IRS Pulls Plug on Its Electronic Tax-Filing System

The Internal Revenue Service’s grand ambition to allow taxpayers to file returns directly from their personal computers to IRS centers via the Internet has gone offline for the foreseeable future, a top agency official said Tuesday.

Deputy Commissioner Michael Dolan said in an interview that the IRS has pulled the plug on its new electronic filing system, known as Cyberfile, and has no plans to resurrect any type of Internet access for tax returns in time for the April 15 filing deadline.

The IRS’ failure to launch Cyberfile drew an angry rebuke from a Senate committee looking at the larger problem of computer modernization at the IRS.

At the hearing, the General Accounting Office, Congress’ investigative arm, blamed mismanagement and shoddy contracting practices. The IRS effort violated a host of federal laws and regulations, the GAO found in a report it issued Tuesday.

“It’s an absolute fiasco!” shouted an angry Sen. Ted Stevens (R-Alaska), chairman of the Senate Governmental Affairs Committee.

The IRS had hoped Cyberfile would encourage taxpayers to file their returns electronically from personal computers, thereby helping the agency meet its crucial goal of eliminating tons of paper filings by moving to an electronic data system. (Electronic filers today must go through independent third parties, who charge a fee to execute the filing.)

But Cyberfile, like many of the other parts of the IRS’ $20-billion effort to update its technology, was hampered by undisciplined contracting, a lack of technical expertise within the agency and a failure to lay out an effective plan at the start, the GAO found.

The IRS was nearly ready to start Cyberfile on a limited test basis in April. That launch was deferred after the GAO found the system had 49 physical and electronic security weaknesses.

At that time, IRS officials said they still hoped to get the system working in time to accommodate late filers for the 1996 filing season. The decision to abandon the project entirely came sometime in July without being publicly announced.

Among other problems, the GAO found, the central computer for Cyberfile was located in a dusty subbasement of the U.S. Department of Agriculture that is subject to flooding. The computer room had doors with locks installed backward, meaning they could be easily breached, and sprinkler pipes hung so low that workers had to squat.

Moreover, the entire idea of allowing taxpayers to file returns through the Internet’s World Wide Web--rather than through a toll-free direct-access number to the IRS--was itself a potentially serious security problem, both for taxpayer confidentiality and for the IRS’ own computers, the GAO found.

“When IRS developed Cyberfile, they did it ass-backwards,” said Rona Stillman, chief scientist at the GAO’s office of computers and telecommunications. “There was no security policy. This was intended to go out over the Internet, which is a very dangerous environment.”

Moreover, critics say, Cyberfile was saddled with an unrealistically tight deadline requiring it to be operational within eight months of the start of development in August 1995.

The IRS turned over responsibility for Cyberfile to the Commerce Department, which in turn outsourced the project without competitive bidding to a firm that only qualified to take it on under a Small Business Administration program for disadvantaged companies.

In fact, the firm was not technically qualified to execute the contract, and Commerce Department officials never allowed qualified contractors--even other disadvantaged firms--to compete, the GAO found.

“Development and acquisition were undisciplined and hastily initiated,” the GAO said about Cyberfile.

In addition, the GAO found that the IRS and Commerce Department financial record keeping was so poor it violated federal law. In some cases, IRS officials charged unrelated activities to the Cyberfile account.

“There is a lack of confidence here in terms of the management of the IRS,” Stevens said, pointing his finger at IRS officials in the room. “We have been going at this for 12 years, and every year we get the same reports. Are we going to go another 12 years before you figure out how to put together these systems?”