By Stephen Barr
Thursday, November 30, 2006

It's not easy changing the way you do business, especially if you are the Internal Revenue Service and your workload surges from January to April each year as taxpayers file returns and await refunds.

"The filing season for the IRS is the Holy Grail," said David Grant, IRS director of procurement. "We don't put it in jeopardy for anything."

With that in mind, the IRS this month modified a $103 million contract, awarded six months ago, for the management of paper tax returns. The original plan to turn over the filing, storage and retrieval activities at seven IRS centers to a contractor Dec. 1 was altered so that, for now, the outsourcing will occur at just two centers.

In a statement, the IRS said the conversion was scaled back "to ensure that a sufficient number of employees with the required training and security clearances are in place to manage the files during the upcoming filing season."

Grant said the IRS and the contractor, IAP Worldwide Services, "mutually agreed" to limit the rollout of the contract to two centers, which he described as the best prepared for the workforce change. "No one has failed to perform on either side," he said.

But the National Treasury Employees Union, which represents most of the agency's rank-and-file workers, faulted the IRS for choosing to rely on a contractor rather than its employees and portrayed the agency as scrambling to reassign to other IRS jobs put in transition by the contracting decision.

"Once again the administration's zeal to send the work of the federal government to private-sector contractors is failing America's taxpayers," Colleen M. Kelley, the union president, said in a statement.

In 2003, the IRS began the process of putting the work, which had been deemed a commercial activity, up for a public-private competition. Two years later, the IRS decided that its employees had won the competition and that the work should stay in-house. Grant said the agency "then discovered some discrepancies" in the bidding process and elected to terminate the award.

After a reexamination, the IRS announced IAP as the winner. The company had filed a protest after the employees won, but Grant said "that wasn't the full driver behind our decision." The IRS projects savings of $25 million to $30 million over the five-year life of the contract.

Kelley said the IRS "has treated its own employees with disdain through this entire process," a contention rejected by Grant, who said IRS senior managers strive to ensure employees are treated fairly in job competitions.

IRS spokesman John Lipold said no IRS employees were laid off because of the decision. Some employees have moved to new jobs, and others opted to take early retirement and cash buyouts, he said.

How many IRS jobs are at issue is unclear. When the jobs were put up for bid, the union estimated that 1,458 employees filed and stored tax returns. By last year, that number had dwindled to about 840 employees. The IRS currently counts 84 permanent jobs and 367 part-time and intermittent positions in file management at the seven centers.

The contractor, IAP, will take over paper file management responsibilities Friday at the centers in Kansas City, Mo., and Ogden, Utah. IAP is to assume filing activities at the remaining centers -- Andover, Mass.; Atlanta; Austin; Fresno, Calif.; and Cincinnati -- in June.

Arlene J. Mellinger, public affairs director for IAP, said the company was "fully prepared to honor its contractual obligations."

IAP is owned by Cerberus Capital Management, a New York hedge fund chaired by John W. Snow, the former Treasury secretary. The company specializes in global operations and logistics, facilities management, and professional and technical services. Last year, IAP acquired Johnson Controls World Services, a longtime federal contractor.

The IRS also has decided to retool another major project, known as a seat-management competition, that involved about 2,700 technology jobs at the agency. That decision was not tied to the filing season but to IRS concerns about the size of the initiative, Grant said.

Seat management includes service and support for desktop and laptop computers and other equipment, the IRS help desk, hardware and software procurement, network services and computer security.

The agency has canceled a public-private competition for the work and will instead break up the project "into smaller, more manageable initiatives to put in industry best practices," Grant said.

Kelley welcomed the cancellation but said the agency "wasted countless dollars" on the project and "spread much anxiety" among IRS technology employees. The union will monitor the IRS's new approach to performing the work, she said.

Stephen Barr's e-mail address isbarrs@washpost.com.