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IRS To Try Computer Upgrade Again

June 23, 1998

WASHINGTON (AP) _ The Internal Revenue Service, which spent $3.3 billion in a failed effort to upgrade its antiquated computers, is ready to try again. And Lockheed Martin and other companies that pocketed millions on the earlier project are vying for a piece of the multibillion-dollar job.

Lockheed was the main contractor on the Document Processing System, a gigantic project to electronically scan and store tax forms. Canceled in October 1996 after $251 million was spent, DPS was one of more than two dozen computer modernization projects on which the tax agency spent $3.3 billion over ten years.

The agency says that this time it has a detailed blueprint and contractors must share in the financial risk of failure.

The IRS blames itself for the failure of the earlier effort. But internal audits and documents reviewed by The Associated Press tell a more complicated story.

Lockheed provided more optimistic estimates of labor savings from DPS than the tax agency estimated, the documents show.

And at a time the DPS project was under growing criticism, Lockheed and Bernard Schwartz, chairman of Loral Corp., engaged in a lobbying effort to save the scanner.

Schwartz is a major Democratic campaign contributor who, along with his company, is being investigated in a separate matter concerning assistance to China’s missile program. He has denied any wrongdoing.

Lockheed and other contractors that worked on the earlier computer upgrade are seeking a piece of the new ``PRIME Integration Services Contract,″ which the IRS will award later this year.

The new contract calls for having private corporations design and build a streamlined computerized tax administration system. Total cost of the 15-year project isn’t known yet, but the first phase has an estimate of $709 million. The IRS calls it ``the single largest systems integration undertaking in the world.″

Lockheed strongly defends its role in the earlier, $1.3 billion DPS contract that it took over when it acquired Loral in 1996.

``I will defend that to the death: The project was on schedule and under cost,″ said Terrance M. Drabant, president of Lockheed Martin Mission Systems. The company tried to find ways to reduce the project’s cost as Congress moved to cut the IRS computer modernization budget, he added.

Schwartz made a similar pitch to Treasury Secretary Robert Rubin. ``DPS is a major software development success story for the IRS and the Treasury,″ according to a Lockheed briefing paper Schwartz sent to Rubin on Sept. 24, 1996.

Former IRS Commissioner Margaret Richardson laughed when she heard that description. ``Well, I don’t think so,″ she said.

Congress sharply cut back computer modernization dollars after finding the IRS would have to sink billions more into DPS and other projects to have them work. Also hampering the last computer upgrade was a lack of technical expertise at the IRS, poor management and trouble with pilot projects.

In October 1995, an internal IRS audit from Dallas called for cancellation of DPS. In April 1996, Richardson put the project under special review, and a month later the IRS slashed the $1.2 million weekly spending to $700,000.

Despite the efforts of Schwartz and Drabant, Rubin supported the IRS’ decision to terminate DPS in October 1996, while keeping the remaining part of the contract open for future work to fix part of the IRS’ computer problems for the year 2000.

``The decision was a difficult one, given present and future budget realities, however, this is an investment IRS cannot currently afford,″ Rubin wrote to Schwartz on Oct. 28, 1996.

Internal IRS documents raise questions about a Lockheed forecast of cost savings _ ``a far more favorable return on the investment than IRS projections,″ according to a Sept. 6, 1996, IRS review of the DPS.

``The Center for Naval Analysis did an independent review of the two methodologies and found the IRS approach to be more sound″ but also found ways to improve the return on investment, the report said. That view also was reflected in a July 1996 Treasury Department review of the project.

Lockheed’s Drabant said the IRS hadn’t included some of his company’s forecast savings.

According to a Lockheed briefing paper, those included labor savings from data retrieval that would greatly cut the time to answer a taxpayer’s question. The company also factored in costs for storing and photocopying paper, since the forms would be on the computer system.

``The probable answer is if we had further discussions with the IRS, we probably would have met in the middle in terms of savings,″ Drabant said.

At the IRS, officials who worked on the DPS project don’t blame Lockheed. ``They did what we told them to do,″ said Joni Guerrero, a program analyst in Austin, Texas, who worked on the prototype.

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