IRS Wasted $12 Million on Microsoft Email System

The Internal Revenue Service spent $12 million to subscribe to a Microsoft enterprise email system that it was ultimately unable to use, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, said the IRS currently has an on-premises email system, but it lacks archiving capability. The hardware is approaching the end of its support period from the manufacturer and has been experiencing numerous failures, resulting in more work for the IRS’s email support staff.

If the IRS does not upgrade its email system, it could adversely affect the IRS’s ability to effectively perform tax administration, the report pointed out. The IRS also needed to comply with a directive from the Office of Management and Budget requiring federal agencies to manage both their permanent and temporary email records in an accessible electronic format by the end of this year, so it planned to procure a new enterprise email system.

To replace the aging email system, the IRS authorized a $12 million purchase of subscriptions over a two-year period between June 2014 and June 2016. Executives from the IRS’s Information Technology organization decided to consider the enterprise email project to be an upgrade to its existing software and not a new development project or program. The IT organization thus did not follow guidance in the Internal Revenue Manual. To replace the old email system, they decided on a combination of Microsoft Office 365 Pro Plus and Microsoft Exchange Online.

However, the IRS managers made the purchase without first determining the project infrastructure needs, nor the integration requirements, business requirements, security and portal bandwidth, and whether the subscriptions were technologically feasible.

“The IRS never deployed the software to be used via the purchased subscriptions, and it may have violated the bona fide needs rule when it purchased the subscriptions using Fiscal Years 2014 and 2015 appropriations and did not deploy the software subscriptions in those years,” said the report. “In addition, the IRS violated Federal Acquisition Regulation requirements by not using full and open competition to purchase these subscriptions.”

In March 2016, the IRS informed TIGTA that the Government Accountability Office had received a bid protest in March related to the procurement of its subscription to the Microsoft email service. The GAO ruled in June to sustain the protest, deciding the IRS was limited to acquiring only updated or replacement versions of its pre-existing software portfolio and that implementing a cloud-based solution was outside the scope of the underlying purchase agreement. The IRS allowed the contracts for the subscriptions to expire a few days later.

TIGTA recommended the IRS’s chief information officer ensure the agency follows the appropriate sections of the Internal Revenue Manual before the subscription requisition process and throughout the subscription project development life cycle for new subscriptions or managed services procurements. The IRS Chief Counsel should also conduct a review to determine if the purchased subscriptions violated the bona fide needs rule and take any actions required by law, TIGTA suggested. The report also recommended that the IRS’s chief information officer and chief procurement officer ensure that if the agency intends to purchase a cloud solution in the future, it should acquire the products through competitive procedures in accordance with federal acquisition regulations.

The IRS agreed with two of the recommendations and said it plans to have a review conducted by the IRS Chief Counsel and to collaborate and follow the federal acquisition regulations. The IRS partially agreed with one of the other recommendations because it does not believe the Enterprise Life Cycle was applicable. The IRS also disagreed with the TIGTA report that it wasted taxpayer dollars.

“The IRS takes seriously our obligation to manage taxpayer dollars in the most efficient and effective manner possible,” wrote IRS chief information officer S. Gina Garza in response to the report. “While we value the insight that TIGTA audits provide, we strongly disagree with the assertions made in the report regarding IRS not following appropriate management practices, deviating from the Federal Acquisition Regulations and using resources inefficiently. The assertions in the report stem from differing perspectives on the approach the IRS took in acquiring Microsoft Office 365 Pro Plus and MS Exchange Online Plan 2. At the time of the acquisition, the IRS deemed the subscription purchases strictly as an upgrade from our current version of MS products, following the same approach and practices that had been used for prior upgrades. As such, the IRS followed appropriate management processes and developed the acquisition plan in line with FAR regulations for acquiring upgrades to software.”

TIGTA, for its part, maintained that the Enterprise Life Cycle was applicable and the funds were wasted.

The Republican chairmen of three congressional committees sent a letter Wednesday to IRS commissioner John Koskinen complaining about the wasted money. They pointed out that the Office of Management and Budget in 2012 required all federal agencies to update their email system by the end of 2016.

“As a result of the IRS’s carelessness, the Agency will not meet OMB’s December 31, 2016, deadline to modernize its email system, wasting millions of taxpayer dollars and further delaying full IRS transparency and accountability,” said House Ways and Means Committee chairman Kevin Brady, R-Texas, Senate Finance Committee chairman Orrin Hatch, R-Utah, and House Ways and Means Oversight Subcommittee chairman Peter Roskam, R-Ill. “These failures are unacceptable and must be addressed.”

The IRS issued a statement Wednesday in response to the congressional letter. “We strongly disagree that the IRS wasted taxpayer dollars,” said a statement emailed by an IRS spokesperson. “The IRS followed appropriate management processes and developed the acquisition in line with federal regulations. Had a contract protest not occurred, the IRS would have been well on its way to using this software and completing this project in 2016. The IRS remains committed to continuously improving our IT systems and processes to follow all federal acquisition rules.”

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