing Estimates Was Largely Consistent with Best Practices

In July 2009, IRS reported preliminary life cycle cost estimates for TS1 and  TS2 of about $1.3 billion through 2024, including about $377 million for  development and $922 million for operations and maintenance. Third, IRS did not conduct a sensitivity analysis to examine the effects of  changing assumptions and ground rules on its estimates. IRS officials stated they intend to include a sensitivity analysis in  the revised cost estimates expected to be available by the completion of  our audit. IRS’s risk management process for CADE 2 is generally consistent with  best practices. These include moving  certain activities up, performing others concurrently and adding  checkpoints to monitor the program’s status. While these actions may increase  the likelihood of meeting the schedule, some of them, such as performing  activities concurrently, could potentially introduce more risk to CADE 2’s  successful development and implementation. Similarly, addressing TS2 benefits and related targets as the  design is being considered could influence design decisions and help  identify early on how systems and processes might be affected. In developing cost estimates for the first two phases of CADE 2, IRS did  not disclose all excluded costs, provide a rationale for documented  excluded costs, adjust for inflation, or perform a sensitivity analysis to  examine the effects of changing assumptions and ground rules. To its credit, IRS has established a risk management process that is  generally consistent with best practices and has identified mitigation  strategies to address each identified risk. Recommendations for Executive Action

We recommend that the Commissioner of Internal Revenue direct the  appropriate officials to take the following five actions:  to provide a better basis for measuring CADE 2 performance in achieving  TS1 benefits, set the remaining quantitative targets where feasible as soon  as possible in 2011; in conjunction with developing the approach for TS2 expected in May  2011, finalize the phase’s expected benefits, set quantitative targets where  feasible, and identify how related systems and business processes might  be affected; and to ensure the revised estimates for CADE 2 are credible, include inflation when calculating costs, include the costs IRS explicitly excluded or provide a rationale for  excluding them, and include any business costs associated with moving to daily processing  or document that these costs were excluded and provide a rationale  for excluding them. Agency Comments and Our Evaluation

IRS’s Commissioner provided written comments on a draft of this report  (reprinted in app. GAO staff who made key contributions to  this report are listed in appendix V.

Appendix I: Objectives, Scope, and Methodology

As agreed, our objectives were to  1.  determine whether the Internal Revenue Service (IRS) has identified  the expected benefits of Customer Account Data Engine (CADE) 2 and  set targets for measuring success, 2.  examine the estimated costs of CADE 2 and assess IRS’s process for  3.  assess IRS’s process for managing the risks associated with CADE 2  and describe the risks IRS has identified using this process.
Why GAO Did This Study

In August 2008, the Internal Revenue Service (IRS) began defining a new strategy for modernizing the way it manages individual taxpayer accounts. The strategy, known as Customer Account Data Engine (CADE) 2, is expected to provide service, compliance, and other benefits to IRS and to taxpayers beginning in 2012. IRS expects to implement CADE 2 in three phases. The first phase is expected to be delivered in 2012, the second in 2014, and the third at a later yet to be determined date. GAO was asked to (1) determine whether IRS has identified the expected benefits of CADE 2 and set targets for measuring success, (2) examine the estimated costs and assess IRS's process for developing them, and (3) assess IRS's process for managing the risks associated with CADE 2 and describe the risks IRS has identified using this process. To do so, GAO reviewed relevant documentation, attended program review meetings, and interviewed IRS officials.

What GAO Found

IRS has identified 20 service, compliance, and other benefits for the first phase of CADE 2, including increasing the percentage of refunds processed daily and reducing the number of erroneous notices due to better account information, and has set quantitative targets for most of these benefits. GAO has previously reported that quantitative targets can be useful for tracking program performance. While it may not always be possible to quantify targets, doing so helps to objectively measure the extent to which expected benefits have been realized. However, IRS has not yet finalized expected benefits for the second phase or set related quantitative targets, because, according to officials, these are contingent upon yet to be made design and funding decisions. Nevertheless, addressing the second phase's benefits and related targets as the design is being considered could influence design decisions and help identify early on how systems and processes might be affected. IRS reported preliminary life cycle cost estimates for the first two phases of the CADE 2 program of about $1.3 billion through 2024. This includes about $377 million for development and $922 million for operations and maintenance. IRS's process for developing the preliminary estimates was generally consistent with best practices. However, the agency did not follow three practices intended to improve the credibility of cost estimates. Specifically, IRS did not (1) consistently document excluded costs or provide a rationale for excluding them; (2) use inflation in calculating costs; and (3) perform an analysis to examine the effects of changing ground rules and assumptions. While IRS stated it would perform the analysis of changing ground rules and assumptions in revised estimates to be available by the completion of our audit, until the agency implements all these practices its estimates may not be credible. IRS's process for managing the risks associated with CADE 2 is generally consistent with best practices. Through its process, IRS identified significant risks facing CADE 2, including that filing season and other top information technology investment priorities may result in contention for key resources, the delivery of the first phase of CADE 2 may be delayed if deficiencies identified in requirements are not corrected in a timely manner, and the risk that technical challenges and other risks to implementing the database identified as a result of prototyping efforts may not be addressed. To its credit, IRS has developed mitigation strategies for each identified risk. While IRS is working to ensure CADE 2 is successfully managed, the schedule for delivering the initial phase is nevertheless ambitious. IRS officials have acknowledged this and are taking actions to increase their chances of meeting it, including moving certain activities up, performing others concurrently, and adding checkpoints to monitor the program's status. While these actions may increase the likelihood of meeting the schedule, some of them, such as performing activities concurrently, could potentially introduce more risk to CADE 2's successful development and implementation. GAO's recommendations include (1) identifying all of the second phase benefits, setting the related targets, and identifying how systems and business processes might be affected; and (2) improving the credibility of revised cost estimates by including all costs or providing a rationale for excluded costs, and adjusting costs for inflation. In its comments on a draft of this report, IRS agreed with GAO's recommendations.