IRS' situation creates an outsourcing quandary

Manufacturing, insurance and health industries are using systems integrators to provide
turnkey solutions to information technology problems in areas outside the core competency
of the companies involved. Prominent IT companies, particularly application software
companies, have contracted out their World Wide Web pages and back-office IT functions.

If management at a private company can realize savings on its core business, it will
contract out IT support functions.

The federal government is more reluctant to outsource IT functions. Federal workers can
lose jobs to outsourcing, and no agency head wants that. Congress doesn't like reducing
its staff, either. Layoffs become even harder if workers are represented by public service
unions who will fight for them.

Also, there are core government functions that limit the drive to outsource.

Most agencies have experienced a big minus of outsourcing: Contractors made bids
replete with promised savings that in fact ended up costing more than the government
employees did.

But rising economic necessities for outsourcing might overcome past reasons not to.
Political support is increasing.

Sen. Craig Thomas (R-Wyo.) has introduced a modified version of his bill from last
Congress to statutorily encourage outsourcing. The bill, S 314, has support from companies
and industries that hope to sell outsourcing services. Last year's version lacked
Democratic co-sponsors.

This bill doesn't address it, but the big issue is data centers. Private industry knows
how to run data centers. There is no government core competency that exceeds private
industry's capability in running a data center.

Last year, the House and Senate Appropriations committees ordered a study of
outsourcing the IRS tax returns submissions process. In January, IRS released its report
and has provided it for public comment to the National Commission on Restructuring the

It shows that IRS remains the most fascinating case for studying outsourcing if you
like policy problems. If you try new methodologies at IRS and fail, you can screw up the
most core function of the government, collecting tax money. And unlike other government
functions, most IRS processing of paper documents is squeezed in from February to May.

When IRS gets paper returns, workers type the information from paper into an electronic
format. Some errors occur. IRS' report to Congress indicates that the 21,000 persons doing
the typing are mainly seasonal workers. The report also notes that the skills of these
workers depends on local economic conditions.

The report shows that labor alone for submission processing costs IRS $362 million.
Part of that could be redirected if IRS received returns electronically.

Millions of U.S. citizens prepare their tax returns in electronic format with tax
preparation software packages or through service providers such as H&R Block.

It takes only a 32-cent stamp to mail a return, whereas most preparers charge $10 or
more to forward an electronic return to IRS. Rational taxpayers choose the Postal Service,
mostly. If a taxpayer wants an early refund, she can pay the $10 and forward the return to
a service provider in the public switched network, who forwards it to IRS.

Results show despite the estimated 59 million returns already in electronic format, IRS
received roughly 13 million electronically, less than 25 percent. By contrast, 70 percent
of the Australian public filed electronically last year.

IRS must create an incentive for taxpayers or service providers who have taxpayer
records in electronic format to file without the steps of printing on paper, having IRS
employees re-enter the data or mailing matching paper records.

Outsourcing the submission processing of paper returns will not yield the full measure
of savings if it merely uses cheaper labor to do this unnecessary input.

Outsourcing also makes possible the nightmare scenario-a contractor employee using
access to tax returns to satisfy idle curiosity about a neighbor's return or to engage in
political activity. Direct electronic transmission over a secure dial-up public switch
network avoids this.

IRS must make the cost of electronic filing the same as a stamp or mask the process.
Solving this puzzle would free money for other needs.

Stephen M. Ryan is a partner in the Washington law firm of Brand, Lowell & Ryan.
He has long experience in federal information technology issues.

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