CSC Wins IRS Contract to Update Systems

After 10 years and billions of dollars in failed efforts, the gargantuan task of overhauling the computer systems at the Internal Revenue Service landed Wednesday in the lap of Computer Sciences Corp.

In turning the job over to the private sector, the federal tax agency is opening a new chapter in its long struggle to bring taxpayers modern conveniences ranging from personalized customer service to the ability to file tax returns via the Internet.

“To improve service, the IRS needs to break out of its technological time warp from the 1950s and 1960s,” IRS Commissioner Charles Rossotti said Wednesday. “This technology modernization project won’t happen overnight, but it will ultimately be a springboard for us to provide top-flight taxpayer service. In many areas, improved service hinges directly on replacing outdated technology.”

That job now belongs to Computer Sciences, the El Segundo-based computer services and consulting firm that won what some analysts predict will be the largest civilian technology contract ever. Over its 10- to 15-year lifetime, the contract will be worth between $5 billion and $7.5 billion, said Paul Cosgrave, the tax agency’s chief information officer.

The new system will be crucial to helping the IRS thwart tax fraud in the future, when the nation’s system of voluntary tax compliance is likely to come under increasing pressure. Earlier this year, Rossotti said Americans fail to pay $195 billion in taxes annually.

CSC specializes in large systems integration projects, but the IRS job will be in a league of its own, said Van Honeycutt, the company’s president, chairman and chief executive.

“It’s an incredibly complicated system that touches everybody’s life,” Honeycutt said. “It’s an extremely complicated system with many different systems, some of them in conflict with others. It’s a system that has to be immediately responsive to changes in regulations handed down by Congress. It’s a system that no one likes to use or deal with.”

Computer Sciences plans to make the system more user-friendly by working closely with IRS employees to develop systems that they think will help them do their jobs better. That would be a departure from the way the IRS attacked the problem before.

“In the past, we would do our best to come up with a set of business requirements, but we never got the requirements right in the first place,” Cosgrave said. “At the end of the day, we had a system that wasn’t needed.”

CSC’s focus on users pushed its proposal ahead of a rival bid from Lockheed Martin, Electronic Data Systems and Andersen Consulting. CSC’s team includes Northrop Grumman, IBM, Lucent Technologies, Science Applications International, Unisys and KPMG Peat Marwick.

“It’s disappointing,” said Thad Madden, a spokesman for Lockheed Martin Mission Systems Co. in Gaithersburg, Md. “We put forward a compelling proposal for a successful program.”

The Computer Sciences-led group will get to work early next year. By the end of 2000, the tax agency and the companies hope to:

* Improve service for people who contact the IRS by phone or via the Internet, with faster access to forms, information and customer service representatives.

* Expand projects involving the so-called Electronic Tax Administration, including the ability to file returns online and pay taxes electronically.

* Design a new generation of workstations so that IRS employees can look up tax records electronically while guaranteeing the security and privacy of taxpayers.

Over the longer term, the team will transform the IRS’ 1960s-era database into a 21st century computer system that will reduce errors, allow the agency to collect more taxes and improve customer service, Cosgrave said.

For Computer Sciences, the contract will mean “many hundreds” of new jobs, although most of them will be based near IRS headquarters in Washington and few will come to the Los Angeles area, Honeycutt said.

Analysts said the high-profile contract win will help the company’s momentum as it awaits decisions on several other key contracts that will be awarded or finalized in the next couple of months by AT&T;, Alcatel and the state of Connecticut.

“This is the biggest deal in the history of the industry,” said Stephen McClellan, a vice president at Merrill Lynch in San Francisco. “It’s a massive victory for CSC. It was kind of like winning the lottery.”

The contract award was announced shortly before the close of trading. Computer Sciences shares gained $2 to close at $68 on the New York Stock Exchange.