The Internal Revenue Service has taken steps to improve its management controls for technology that will help it implement the Foreign Account Tax Compliance Act, or FATCA, to improve U.S. tax compliance involving foreign financial assets and offshore accounts, according to a new report, but more work needs to be done.

The agency needs to strengthen the system development controls for the new international information technology system, including a new Foreign Financial Institution Registration System, said the report.

The report, released publicly Thursday by the Treasury Inspector General for Tax Administration, noted that development of the Foreign Financial Institution Registration System is underway to enable the IRS to meet its goals and requirements established by FATCA, which was included as part of the HIRE Act of 2010. 

The expected benefits of this information technology project include the ability to effectively register foreign financial institutions; increase annual enforcement revenue; and support the IRS’s new overall information reporting system for FATCA. The successful development, deployment, and implementation of the Foreign Financial Institution Registration System should significantly improve taxpayer compliance internationally and thus enhance IRS tax administration.

The overall objective of TIGTA’s review was to determine whether the IRS’s systems development approach for the Foreign Financial Institution Registration System is mitigating risks through the application of information technology management controls aimed at successful development and delivery of requirements and capabilities in support of FATCA requirements, milestones, and goals.

Specifically, TIGTA evaluated the IRS’s established management controls and processes over information technology program management, security control processes, testing documentation, requirements management, and fraud prevention controls.

The IRS is developing the Foreign Financial Institution Registration System within its new Enterprise Life Cycle Iterative Path systems development and testing process. The initial system release was substantially developed and nearing deployment when the IRS terminated the effort in November 2012. Following new Treasury Department regulations, changes with intergovernmental agreements, and new processes needed to implement FATCA, the IRS was unable to fully use the initial system. Subsequently, the IRS modified and expanded the scope of the system requirements. The major redesign and initiation of a new development effort was necessary because the IRS did not sufficiently develop requirements for the initial Foreign Financial Institution Registration System as needed for new system development.

“The Foreign Account Tax Compliance Act can effectively improve U.S. tax administration involving offshore accounts by utilizing FATCA computer applications that are developed and implemented in a timely and effective manner,” said TIGTA Inspector General J. Russell George in a statement. “Improved system development, management controls, and testing are needed to ensure the system works as intended to improve tax compliance.”

TIGTA made six recommendations to the IRS for improved system development, documentation, management and testing. In response to the report, the IRS agreed with all six recommendations. However, TIGTA said it believes that the action plans provided by the IRS for two of the recommendations were not fully responsive.

“While we agreed with the recommendations, we take exception to the conclusion drawn by TIGTA that states a major redesign of the system was necessary due to IRS not sufficiently developing requirements and hence the title of the TIGTA report,” aid IRS chief technology officer Terence V. Milholland in response to the report. “As we discussed during the audit, the major redesign was due to late regulatory changes, driven by significant public feedback on the draft regulations that impacted the in-flight system design. The facts show that IRS terminated the release immediately upon learning of the new regulations. In addition, to ensure the new FATCA development was implemented and deployed timely and within acceptable cost thresholds, IRS management timely identified and communicated system changes to minimize costs and reduce waste. IRS continues to adhere to published guidance, standards and procedures for life-cycle development, testing and program management.  Therefore, we disagree with TIGTA's conclusion that adequate program controls improvements are necessary. FATCA did in fact have strong program management principles in place…”

Milholland added that he continued to disagree with the “outcome measures” in TIGTA’s draft report, in which TIGTA compared the projected costs of two iterations of the software and calculated the potential amount of “inefficient use of resources” to be around $2.2 million.

“The $2.2M cost increase was attributed to the late changes in scope due to determination of the final regulations resulting from the Hiring Incentives to Restore Employment (HIRE) Act of 2010,” Milholland responded. “FATCA Registration development was well underway in order to meet the already tight deadline for the existing law before the change in legislated scope requirements resulted in an additional $2.2M in cost. The cost overrun was not due to inefficient use of resources as stated in the report; rather, a change of legislated scope that we had no choice but to account for by mandatory congressional deadlines. IRS leadership supporting the FATCA effort leveraged staff from legacy investments and matrixed them into the program in order to meet the deadlines for FATCA registration despite other competing priorities and staffing shortages due to a continuing hiring freeze.”