IRS SAYS COMPUTER PLAN FAILED; PROPOSES FARMING OUT RETURNS.

Byline: David Cay Johnston The New York Times

The IRS conceded Thursday that it had spent $4 billion developing modern computer systems that a top official said ``do not work in the real world,'' and proposed contracting out the processing of paper tax returns filed by individuals. That would allow nongovernment workers to see confidential information about the incomes of individual Americans.

Arthur Gross, an assistant commissioner of internal revenue who was appointed 10 months ago to rescue the agency's efforts, said customer service representatives must use as many as nine different computer terminals, each of which connects to several different data bases, to resolve problems.

``Dysfunctional as some of these systems may be today,'' Gross said, the IRS ``is wholly dependent on them'' to bring in the $1.4 trillion of taxes that finance the government. He expressed doubt that the agency was capable of developing modern computer systems, saying it lacked the ``intellectual capital'' for the job.

The proposal to contract out the processing of paper tax returns would save little money, as it costs only $34 million for clerks to extract information from 200 million paper tax returns and enter into IRS computers. But such a move is sure to arouse protests from taxpayers concerned about who can see how much money they make and how much they pay in income taxes.

The Government Accounting Office has sharply criticized the IRS' administration of the modernization project, and the agency has previously acknowledged problems with the effort. But Gross' comments marked the first time that it said it would have to scrap the project altogether and start over.

Gross' admission that the Tax Systems Modernization effort has failed came in testimony before the National Commission on Restructuring the IRS, a bipartisan panel created by Congress to examine the agency's operations.

The panel is expected to press for a different approach to developing modern computer systems and to recommend innovative ways to persuade more Americans to file their tax returns electronically.

Gross said the IRS already had killed one modernization project, a plan to turn paper tax returns into electronic images, after paying $284 million to Lockheed Martin, the nation's largest defense contractor.

A spokesman for the commission said the cost of shutting down the project ``will be astronomical.'' He said 12 other systems were under review to determine whether they should also be killed.

The IRS said it did not have an estimate of what it might cost to cancel those projects.

The failure of the modernization effort will mean years of frustration for taxpayers who get into a dispute with the IRS, especially one that involves records kept on two or more of its computer systems.