IRS did not perform the necessary requirements analysis for Cyberfile or identify alternative ways to satisfy these requirements. Neither did it prepare an acquisition strategy documenting how it would acquire the most cost-effective alternative. IRS cited the Brooks ADP Act, rather than the Economy Act,for its authority to enter into its interagency agreement with NTIS. NTIS Did Not Fully Comply With Procurement Laws and Regulations for the Cyberfile Acquisition

In procuring Cyberfile, NTIS did not fully comply with federal acquisition laws and regulations, which are intended to encourage full and open competition and help agencies develop and acquire information systems that meet their needs and are delivered on time and within budget. Specifically, NTIS (1) awarded a Section 8(a) contract on a sole source basis without making a reasonable determination that the value of the contract was below SBA competition thresholds, (2) improperly modified the contract to add a requirement to develop Cyberfile, and (3) did not effectively hold the contractor accountable for specific deliverable dates, attributes, and quality. For procurements such as NTIS’ technical services support contract, the threshold is $3 million. IRS Did Not Adequately Oversee NTIS’ Systems Development and Acquisition Efforts

IRS abdicated its responsibility to ensure that NTIS was managing the Cyberfile effort efficiently and effectively. We also found that IRS did not properly account for Cyberfile obligations and costs because it did not effectively discharge its financial management responsibilities for the project. This is essential to maintaining good financial management information and effectively tracking project obligations and costs. Our review found that NTIS did not maintain adequate supporting documentation for many Cyberfile transactions. IRS Improperly Accounted for Cyberfile Advances

NTIS received two advances totaling about $17.1 million from IRS. As of August 3, 1996, however, IRS has only recorded about $17.1 million. As a result, excess costs were incurred. Interagency Agreement Did Not Minimize IRS’ Costs

IRS did not structure its agreement with NTIS to minimize its costs. Recommendations

In light of the severity of acquisition and financial problems identified, we recommend that, before resuming the Cyberfile project, the Commissioner of the Internal Revenue Service:
Provide to the Senate Committee on Governmental Affairs, the House Committee on Government Reform and Oversight, the Senate and House Appropriations Committees, the Senate Committee on Finance, and the House Committee on Ways and Means, a report detailing the weaknesses in IRS’ acquisition and financial management processes and controls that permitted Cyberfile mismanagement (e.g., permitted IRS to disregard system acquisition policies and procedures, disregard federal acquisition regulations, and provide inadequate oversight of NTIS system development and acquisition efforts); actions that have been taken to ensure that these weaknesses in IRS’ processes and controls have been corrected and that resulting mismanagement does not recur; and
IRS’ plans for Cyberfile, including a business case analysis addressing costs, mission-related benefits and technological risks, schedule and milestones, and acquisition strategy. We interviewed IRS and NTIS program and information system officials to understand (1) why NTIS was considered to develop Cyberfile, (2) how IRS evaluated NTIS, and (3) how NTIS performed on other projects done for IRS.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) acquisition of Cyberfile, an electronic filing system that the National Technical Information Service (NTIS) is developing for IRS, focusing on whether: (1) the IRS decision to use NTIS to develop Cyberfile was based on sound analysis; (2) IRS and NTIS followed applicable procurement laws and regulations; (3) IRS and NTIS properly accounted for Cyberfile obligations and costs; and (4) IRS cost-effectively acquired equipment and services.

What GAO Found

GAO found that: (1) IRS did not adequately analyze its requirements, consider alternative ways to satisfy its requirements, prepare a strategy for how it would acquire the most cost-effective alternative, or assess NTIS ability to develop, deliver, and operate an electronic filing system before deciding to use NTIS to develop Cyberfile; (2) IRS selected NTIS because of expediency and its belief that NTIS could meet a delivery date of February 1996; (3) IRS suspended development after advancing $17.1 million to NTIS; (4) IRS is reevaluating the project, since NTIS did not deliver it on time; (5) IRS cited the Brooks Act for its authority to procure Cyberfile, but it did not fully comply with the implementing regulation's requirements; (6) IRS did not obtain the proper delegation of procurement authority from the Treasury Department; (7) NTIS did not obtain the Small Business Administration's (SBA) approval to modify an existing sole-source Section 8(a) contract to add the Cyberfile project for a total cost of $3.3 million, and violated SBA rules for competing the procurement among eligible firms; (8) NTIS did not hold the contractor accountable for delivery dates and costs; (9) IRS did not ensure that NTIS efficiently and effectively managed the project; (10) IRS understated Cyberfile obligations and improperly accounted for the $17.1-million NTIS advance; (11) NTIS did not properly document significant financial transactions or record obligations and costs; and (12) IRS did not implement adequate controls to ensure that it did not incur excess costs after the project's suspension.