TREASURY
INSPECTOR GENERAL FOR TAX ADMINISTRATION
The Electronic Fraud Detection System Redesign Failure Resulted in Fraudulent Returns and Refunds Not Being Identified
August 9, 2006
Reference Number: 2006-20-108
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.
Redaction Legend:
1 = Tax Return/Return Information
3(a) = Identifying Information - Name of an Individual or IndividualsPhone Number |
202-927-7037
Email Address | Bonnie.Heald@tigta.treas.gov
Web Site |
http://www.tigta.gov
August 9, 2006
MEMORANDUM FOR ACTING CHIEF INFORMATION OFFICER
FROM: Michael R. Phillips /s/ Michael R. Phillips
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – The Electronic Fraud Detection System Redesign Failure Resulted in Fraudulent Returns and Refunds Not Being Identified (Audit # 200620009)
This report presents the results of our review to determine whether the Internal Revenue Service (IRS) effectively managed annual programming changes and requested modifications to the Electronic Fraud Detection System (EFDS) prior to Processing Year[1] (PY) 2006.
Synopsis
The EFDS is the
primary information system used to support the Criminal
Investigation (CI) Division’s Questionable Refund Program, a nationwide program
established to detect and stop fraudulent claims for refunds on income tax
returns. In PY 2005, the CI Division
stopped $412.2 million in fraudulent refunds. In 2001, a
contractor was hired to assist the IRS with EFDS operations, maintenance, and
enhancements. As of April 24, 2006, over
$37 million had been paid to the contractor for this work, including $18.5 million
for system development efforts. Two
other contractors were paid approximately $2 million for system development
work, bringing the total EFDS system development cost to $20.5 million.[2] The January 31, 2006, Business Case shows the EFDS total costs from August
1994 through September 2005 were $185.9 million.
In 2002, the IRS initiated an
effort to redesign the EFDS to improve system performance, reliability, and
availability. The redesigned EFDS
web-based application[3] (Web EFDS) was to be implemented in January 2005. Due to system development problems, the
implementation date was delayed until January 2006. However, the implementation date was not met. On April 19, 2006, all system
development activities for the Web EFDS were stopped, and all efforts were
focused on restoring the old EFDS for use in January 2007. Therefore, the IRS has been and will be unable
to use the EFDS to prevent fraudulent refunds during PY 2006. The
IRS reported that, due to other leads,[4]
$93.9 million[5]
in fraudulent refunds had been stopped as of May 19, 2006, without the EFDS
being operational.
The lack of adequate executive oversight and monitoring of
the Web EFDS project contributed to the EFDS not being implemented for PY 2006. From June 2002 until July 2003, an EFDS Executive Steering
Committee held periodic meetings to review the project’s activities. After July 2003, executive oversight for the
project was provided by Business Systems Development (BSD) office executives
who also have responsibility for managing the maintenance and development work
for over 325 IRS systems. The IRS is
considering expanding the Senior Management Dashboard Review of projects to
include nonmodernization projects such as the EFDS. The
IRS also established an Enterprise Services office in the Modernization
and Information Technology Services organization to consolidate common
enterprise programs.
In the Business Case required by the Office of Management and Budget, the EFDS is presented as a Steady State project although the Business Case describes ongoing operations and maintenance activities, development of the web-based application, and redesign of the database. The Business Case also contains several conflicting statements describing the status of the project and the related system development efforts. Based on IRS guidelines, the EFDS should be categorized as a Development/Modernization/Enhancement project and be governed by an Executive Steering Committee that includes executives from outside the BSD organization. Although the Business Case was reviewed by the IRS, the Department of the Treasury, and the Office of Management and Budget, none of the reviewers questioned the categorization of the project or the conflicting statements.
Because the EFDS was classified as a Steady State project, an initial cost estimate for the Web EFDS development was not prepared. Therefore, management did not monitor for and we cannot determine whether there were cost overruns. However, the Web EFDS was initially scheduled to be implemented in January 2005, and funds continued to be added to the project to pay the contractors for their system development efforts.
Project documentation indicates the Web EFDS project followed the Enterprise Life Cycle-Lite system development
methodology and the status of the project was monitored through project team
and contractor discussions, status reports, and reviews of the work breakdown
structure. Although numerous indications
of potential risks and problems were raised throughout the project, effective
corrective actions were not taken. Also,
three key project management documents were not maintained properly or created
timely.
During development of the Web EFDS,
there were numerous changes in project management and executives responsible
for overseeing the project. Frequent
changes in leadership can affect the project continuity and direction and may
indicate other problems with the project.
There was also excessive
turnover of contractor employees working on the project, partially due to
mergers of the contractor firms. The
combination of the assignment of new employees who need to become familiar with
a project and the loss of highly skilled employees can jeopardize information
technology projects and result in less than full performance.
Because the Web EFDS was not implemented as scheduled in
2005 and 2006, and there are no current plans to continue development of the Web
EFDS, we estimate the IRS inefficiently used resources totaling $20.5 million
from May 25, 2001, to April 24, 2006, for the contractor costs associated with
development of the Web EFDS. An
undeterminable amount of internal staffing costs were also incurred in trying
to test the new System and monitor the primary contractor’s activities.
We reviewed six work requests written against the EFDS task order and determined they included deliverables written in general terms with no specific due dates. Because of the contract type used to procure contractor assistance, the contractor continues to be paid for system development work while a critical system used to stop fraudulent tax returns and refunds was not operational during PY 2006. In addition, the Federal Government’s interest has not been protected, and the contractor cannot be held accountable for not meeting deliverable due dates.
While the contract vehicle used to obtain contractor services is very important, the effectiveness of the Contracting Officer’s Technical Representative (COTR) in monitoring the contractor’s performance is also crucial in assuring successful contract administration. ****3(d)****
IRS management
advised us that, during a meeting between IRS and contractor executives, a
Contractor Senior Director commented the old EFDS would be updated and
implemented at no cost to the Federal Government because the contractor did not
deliver the Web EFDS as scheduled. However,
the contractor submitted charges totaling $459,718 for the additional work to
get the old EFDS ready for implementation, and these charges were paid by the
IRS. The EFDS Project Manager advised us
the invoices were paid without question because all invoices for the contract
type that was used must be paid in full.
The contractor had stated only verbally it would not charge the IRS for
updating the old EFDS for use in 2005, and the matter was not raised with the
contractor. Therefore, these costs are considered
questioned costs because the contractor did not deliver a Web EFDS that worked.
The EFDS Project Executive advised us a decision would be made in the future about whether to continue the Web EFDS development efforts and what contracting approach should be used. The IRS has established a Questionable Refund Program Executive Steering Committee to review and approve changes to the Program, but due dates regarding any Program change decisions have not been determined.
By using cost-reimbursement contracts, ineffectively monitoring
contractor performance, and not questioning contractor invoice charges for
updating the old EFDS, the IRS did not ensure the Federal Government’s
interests were protected and the Web EFDS was implemented timely to identify and stop fraudulent
tax returns and refunds.
Recommendations
We recommended the Chief
Information Officer ensure the EFDS project is assigned to an Executive Steering
Committee for executive oversight; the Business Case and the information technology
investment portfolio are revised to categorize the EFDS project properly and include
accurate and consistent information; project risks are identified and addressed
properly; the proper system development life cycle methodology is implemented
for EFDS development; other projects being managed in the new Applications
Development organization are assigned to the appropriate oversight process; and
high-risk projects, like the EFDS, are included in the Senior Management
Dashboard Review process. We also
recommended the Chief Information Officer ensure contractors are held
accountable for performance; COTRs are trained adequately and perform their
duties properly; discussions are initiated with the Director, Procurement, and
the contractor to recover the funds paid to the contractor to restore the old
EFDS for PY 2005 and any additional costs resulting from nondelivery of a
functional Web EFDS; and additional work on the Web EFDS is deferred until the
IRS decides who will perform the EFDS work.
Response
IRS management agreed with all of the
recommendations and has begun to implement corrective actions, such as placing
the EFDS project under the governance of the Taxpayer Relationship Management Executive Steering Committee on
May 31, 2006, and identifying, documenting, and discussing EFDS risks, issues,
and mitigation strategies at the appropriate oversight committees.
IRS management also plans to
implement several corrective actions, including identifying high-risk projects
in the Applications Development organization and assigning them to the
appropriate oversight process. The IRS
stated it is revising the Business Cases to categorize the restoration
of the old EFDS for 2007 as a Steady State project. The categorization proposal will be sent to
the Department of the Treasury Office of the Chief Information Officer for
concurrence and to ensure accuracy and consistency of the information. In
June 2006, the IRS began discussions of tailoring the Enterprise Life Cycle
methodology for the project restoring the old EFDS. In addition, the IRS is negotiating the contract
for the EFDS restoration, anticipating that it will be a cost-plus-fixed-fee contract
with a percentage of the contractor’s fees dependent upon timely delivery
of specified milestones. In Fiscal Year
2007, the appropriate project office management staff will have a commitment to
ensure all COTRs are trained adequately and their duties are performed properly
to monitor the contractors’ performance effectively. In May 2006, the IRS initiated discussions
with the contractor regarding cost-sharing for the contract to restore the old
EFDS for PY 2007. An IRS-wide initiative
for the Questionable Refund Program has started, and a high-level strategy will
be completed by December 31, 2006. Any
further development of the Web EFDS will include requirements identified from
this initiative, and any new development work will be opened to
competition. Management’s complete response to the draft report is included as
Appendix VIII.
Copies of this report are also being sent to the IRS managers affected by the report recommendations. Please contact me at (202) 622-6510 if you have questions or Margaret E. Begg, Assistant Inspector General for Audit (Information Systems Programs), at (202) 622-8510.
The Electronic Fraud Detection
System Did Not Have Adequate Executive Oversight
The Electronic
Fraud Detection System Risks Were Not Effectively Managed
Appendices
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix
IV – Outcome Measures
Appendix VI
– Glossary of Terms
Appendix VII – Electronic Fraud Detection System Management Turnover
Appendix VIII – Management’s Response to the Draft Report
The Modernization and Information Technology Services (MITS) organization is responsible for providing information technology support and services for the Internal Revenue Service (IRS) by building and maintaining information systems that will help the IRS achieve its mission, objectives, and business vision. The MITS Strategic Plan for Fiscal Years (FY) 2005 – 2006 supports the IRS’ objective of discouraging and deterring noncompliance with the tax laws by delivering modernized information systems.
The Criminal Investigation (CI) Division’s Questionable
Refund Program is a nationwide program established to detect and stop
fraudulent claims for refunds on income tax returns. The Electronic Fraud Detection System (EFDS) is the primary information
system used to support the Questionable Refund
Program and is currently maintained
by the MITS Applications Development organization.[6] Figure 1 shows the number of fraudulent refund returns and
refunds identified and stopped over the last 4 years.
Figure 1: Fraudulent Refund Returns and Refunds Identified and Stopped*