Strategic Context

Fiscally, the Commonwealth of Virginia relies on timely and accurate tax collection, which is facilitated in large part by its information technology (IT) tax management system. The primary purpose of a modern integrated tax system is to enable revenue agencies to administer the full breadth of tax programs mandated by law, and to collect the revenues duly owed to the Commonwealth fairly and efficiently, all while keeping pace with the ever-changing digital customer-centric demands of Virginia taxpayers.

Virginia Tax's portfolio of current state technology solutions handling the day-to-day execution of key tax business processes is rapidly becoming obsolete, with its core tax system, Integrated Revenue Management System (IRMS), having been custom built and implemented over twenty years ago. The age and customization of the core IRMS technologies and related supporting applications has created functional and technological gaps that impact the Commonwealth's ability to efficiently perform tax operations and limits the agency's ability to make timely changes in response to legislative requests. System limitations have also resulted in increasing internal and external security risks and have put Virginia Tax's compliance with federal regulations for the handling of Federal Tax Information (FTI) in jeopardy in the near term. With an aging workforce and departure of key Virginia Tax personnel, the availability of knowledgeable and experienced personnel to manage and make changes within this complex solution landscape is quickly diminishing, posing an operational risk.

To address these challenges, item 273 of the 2022 Appropriation Act required, Virginia Tax to conduct a strategic planning exercise to identify and evaluate options for the replacement of IRMS. To support this effort, Virginia Tax engaged Gartner to assess the current state of the legacy systems, identify and evaluate approaches for full-scale modernization and develop a Transformation Roadmap to serve as the basis for Virginia Tax's system modernization program.

Current State Challenges and Drivers for Modernization

Virginia Tax's ability to effectively achieve its mandates is inhibited by the following challenges stemming from the agency's legacy technologies:

• Aging and Complex Legacy Solutions: Virginia Tax's core legacy system (IRMS) is comprised of 40+ interrelated applications, including multiple databases, with the core systems using custom-coding and built on technology approaching obsolescence.

• Unsupported Business Capabilities: Core business capabilities desired by internal and external stakeholders are not adequately supported by IRMS, and the resources required to make changes of the scale needed to meet identified needs are unavailable.

• Increased Risks and Decreased Efficiency: Critical functionality gaps, such as difficulty performing data analytics, inadequate workflow management and challenges introducing additional internal and security controls increase Virginia Tax's operational and security risks and decrease operational efficiency.

• Inadequate Online Taxpayer Service Options: Online account access for information and transaction processing are not consistently or adequately supported for business and individual taxpayers and tax preparers; and

• Diminishing Institutional Knowledge: IRMS' aging technology leaves Virginia Tax heavily reliant upon diminishing institutional staff knowledge, since IRMS is highly customized and the resources with the necessary skillsets are extremely limited in the market.

As part of the modernization planning process, Virginia Tax has identified the following key strategic goals for modernization of existing legacy systems:

• Enhance Effectiveness: Improve scalability of business solutions, inform managerial decision-making, improve ease of use and streamline the customer experience.

• Optimize Productivity: Reduce processing inefficiencies, reduce technical debt, improve processes and self-service tools and enhance the ability to query and analyze data.

• Improve Agility: Ensure the continued stability of tax revenue collection and management while being able to implement new tax types and programs and adjust existing processes timely in response to legislative requests, new policy initiatives and customer needs; and

• Drive Compliance and Mitigate Risk: Enhance compliance with the current and future Virginia and federal tax policy and legislation and reduce the tax gap; harden security and increase agility in handling of fraud and cybersecurity threats.

Recommendation Summary

Based on the analysis detailed in this report, Gartner recommends that Virginia Tax seek to replace the existing IRMS legacy integrated tax solution with a single-vendor Commercial Off the Shelf (COTS) integrated tax system, developed and implemented by a proven firm with deep tax knowledge and expertise. A COTS solution will yield the following key benefits:

• Configurable to meet a majority of Virginia Tax's needs and streamline operations with minimal customizations.

• Modem technology and architecture platform and principles, improving security posture and reducing the burden on Virginia Tax resources to maintain and support the agency's core solutions; and

• Scalability and flexibility required to support Virginia Tax's new and emerging needs.

• Cloud based COTS solution (particularly in the form of SaaS) reduces the operational burden of running and maintaining hardware and software, which frees up IT staff to focus on more valuable innovation and growth initiatives

Program Schedule and Budget Implications

The analysis shows that the recommended modernization strategy for Virginia Tax's will require approximately 4 years to complete at a budget of approximately $89M+/-20% (range of $71-107M), inclusive of internal and external costs. The program will require effective and proactive planning, a robust program management and governance structure, strong executive level support and a focused change management strategy. Key elements and next steps for the modernization program are outlined in the Strategic Transformation Roadmap.

In calendar year 2023, Virginia Tax should begin defining clear functional and technical requirements for a modem COTS solution and develop a comprehensive request for proposal (RFP) to procure the best-fit Single Vendor COTS Solution and implementation partner.

Program Benefits

Virginia Tax's system modernization will achieve not only significant cost savings but will realize positive financial benefits once functionality begins to be implemented during the phased rollout, culminating in a projected 200%+ cost to benefit ratio at the end of the 10-year period. In addition to the quantifiable benefits, following are key anticipated qualitative benefits of the selected strategy:

• Deploy a reliable and flexible system able to meet Virginia Tax' future needs, leveraging the current and future benefits of COTS applications (e.g., implementation savings and future functionality enhancements);

• Support business process efficiency and flexibility through the automation of current manual processes.

• Reduce day-to-day administrative burden on Virginia Tax staff by simplifying the system landscape and streamlining data access.

• Enhance speed to production for business changes, though highly configurable and visible business rules that do not require complicated programming, which mitigates the risk of aging technology that is difficult to extend and expand.

• Improve taxpayer relationship management through the deployment of web-enabled taxpayer self service capabilities (e.g., fully integrated e-filing, tax payer account access and electronic bill presentment and payment);

• Enhance information management to support operational and policy decision making.

• Simplified management resulting from a single vendor and hosted service provided off-premises; and

• Mitigate the risk associated with loss of key support personnel.

Another factor that cannot be overlooked is that the revenues collected by Virginia Tax are the lifeblood of the Commonwealth, the costs incurred with the collection of those revenues impacts not only Virginia Tax but other programs in need of state funding to serve the citizens of Virginia. Now more than ever, it is imperative to establish an environment that enables optimal processing and collections of tax revenues.

Critical Success Factors

Virginia Tax recognizes the complexity associated with its replacement strategy and has identified the following critical success factors that will enable an effective implementation. These success factors are also considered in the Transformation Roadmap:

• Strong Executive Management commitment and championship throughout the project.

• Early involvement and buy-in from business and technical subject matter experts.

• Well-defined program governance structure and controls that enable informed and effective decisions.

• Clear communication and strong organizational change management.

• A realistic implementation schedule divided into small, manageable segments with clearly defined business benefits.

• An approved implementation budget with realistic investment expectations by internal and external stakeholders.

• Clearly articulated business and technical requirements and a process to define, manage and communicate changes over the life of the project; and

• Effective project management discipline, availability of internal technical expertise and strong management over external services providers.