IRS Weighs Outside Computer Help

WASHINGTON â€”  The Internal Revenue Service, faced with deteriorating computer systems, plans to survey private computer companies to see if they could build and operate systems that would “readâ€� the approximately 200 million tax returns filed each year.

The plan to seriously consider “outsourcing� represents a departure for the agency, which traditionally has kept all taxpayer data under its own employees’ control.

The IRS outlined the outsourcing plan in a 43-page report sent last week to the House and Senate Appropriations subcommittees that oversee the Treasury Department. Last year, the subcommittees directed the IRS to “study the potential costs and benefits of outsourcing,� in part because the agency faces flat or declining budgets in coming years, congressional aides said.

IRS officials, who asked not to be identified, said the contracts could make the agency more efficient and reduce mistakes. Transcription errors occur with 3% to 5% of paper returns.

No decisions have been made, agency officials said, but the report sent to Congress suggests that, if approved, the contracts could begin about four years after the IRS finishes evaluating industry responses.

The agency operates 10 tax return processing service centers around the nation; each uses a “pipeline� of workers and computers. Workers open the envelopes, tag the tax return with an identification number, look for errors or fraud and enter essential information into IRS computers. The agency issues more than $130 billion in tax refunds each year.

But its computers are aging. The system used to enter data for processing and posting to a taxpayer’s master file account is 12 years old, and the system that routes checks to banks for deposit is 19 years old.

Replacement parts for both computer systems “are not available and must be cannibalized from other systems or machine-tooled,� the IRS report said.

Congress has appropriated funds to upgrade the computer systems, and the IRS hopes to have them in place for the 1999 filing season. Although the upgrade solves short-term problems, it still means the information pipeline will continue to rely on manual data entry.

If private firms could handle the IRS workload, the agency anticipates it could save money by avoiding the cost of investing in scanners and deploying them in the service centers. The centers currently rely on seasonal employees, who are hired to keep the data pipeline up to speed during the filing season.

The IRS report indicates that the White House and Congress would have to endorse any outsourcing plan, in part because of “the potential impact on existing IRS service centers and the government employees whose positions may be in jeopardy.�