Tax Administration
Advance Tax Refund Program Was a Major Accomplishment, but Not Problem Free Gao ID: GAO-02-827 August 2, 2002The Economic Growth and Tax Relief Reconciliation Act of 2001 replaced the 15-percent tax rate for individual taxpayers with a 10-percent rate. To stimulate the economy quickly, the act provided for an advance refund in 2001. Between July and December 2001, the Internal Revenue Service (IRS), working with the Department of the Treasury's Financial Management Service (FMS), mailed out 86 million advance refund checks totaling $36.4 billion. IRS spent $104 million to run the advance tax refund program, and FMS spent $34 million to issue checks; IRS expects to spend another $12 million during fiscal year 2002. Overall, GAO found that IRS and FMS did a good job carrying out the program. However, the advance refunds and related rate reduction led to increased errors during the 2002 tax-filing season because of taxpayer confusion about the tax credit. In GAO's view, an independent review of the computer programming used to carry out a major effort such as the advance tax refund program might help avoid future problems. At the same time, clearer tax return instructions might reduce the number of returns filed in error.
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Director: Team: Phone:GAO-02-827, Tax Administration: Advance Tax Refund Program Was a Major Accomplishment, but Not Problem Free
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United States General Accounting Office:
GAO:
Report to the Chairman and Ranking Minority Member, Committee on
Finance, U.S. Senate.
August 2002:
Tax Administration:
Advance Tax Refund Program Was a Major Accomplishment, but Not Problem
Free:
GAO-02-827:
Contents:
Results in Brief:
Background:
Scope and Methodology:
Over $36 Billion in Advance Tax Refunds Were Issued at a Cost of at
Least $138 Million:
Overall, IRS Did a Good Job Implementing the Advance Tax Refund
Program; but Several Problems Were Encountered:
Several Problems Related to the Rate Reduction Credit Arose During the
2002 Tax Filing Season:
Issues Encountered During the Advance Tax Refund Program Could Provide
Useful Guidance for the Future:
Conclusions:
Recommendation for Executive Action:
Agency Comments:
Appendix I: Duplicate, Altered, and Counterfeit Advance Tax Refund
Checks:
Appendix II: Taxpayer Advocate Service Involvement with the Advance Tax
Refunds and Rate Reduction Credit:
Appendix III: Excerpts from the Tax Year 2001 Form 1040 Instructions
Related to the Rate Reduction Credit:
Appendix IV: Comments from the Internal Revenue Service:
Appendix V: Comments from the Financial Management Service:
Tables:
Table 1: Accessibility of IRS‘s Telephone Assistance during the Advance
Tax Refund Period:
Table 2: Increase in Demand for Telephone Assistance during Advance Tax
Refund Period:
Table 3: Individual Returns Processed with Rate Reduction Credit Errors
as of May 31, 2002:
Figure:
Figure 1: CSR Level of Service in the 2001 and 2002 Filing Seasons:
Abbreviations:
CSR: customer service representative:
DFAS: Defense Finance and Accounting Service:
FMS: Financial Management Service:
IRS: Internal Revenue Service:
ITIN: Individual Taxpayer Identification Number:
NAP: National Account Profile:
SSN: Social Security number:
TAS: Taxpayer Advocate Service:
TIGTA: Treasury Inspector General for Tax Administration:
[End of section]
United States General Accounting Office:
Washington, DC 20548:
August 2, 2002:
The Honorable Max Baucus:
Chairman:
The Honorable Charles E. Grassley:
Ranking Minority Member:
Committee on Finance:
United States Senate:
For tax years beginning after 2000, the Economic Growth and Tax Relief
Reconciliation Act of 2001, [Footnote 1] signed into law on June 7,
2001, applied a new 10-percent income tax rate to a portion of an
individual‘s income that was previously taxed at 15 percent. To
stimulate the economy more rapidly than would be achieved if taxpayers
had to wait until they filed their tax year 2001 return to realize the
full impact of this rate reduction, the act provided for eligible
taxpayers to receive an advance tax refund in 2001. [Footnote 2] The
amount of the refund was to be based on the filing status and amount
of taxable income on the taxpayer‘s 2000 return. The Internal Revenue
Service (IRS) was to identify eligible taxpayers and the Department of
the Treasury‘s Financial Management Service (FMS) was to issue the
checks on behalf of IRS, with the first checks scheduled to be received
during the week of July 23, 2001, about 6 weeks after the act became
law.
Taxpayers who were eligible to receive an advance tax refund in 2001 but
who (1) did not receive a check because IRS did not have their current
address or (2) did not have enough taxable income in 2000 to qualify for
the maximum amount allowable, may have been entitled to a rate
reduction credit when filing their tax year 2001 returns. [Footnote 3]
In addition, taxpayers who were not eligible for an advance tax refund,
such as those who did not have taxable income in 2000, may have been
entitled to a rate reduction credit provided they had taxable income in
2001. In response to your request for information on IRS‘s efforts to
implement this provision of the Economic Growth and Tax Relief
Reconciliation Act of 2001, this report includes information on (1) the
number and dollar amount of advance tax refund checks issued and the
costs to IRS and FMS for administering this program; (2) implementation
of the advance tax refund program, including various problems
encountered during implementation; (3) the effect of the advance tax
refunds and related rate reduction credit on the 2002 tax filing
season; and (4) observations that we believe IRS may find useful if it
is required to issue advance tax refunds or encounters a similar
management challenge in the future. As agreed with your office, we
collaborated with the Treasury Inspector General for Tax Administration
(TIGTA) on this review and included information on the results of
TIGTA‘s work in this report.
Results in Brief:
Between July and December 2001, IRS, through FMS, mailed about 86
million advance refund checks totaling about $36.4 billion. [Footnote
4] According to IRS and FMS officials, (1) IRS incurred costs of about
$104 million during fiscal year 2001 to administer the advance tax
refund program, including staffing costs for such activities as
computer programming and responding to taxpayer inquiries as well as
costs for contracts, postage, and printing, and (2) FMS incurred about
$34 million in costs to issue the checks. IRS expected to incur at
least $12 million in additional costs during fiscal year 2002.
[Footnote 5]
Overall, IRS and FMS did a good job implementing the advance tax refund
program. For example, most taxpayers received accurate and timely
notification of their advance refunds, and advance refunds were
accurately calculated and issued to eligible taxpayers. Given the
relatively short time in which the program had to be implemented, this
was a significant accomplishment. However, TIGTA‘s work6 and ours
identified the following problems related to the implementation of this
program in 2001.
* A computer programming problem resulted in 523,000 taxpayers receiving
notices indicating that they would receive larger advance refunds than
they were entitled to receive. IRS corrected the programming before any
advance tax refunds were issued and sent correction notices to the
affected taxpayers.
* About 5.3 million taxpayers who had filed their tax returns by the
April 16, 2001, filing deadline received untimely advance refund
notices due to a combination of (1) IRS‘s procedures for processing
returns, which give priority to returns filed by taxpayers who are due
to receive a refund, and (2) the way programming was developed to
generate these notices. This delay only affected the notices, not the
timely mailing of the advance refund checks.
* About 548,000 advance refund checks valued at about $174 million were
returned undeliverable due to incorrect addresses. As of late October
2001, IRS had identified about 34,000 of these checks that, because of
issues related to IRS's computer programming and research done by IRS
employees, were not reissued in a timely manner even though IRS had
updated address information.
* Taxpayers who called IRS between July and September 2001, when most
advance refund notices and checks were mailed out, had greater
difficulty reaching IRS assistors than did taxpayers who called during
the same 3 months in 2000 or during the 2001 tax return filing season.
IRS data suggest that the decline in telephone service was caused by
the significant demand for advance refund-related telephone assistance.
The advance tax refunds and related rate reduction credit had the
following effect on the 2002 tax filing season.
* As of May 31, 2002, over 7 million individual returns, or 6.5 percent
of all individual returns processed, had errors related to the rate
reduction credit. Some taxpayers who had received an advance refund and
thus were not entitled to a credit claimed one anyway, while others who
were entitled to the credit either failed to claim it or computed the
credit amount incorrectly. Overall, more than one-half of all returns
identified with errors during IRS processing had errors related to the
credit.
* IRS data suggest that significant demand for telephone assistance
related to the rate reduction credit negatively affected telephone
service, especially in mid- to late-February 2002 when the greatest
number of taxpayers called with questions about the credit.
* Various problems were identified early in the filing season. For
example, TIGTA identified two problems that, if IRS had not corrected
them, could have (1) provided about $50 million in rate reduction
credits to about 217,000 taxpayers who were not entitled and (2)
provided erroneous automated telephone information to about 35 million
taxpayers concerning whether they had received an advance tax refund.
[Footnote 7]
* IRS originally did not correct errors made by taxpayers who
underclaimed the credit by less than a specified amount. After TIGTA
discussed this policy with IRS, IRS said it would allow the
underclaimed credit and any interest to the affected taxpayers (as many
as 2.5 million) by the end of calendar year 2002.
We have some observations based on our work and TIGTA‘s that IRS may
find useful if faced with similar challenges in the future. For
example, an independent review of computer programming necessary to
implement a major effort like the advance tax refund program might
avoid potential problems that could negatively affect taxpayers and/or
create unnecessary work for IRS, and greater attention to the clarity
of information in the tax return instructions when there has been a
major change to the tax return might reduce the number of returns filed
in error.
To identify the full range of challenges IRS faced with respect to the
advance tax refunds and rate reduction credit and any changes in
procedures or processes that might be warranted if faced with similar
types of challenges in the future, we are recommending that IRS assess
and document its overall performance with respect to the advance tax
refunds and related rate reduction credit. In commenting on a draft of
this report, the Commissioner of Internal Revenue agreed with our
recommendation.
Background:
To be eligible for an advance tax refund in 2001, taxpayers (1) had to
have a federal income tax liability on their tax year 2000 return, (2)
could not be claimed as a dependent on someone else‘s tax year 2000
return, and (3) could not be a nonresident alien. [Footnote 8] The
amount of advance tax refund that taxpayers could receive depended on
their filing status and the amount of taxable income shown on their tax
year 2000 return. The maximum refund amount was $600 for a married
couple filing jointly or a qualified widow(er), $500 for a head of
household, and $300 for a single individual or married person filing
separately.
Before issuing the advance tax refund checks, IRS was to send every
individual who filed a return for tax year 2000 a notice either
informing them of the refund amount they were to receive and the week
in which they were to receive it or telling them that they were
ineligible for a refund and why. [Footnote 9] Prior to sending a
disbursement request to FMS, IRS was to reduce the amount of the
refunds for any delinquent federal taxes owed by the taxpayers. FMS
then issued the advance refund checks for IRS with assistance from the
Defense Finance and Accounting Service (DFAS). [Footnote 10] Before
issuing these checks, FMS was to reduce the amount of the checks by the
amount of certain other debts owed by the taxpayers, such as delinquent
child support. These reductions by IRS and FMS are referred to as
’offsets.“
IRS sent out the initial advance tax refund notices to 112 million
taxpayers by mid-July 2001. Most advance refund checks were then to be
issued over a 10-week period from the week of July 23, 2001, through
the week of September 24, 2001, based on the last two digits of a
taxpayer‘s Social Security number (SSN). For example, taxpayers with 00
through 09 as the last two digits of their SSN were to receive their
checks the week of July 23, 2001, while taxpayers with 90 through 99 as
the last two digits of their SSN were to receive their checks the week
of September 24, 2001. Taxpayers who filed their tax year 2000 returns
after April 16 were to receive their advance tax refund checks later in
the fall. [Footnote 11] All checks were to be issued by December 31,
2001.
Taxpayers who received an advance refund check for the full $600, $500,
or $300 based on their tax year 2000 filing status, as well as
taxpayers who would have received these amounts except for having all
or part of their check offset, were not eligible for a rate reduction
credit on their 2001 return. However, taxpayers who were entitled to an
advance refund check but either did not receive a check because IRS did
not have their current address, for example, or did not receive the
maximum amount for their filing status because they did not have enough
taxable income in 2000, may have been eligible for a rate reduction
credit on their tax year 2001 return. In addition, taxpayers who were
not entitled to an advance tax refund, such as those who did not have
taxable income in 2000, may have been entitled to a rate reduction
credit provided they had taxable income in 2001.
Scope and Methodology:
We obtained, from IRS and FMS, statistical information on the number and
dollar amount of advance tax refund checks issued, the number and dollar
value of refund checks that were offset for federal tax debts and for
debts other than federal taxes, and the cost to IRS and FMS for
administering the program. We did not independently verify the
statistical and cost data provided by IRS and FMS. However, as
discussed later, a sampling of advance tax refund transactions done as
part of our audit of IRS‘s fiscal year 2001 financial statements
indicated that there were no material errors requiring audit
adjustments. [Footnote 12] In addition, based on sampling done during
its review of the advance tax refund program, TIGTA concluded that IRS
had accurately calculated and issued advance refunds to eligible
taxpayers.
To assess implementation of the advance tax refund program, we:
* collaborated with TIGTA staff who reviewed various aspects of the
program, such as the accuracy of IRS‘s computer programming and
taxpayer eligibility for advance refunds; [Footnote 13]
* analyzed advance tax refund procedures, including IRS procedures for
meeting expected increases in telephone demand and FMS procedures for
handling undeliverable refund checks, refund offsets, and claims for
nonreceipt of refunds;
* discussed with officials of IRS‘s Office of the Taxpayer Advocate,
that office‘s involvement in the advance tax refund program; and;
* obtained statistics on undeliverable advance refund notices and
checks; taxpayer contacts with IRS concerning advance tax refunds and
the level of telephone service provided by IRS during the advance tax
refund period; claims for nonreceipt of refunds; and duplicate,
altered, and counterfeit advance tax refund checks.
To determine the effect of the advance tax refunds and related rate
reduction credit on the 2002 tax filing season, we:
* collaborated with TIGTA staff who determined if IRS properly
identified and referred for correction returns with rate reduction
credit errors during the 2002 filing season;
* reviewed information on the rate reduction credit on IRS‘s Web site
and in the instructions IRS provided taxpayers for preparing income tax
returns to be filed in 2002;
* analyzed statistics on (1) the number and type of rate reduction
credit errors on tax returns filed in 2002, (2) the demand for
telephone assistance during the 2002 filing season, and (3) the level
of telephone service provided by IRS during that period; and;
* discussed with IRS officials their procedures for handling rate
reduction credit errors and responding to any increased demand for
telephone assistance.
We used the results of our work and TIGTA‘s to identify observations
that IRS may find useful if it is required to issue advance tax refunds
or encounters a similar management challenge in the future.
We did our work at IRS‘s National Office in Washington, D.C.; the IRS
campuses in Atlanta, Ga., and Philadelphia, Pa.; IRS‘s Wage and
Investment Division and Joint Operations Center in Atlanta, Ga.; and
FMS‘s National Office in Washington, D.C. Our work was done between
July 2001 and May 2002 in accordance with generally accepted government
auditing standards. We obtained written comments on a draft of this
report from the Commissioner of Internal Revenue and the Commissioner
of FMS. Their comments are discussed near the end of this report and
are in appendixes IV and V, respectively.
Over $36 Billion in Advance Tax Refunds Were Issued at a Cost of at
Least $138 Million:
Between July and December 2001, about $36.4 billion in advance tax
refunds were issued to about 86 million taxpayers. [Footnote 14]
Another $3 billion in advance tax refunds was offset for various debts
owed by taxpayers, most of which was for delinquent federal taxes.
According to IRS and FMS officials, this initiative was accomplished at
a cost of at least $138 million.
Billions of Dollars in Advance Tax Refunds Sent to Millions of
Taxpayers:
IRS, through FMS, mailed out advance tax refunds according to a
schedule that called for taxpayers to begin receiving checks the week
of July 23, 2001. Altogether, almost 92 million taxpayers were to
receive about $39 billion in advance tax refunds, with most of the
checks to be received during the first 10 weeks of the program.
However, primarily because some checks were offset to recover past
debts and, to a lesser extent, because other checks were returned
undeliverable, about 86 million taxpayers received about $36.4 billion
in advance refunds.
The notice IRS sent to taxpayers who were eligible to receive an
advance tax refund included a statement that the amount of the refund
could be reduced by any outstanding debt owed, such as past due federal
and state income taxes or child support. In that regard, for any
taxpayer whose account involved a federal tax debt, IRS was to offset
the advance tax refund, either in whole or in part, to collect the
debt. In addition, FMS was to offset the advance tax refunds to collect
other types of debt via the Treasury Offset Program. [Footnote 15]
Taxpayers whose advance refunds were offset, either in whole or in
part, were to receive a notice explaining the offset. Because IRS and
FMS have no effective way of associating notices from IRS with checks
issued by FMS, notices regarding IRS offsets would have been sent to
taxpayers separate from the advance refund checks. [Footnote 16] On the
other hand, notices regarding FMS offsets could be mailed with the
checks.
According to data obtained from IRS and FMS, the two agencies offset the
advance tax refunds by almost $3 billion to collect various types of
taxpayer debt. IRS offset about $2.5 billion to recover delinquent
federal tax, and about 5.4 million taxpayers had their entire advance
tax refund offset due to a federal tax delinquency. FMS offset about
$468 million for the following reasons:
* $261.5 million for delinquent child support.
* $190.8 million for federal debts other than delinquent taxes.
* $15.7 million for delinquent state taxes.
Some taxpayers also had their advance tax refunds offset by as little as
1 cent for interest that was owed. According to IRS, this resulted from
its failure to include accrued interest in computer programming that IRS
implemented in January 2001 to write off small dollar amounts of tax
owed. An IRS official said that the computer programming has since been
corrected. However, according to the official, IRS did not track the
number of taxpayers who were affected.
IRS and FMS Incurred Costs of at Least $138 Million for Implementing
the Advance Tax Refund Program:
According to an IRS official, it cost IRS about $104 million to
administer the advance tax refund program through the end of fiscal
year 2001. Included in these costs were $36 million for contract costs,
$33 million for postage, $30 million for labor, and $5 million for
printing. [Footnote 17] According to an FMS official, FMS incurred
about $34 million in costs to issue the checks on behalf of IRS,
including the assistance provided by DFAS.
In order to administer the advance tax refund program, IRS, among other
things, had to:
* develop the computer programming necessary to determine taxpayer
eligibility for a refund and the amount of refund, including any related
federal tax offset;
* arrange for printing and mailing notices informing taxpayers whether
or not they would receive a refund;
* respond to telephone calls and correspondence from taxpayers
concerning the refund;
* resolve undelivered and returned refund checks; and;
* prepare adjustment notices for refunds that were offset due to
federal tax debts.
According to an IRS official, it took about 3 months between March and
June 2001 to develop the necessary computer programming to implement
the advance tax refund program and to arrange for printing and mailing
advance tax refund notices. IRS temporarily reassigned staff from other
functions to assist with taxpayer telephone calls and correspondence
related to the advance tax refunds. For example, IRS recalled furloughed
staff at its forms distribution centers to assist taxpayers who called
IRS with questions about the advance refund that were relatively easy to
answer. In addition, IRS used submission processing staff from its
Philadelphia campus to help respond to over 90,000 written inquiries
from taxpayers concerning the advance tax refunds.
Overall, IRS Did a Good Job Implementing the Advance Tax Refund
Program; but Several Problems Were Encountered:
In its reports on IRS‘s implementation of the advance tax refund program
in 2001, TIGTA concluded that (1) most taxpayers received accurate and
timely notification of their advance refunds, (2) advance refunds were
accurately calculated and issued to eligible taxpayers, [Footnote 18]
and (3) IRS took proper actions to prevent the issuance of advance tax
refunds after December 31, 2001. Similarly, our review of a sample of
80 advance tax refund transactions disclosed no material errors
requiring adjustments in the advance refund sample. We determined that
all of the taxpayers in our sample were eligible for the advance
refund, all of those refunds were calculated correctly, there were no
instances where a taxpayer had a debt recorded in the Treasury Offset
Program that should have been offset but was not, and there were no
instances in which the taxpayer had an outstanding tax debt that should
have been offset by IRS but was not. Based on our sample results, we
estimate that the number of errors requiring adjustment in the
population of all advance tax refunds was 0 plus/minus 4.5 percent.
[Footnote 19]
Despite this significant accomplishment, TIGTA‘s work and ours
identified the following problems related to implementation of the
advance tax refund program in 2001:
* A computer programming problem resulted in 523,000 taxpayers receiving
inaccurate advance refund notices.
* About 5.3 million taxpayers received untimely advance refund notices
because of IRS‘s procedures for processing returns and the way
programming was developed to generate advance refund notices.
* Over 2 million advance refund notices and about 548,000 advance refund
checks valued at about $174 million were returned undeliverable due to
incorrect addresses. As of late October 2001, IRS had identified about
34,000 of these checks that were not reissued in a timely manner even
though it had updated address information.
* Taxpayers who called IRS during the first 3 months of the advance tax
refund period (July through Sept.) had greater difficulty reaching IRS
assistors than did taxpayers who called during the same timeframe in
2000 or during the 2001 tax filing season.
Programming Error Resulted in Some Inaccurate Advance Refund Notices:
As noted earlier, the maximum amount of a taxpayer‘s advance refund was
to be $600, $500, or $300 depending on the taxpayer‘s filing status.
However, the actual amount of the advance refund was limited to the
lesser of (1) 5 percent of the taxable income on the taxpayer‘s tax year
2000 return and (2) the net income tax from the tax year 2000 return
after subtracting nonrefundable credits, such as the credit for child
and dependent care expenses, child tax credit, credit for the elderly,
and education credit. TIGTA found that IRS had initially erred in
developing its computer program for the advance tax refunds by not
limiting the refund amounts to the net income tax after nonrefundable
credits. As a result, TIGTA determined that about 523,000 taxpayers had
been sent inaccurate notices indicating that they would receive larger
advance refund checks than they were entitled to receive.
TIGTA informed IRS of this programming error on July 3, 2001, and IRS
was able to correct the programming before any erroneous advance tax
refunds were issued”thus avoiding overpayments of about $118 million.
IRS also sent corrected notices to the affected taxpayers. According to
TIGTA, IRS management determined that the error arose because testing
of the programming only verified that the computer output matched the
programming logic. The testing did not verify that the programming logic
was in accordance with the requirements of the law.
About 5 Million Taxpayers Received Untimely Advance Refund Notices:
TIGTA also determined that about 5.3 million taxpayers who had filed
their tax year 2000 returns by the April 16, 2001, filing deadline
would have delays of from 1 week to 9 weeks in receiving their advance
refund notices. [Footnote 20] According to TIGTA, this delay prevented
taxpayers from being timely notified of their advance refunds and may
have caused additional calls to IRS from taxpayers wanting to know when
they would receive their advance refund.
TIGTA attributed the delays to the following two reasons:
* IRS‘s normal procedure is to process income tax returns filed by
taxpayers who are due to receive a tax refund before processing income
tax returns filed by other taxpayers. Thus, many nonrefund returns
filed by April 16, 2001, had not been processed by the time IRS
prepared the initial list of taxpayers who were to receive advance tax
refund notices.
* When IRS developed the programming to generate the advance tax refund
notices for taxpayers whose returns had yet to be processed when the
initial list was prepared, it decided to mail the notices to these
taxpayers just before they were to receive their advance tax refund
checks, rather than mailing the notices as soon as their tax returns
were processed. In response to TIGTA‘s finding, IRS issued a news
release explaining that some taxpayers might experience a delay in
receiving their advance tax refund notices.
A Small Percentage of Advance Refund Notices and Checks Were
Undeliverable:
One challenge that IRS encountered throughout the implementation of the
advance tax refund program involved undeliverable advance tax refund
notices and checks due to incorrect addresses. Undeliverable advance
refund notices were to be returned to IRS‘s Philadelphia campus, and
undeliverable advance refund checks were to be returned to the FMS
payment center from which they were issued.
Through December 31, 2001, over 2 million advance tax refund notices
were returned undeliverable to IRS (about 1.6 percent of 125 million
notices sent), including about 1.2 million notices sent to taxpayers who
were to receive an advance refund and about 900,000 notices sent to
taxpayers who were ineligible for an advance refund. According to an IRS
official, the undeliverable notices were sorted and counted by type of
notice and then destroyed. Because these notices were sent to taxpayers
via first class mail, the Postal Service was to forward notices for
which taxpayers had provided an address change. Therefore, IRS decided
that it would not be cost-effective to follow up on the undeliverable
notices.
According to IRS officials, if a notice was undeliverable, a check would
still have been sent to the same address, unless IRS had received an
updated address from the taxpayer. According to FMS, about 580,000
advance tax refund checks had been returned as of December 31, 2001,
the last date that IRS was authorized to make advance payments. About
548,000 of those checks (less then 1 percent of the advance refund
checks sent) valued at about $174 million were returned undeliverable
due to problems with the taxpayer‘s address, according to IRS.
[Footnote 21] The percentage of checks returned undeliverable (less
than 1 percent) was less than the approximate 4-percent rate that an
FMS official indicated was the normal rate for undeliverable tax
refunds.
According to an FMS official, undeliverable advance refund checks, like
other tax refund checks that are returned undeliverable, were cancelled
and information concerning the cancelled checks was provided to IRS. IRS
was to research a taxpayer‘s account to determine if there was an
updated address to which another check could be sent. IRS updates
taxpayer addresses each week through a National Change of Address
Database maintained by the Postal Service. Taxpayers can also update
their addresses with IRS by submitting an IRS Form 8822 ’Change of
Address.“
In addition, for purposes of the advance tax refunds, IRS revised its
normal procedures by authorizing its customer service representatives to
accept change of address information over the telephone from taxpayers.
Officials at IRS‘s Philadelphia campus said that much of the written
correspondence they received during the period that the advance tax
refund payments were being made involved address changes from taxpayers
who wanted to ensure that they would receive their checks.
TIGTA found that some undeliverable advance refund checks were not
reissued even though IRS had updated address information. According to
TIGTA, this occurred because:
* IRS did not program its computer system to automatically reissue
undelivered refunds for all types of address changes made to taxpayers‘
accounts and;
* IRS employees did not always perform adequate research on IRS
computer systems necessary to identify current addresses and reissue the
refunds.
TIGTA brought this to IRS‘s attention, and as of late October 2001, IRS
had identified about 34,000 taxpayers for whom refunds had not been
reissued even though updated addresses were available. TIGTA estimated
that the 34,000 refunds totaled over $10 million and had been delayed
for an average of 8 weeks. According to TIGTA, in late December 2001,
IRS reissued refunds for taxpayers for which IRS had a more current
address. However, because this issue goes beyond the advance tax
refunds and affects refunds in general, TIGTA recommended that IRS (1)
revise its computer programming to automatically reissue undelivered
refunds for any address changes after the refunds are initially issued
and (2) eliminate the need for IRS employees to perform certain IRS
computer system research to identify a more current address because the
recommended programming revision would enable the computer to perform
this research. IRS agreed with both recommendations and plans to
initiate both the programming and procedural changes necessary to
implement them.
Besides having to deal with undeliverable advance refund checks, FMS
also had to deal with a relatively small number of duplicate, altered,
and counterfeit checks. This issue is discussed in appendix I.
Taxpayers Calling IRS During the First 3 Months of the Advance Refund
Period Had Problems Reaching an Assistor, but Access Later Improved:
IRS‘s telephone assistance performance measures for the first 3 months
of the advance tax refund period (July through Sept.)”when notices were
mailed out and checks were mailed to most taxpayers”show that taxpayers
had problems reaching an IRS assistor. Overall, when compared with the
same 3-month period in 2000, the accessibility of IRS‘s telephone
assistance generally declined. According to IRS officials, accessibility
declined because the demand for assistance, driven by taxpayer questions
about the advance refund, exceeded the capacity of available telephone
equipment and staffing to answer the calls. However, during the last
3 months of the refund period (Oct. through Dec.), accessibility
improved compared with the first 3 months of the refund period and the
same 3-month period in 2000.
Problems reaching an IRS assistor may have caused some taxpayers to call
the Taxpayer Advocate Service with questions about the advance refund.
Appendix II has information on taxpayer contacts with the Taxpayer
Advocate Service concerning advance tax refunds.
IRS generally projects demand for telephone assistance based on
historical data. Because IRS did not have previous experience with an
initiative of the type and scope of the advance tax refund to provide
historical data, IRS did a speculative analysis in June 2001 to project
the volume of advance refund-related calls it would receive. The
analysis projected that IRS would receive 53.2 million additional calls
during the advance refund period. [Footnote 22] This would have been a
275-percent increase over the 19.4 million calls IRS received in the
same 6-month period in 2000 and about a 129-percent increase over the
41.2 million calls IRS received in the 2001 filing season (Jan. through
July 14, 2001), which is traditionally IRS‘s busiest time of the year
for telephone assistance. According to the text of the analysis, the
assumptions on which the analysis was based were risky, and IRS
officials had limited confidence in the results.
Although IRS lacked a reliable projection of advance refund-related
demand for telephone assistance, IRS officials said that they expected
demand to be significant based on previous general experience with
refunds and changes in the tax law. However, according to IRS
officials, IRS did not plan for nor expect to meet a dramatic increase
in telephone assistance demand during the advance refund period, but,
instead, had a two-pronged approach for responding to as much as
possible of the increased demand given the telephone equipment and the
staff resources that were available. The first prong of IRS‘s strategy
was to handle as many calls as possible through automation, thereby
freeing up assistors to handle calls that required live assistance. To
accomplish this, IRS publicized its TeleTax telephone number in the
notices sent to taxpayers and through an announcement played on IRS‘s
main telephone assistance line. [Footnote 23] The TeleTax line had
recorded information on the advance tax refund program and an
interactive service that told the taxpayer the expected date the check
would be mailed based on the last two digits of the SSN entered by the
taxpayer. IRS data show that many taxpayers called for this
information”from July 1 through December 31, 2001, IRS received about
36.6 million calls on TeleTax compared with 1.8 million calls received
on TeleTax during the same months in 2000.
The second prong of IRS‘s strategy was to devote more staffing to
answering refund-related calls. IRS‘s forms distribution centers
recalled about 450 employees from furlough and trained them to handle
simpler calls related to the advance tax refund. Also, IRS devoted more
staffing to its regular telephone operations compared to the previous
year”during the first 3 months of the refund period, IRS expended 1,952
staff years in its toll-free telephone operation, 179 more staff years
than during the same 3-month period in 2000, or about a 10-percent
increase. According to IRS officials, total staffing increases do not
fully reflect the extent of the staffing for answering refund-related
calls because IRS directed resources from other toll-free work, such as
answering calls from taxpayers about their accounts, to answer refund
calls. IRS estimates that of the 1,952 total staff years expended
during the first 3 months of the advance refund period, 493, or 25
percent, were expended answering advance refund-related calls.
Despite IRS‘s efforts to meet the increased demand for telephone
assistance, taxpayers had greater difficulty in accessing that
assistance during the first 3 months of the advance refund period as
compared with the same time period in 2000. IRS has four measures for
judging its performance in providing access to telephone assistance. As
shown in table 1, during the first 3 months of the refund period”when
notices were mailed out and checks were mailed to most taxpayers”IRS‘s
telephone performance declined for all four measures compared with the
same time period in 2000. However, as also shown in table 1,
performance improved during the last 3 months of the refund period
(when, as discussed later, the demand for assistance decreased) and was
better than in the same 3-month period in 2000.
Table 1: Accessibility of IRS‘s Telephone Assistance during the Advance
Tax Refund Period:
Measure: Customer service representative level of service[A];
7/1/01 through 9/30/01: 47%;
7/1/00 through 9/30/00: 64%;
10/1/01 through 12/31/01: 63%;
10/1/00 through 12/31/00: 55%.
Measure: Assistor response level[B];
7/1/01 through 9/30/01: 37%;
7/1/00 through 9/30/00: 38%;
10/1/01 through 12/31/01: 50%;
10/1/00 through 12/31/00: 36%.
Measure: Abandon rate[C];
7/1/01 through 9/30/01: 18%;
7/1/00 through 9/30/00: 12%;
10/1/01 through 12/31/01: 15%;
10/1/00 through 12/31/00: 18%.
Measure: Average speed of answer[D];
7/1/01 through 9/30/01: 408 seconds;
7/1/00 through 9/30/00: 260 seconds;
10/1/01 through 12/31/01: 276 seconds;
10/1/00 through 12/31/00: 394 seconds.
[A] This measure is intended to show IRS‘s effectiveness in providing
callers with access to an assistor. It includes callers who received
automated service when the assistor service queue was full.
[B] This measure shows the percentage of callers that waited 30 seconds
or less to speak to an assistor.
[C] This measure shows the percentage of callers that hung up while
waiting to speak to an assistor.
[D] This measure shows the average number of seconds taxpayers waited
to speak to an assistor.
Source: IRS data.
[End of table]
According to IRS officials, (1) a significant increase in the demand for
telephone assistance caused the decline in accessibility during the
first 3 months of the advance tax refund period, (2) this increase was
driven by taxpayer questions about the advance tax refund, and (3) the
demand for assistance exceeded IRS‘s capacity for handling it given
IRS‘s available equipment and staff resources. As we previously
reported, demand for assistance is one of the key factors that can
affect level of service. [Footnote 24] As demand increases, for
example, level of service would typically decline because, other
factors being held constant, IRS would likely answer a lesser
percentage of the calls.
Table 2 has information on the demand for telephone assistance during
the 6-month advance tax refund period and the same 6-month period in
2000. The table shows that the increase in demand during the first 3
months of the advance tax refund period was especially significant.
Table 2: Increase in Demand for Telephone Assistance during Advance Tax
Refund Period:
2000:
2001:
Increase, Amount:
Increase, Percent:
Measure of demand[A]: Call attempts (in millions)[B]: July through
September;
2000: 11.4 million;
2001: 23.8 million;
Increase, Amount: 12.4 million;
Increase, Percent: 108%.
Measure of demand[A]: Call attempts (in millions)[B]: October through
December;
2000: 7.9 million;
2001: 11.8 million;
Increase, Amount: 3.8 million;
Increase, Percent: 48%.
Measure of demand[A]: Call attempts (in millions)[B]: Total;
2000: 19.3 million;
2001: 35.6 million;
Increase, Amount: 16.2 million;
Increase, Percent: 84%.
Measure of demand[A]: Unique numbers (in millions)[C]: July through
September;
2000: 7.1 million;
2001: 13.3 million;
Increase, Amount: 6.2 million;
Increase, Percent: 88%.
Measure of demand[A]: Unique numbers (in millions)[C]: October through
December;
2000: 6.5 million;
2001: 7.5 million;
Increase, Amount: 1.1 million;
Increase, Percent: 16%.
Measure of demand[A]: Unique numbers (in millions)[C]: Total;
2000: 13.5 million;
2001: 20.8 million;
Increase, Amount: 7.3 million;
Increase, Percent: 54%.
[A] Data are for IRS‘s three main toll-free telephone lines and do not
include calls to TeleTax. Totals and increase amounts may not compute
due to rounding.
[B] Call attempts includes repeat calls and is the sum of calls
answered, calls abandoned by the caller before receiving assistance,
and calls that received a busy signal.
[C] The unique numbers measure is IRS‘s estimate of the number of
taxpayers who called, rather than the number of calls. It measures the
number of calls from identifiable telephone numbers and counts all call
attempts from each telephone number as one call until the caller
reaches IRS and is served or until a 1-week window expires.
Source: GAO analysis of IRS‘s data.
[End of table]
Although table 2 shows that demand during the last 3 months of the
advance tax refund period was higher than during the same 3 months in
2000, table 1 showed that accessibility to telephone assistance improved
compared to 2000. According to IRS officials, accessibility improved
despite the increase in demand because of (1) improvements in the
routing of calls, (2) changes in the types of calls received, and (3)
more staff time devoted to telephone assistance.
Several Problems Related to the Rate Reduction Credit Arose During the
2002 Tax Filing Season:
The 2002 tax filing season was adversely affected by several problems
related to the rate reduction credit. Most significant were the
substantial number of returns filed with errors related to the credit
and a degradation of telephone service in February 2002 that was likely
due to an increase in demand for assistance related to the credit.
Other problems were avoided when TIGTA identified computer programming
errors related to the credit that IRS was able to resolve before any
taxpayers were affected. However, two other issues were identified too
late to avoid affecting taxpayers”one involved a programming problem
that resulted in some taxpayers getting credits to which they were not
entitled, the other involved an IRS policy that resulted in some
taxpayers not getting credits to which they were entitled.
IRS Took Some Steps after the Start of the 2002 Filing Season in
Response to a Large Volume of Errors:
To help ensure that taxpayers correctly dealt with the rate reduction
credit on the returns they filed in 2002, IRS built checks into its
computer system that enabled it to verify the amount of the rate
reduction credit claimed and to adjust incorrectly claimed credit
amounts accordingly. Using those checks, IRS identified a substantial
number of errors related to the rate reduction credit on returns
prepared both by taxpayers and paid tax return preparers. As shown in
table 3, IRS had identified over 7 million individual returns with rate
reduction credit errors as of May 31, 2002, which represented 57.3
percent of returns with errors and 6.5 percent of total returns
processed at that time.
Table 3: Individual Returns Processed with Rate Reduction Credit Errors
as of May 31, 2002:
Returns prepared by: Taxpayers;
Number of returns processed: 44,877,542;
Number of returns with errors: 7,420,342;
Percentage of returns with errors: 16.5%;
Number of returns with rate reduction credit errors: 3,724,556;
Percentage of returns with rate reduction credit errors: 8.3%;
Rate reduction credit errors as a percentage of returns with errors:
50.2%.
Returns prepared by: Tax return preparers;
Number of returns processed: 63,777,960;
Number of returns with errors: 4,825,559;
Percentage of returns with errors: 7.6%;
Number of returns with rate reduction credit errors: 3,291,220;
Percentage of returns with rate reduction credit errors: 5.2%;
Rate reduction credit errors as a percentage of returns with errors:
68.2%.
Totals:
Number of returns processed: 108,655,502;
Number of returns with errors: 12,245,901;
Percentage of returns with errors: 11.3%.
Number of returns with rate reduction credit errors: 7,015,776;
Percentage of returns with rate reduction credit errors: 6.5%;
Rate reduction credit errors as a percentage of returns with errors:
57.3%.
Source: GAO analysis of IRS‘s data.
[End of table]
Taxpayers and return preparers made various types of errors related to
the rate reduction credit during the 2002 tax filing season.
* Over 4.4 million taxpayers who were entitled to a credit failed to
claim the credit on their tax year 2001 return.
* Almost 1.8 million taxpayers who had received the maximum advance tax
refund in 2001 and thus were not entitled to a credit claimed the
amount of their advance refund as a credit on their 2001 return.
* Over 800,000 taxpayers who were entitled to and claimed a credit
incorrectly computed the amount to which they were entitled.
Once IRS recognized that taxpayers and return preparers were having
problems related to the rate reduction credit, it took immediate
action. For example, as early as January 23, 2002, IRS posted
information to its Web site and issued news releases informing the
public that many early tax returns were being filed with rate reduction
credit errors. In addition, IRS provided clarifying information to
preparers who file returns electronically and, around the beginning of
February, began rejecting electronic submissions that involved certain
types of errors related to the credit. By rejecting these submissions,
IRS required the taxpayer or return preparer to correct the error
before IRS would accept the electronic return for processing. This is
consistent with IRS‘s traditional practice of rejecting electronic
submissions that contain other errors, such as incorrect SSNs. As of
July 1, 2002, IRS had rejected over 300,000 electronic submissions
with rate reduction credit errors. [Footnote 25]
Despite IRS‘s efforts, the rate at which filed returns included errors
related to the rate reduction credit did not drop significantly during
the filing season. As of March 15, 2002, 6.8 percent of all returns
filed included a rate reduction credit error; as of May 31, 2002, the
error rate was 6.5 percent.
Demand for Telephone Assistance Related to the Rate Reduction Credit
Likely Negatively Affected Level of Service in the 2002 Filing Season:
IRS data suggest that demand for telephone assistance related to the
rate reduction credit was significant during the 2002 filing season and
that the demand negatively affected telephone level of service,
especially in mid- to late-February when the greatest number of
taxpayers called with questions about this credit.
As discussed earlier, the amount of demand for assistance is one of the
key factors that can affect level of service, with an increase in demand
being associated with a decrease in the level of service because, other
factors being held constant, IRS would answer a lesser percentage of
the calls. The average time it takes assistors to handle calls is
another factor that affects level of service, with a higher average
handle time being associated with a decrease in level of service.
[Footnote 26] According to IRS officials, as the filing season
progressed, demand for assistance related to the rate reduction credit
increased significantly and unexpectedly, causing the level of service
to decline. Officials said that taxpayer access to service began
declining in early February as taxpayers called in response to notices
IRS mailed them because of errors on their returns related to the
credit. In that regard, data provided by IRS showed that taxpayers made
about 1.5 million calls to IRS's accounts assistance telephone number
during the 3 weeks ending March 2, 2002, compared with about 0.8
million such calls during the same 3-week period in 2001. Because these
account-type calls take longer to handle, on average, than other types
of calls, this increase in account-related demand increased the average
handle time and lowered the level of service.
Figure 1 shows that customer service representative (CSR) level of
service during the first 6 weeks of the 2002 filing season was
significantly better than or about the same as the level of service
during the first 6 weeks of the 2001 filing season but was
significantly worse during the next 3 weeks (the 3 weeks ending March
2). In the remaining weeks of the filing season, CSR level of service
returned to levels comparable to 2001 performance.
Figure 1: CSR Level of Service in the 2001 and 2002 Filing Seasons:
[See PDF for image]
This figure is a multiple line graph depicting the following
information: (percentages are approximated from the graph)
Percent of calls served:
Week ending in 2001: January 5: 62%;
Week ending in 2002: January 5: 70%.
Percent of calls served:
Week ending in 2001: January 12: 70%;
Week ending in 2002: January 12: 74%.
Percent of calls served:
Week ending in 2001: January 19: 67%;
Week ending in 2002: January 19: 86%.
Percent of calls served:
Week ending in 2001: January 26: 67%;
Week ending in 2002: January 26: 84%.
Percent of calls served:
Week ending in 2001: February 2: 64%;
Week ending in 2002: February 2: 74%.
Percent of calls served:
Week ending in 2001: February 9: 63%;
Week ending in 2002: February 9: 63%.
Percent of calls served:
Week ending in 2001: February 16: 72%;
Week ending in 2002: February 16: 55%.
Percent of calls served:
Week ending in 2001: February 23: 71%;
Week ending in 2002: February 23: 61%.
Percent of calls served:
Week ending in 2001: March 2: 80%;
Week ending in 2002: March 2: 65%.
Percent of calls served:
Week ending in 2001: March 9: 72%;
Week ending in 2002: March 9: 75%.
Percent of calls served:
Week ending in 2001: March 16: 73%;
Week ending in 2002: March 16: 72%.
Percent of calls served:
Week ending in 2001: March 23: 71%;
Week ending in 2002: March 23: 72%.
Percent of calls served:
Week ending in 2001: March 30: 75%;
Week ending in 2002: March 30: 75%.
Percent of calls served:
Week ending in 2001: April 6: 76%;
Week ending in 2002: April 6: 71%.
Percent of calls served:
Week ending in 2001: April 13: 72%;
Week ending in 2002: April 13: 72%.
Percent of calls served:
Week ending in 2001: April 20: 55%;
Week ending in 2002: April 20: 65%.
Source: IRS data.
[End of figure]
The performance dip coincides with other data that indicate there was
likely a significant increase in demand related to the rate reduction
credit. For example, previous IRS studies have shown a strong
relationship between the volume of certain types of notices IRS mails
to taxpayers and the demand for telephone assistance. One such notice
is the CP-12, which IRS sends to taxpayers notifying them of a math
error on a return. The notice gives the taxpayer information about the
error and includes one of IRS‘s main toll-free telephone numbers for
the taxpayer to call for further information. According to IRS data,
for the 4 weeks beginning February 3, 2002, IRS mailed over 1.6 million
of these notices”about 5 times the number mailed over the same period
in 2001. According to IRS officials, the bulk of this increase was due
to taxpayer errors in completing the rate reduction credit line of the
tax return.
Unlike the advance tax refund period in which IRS‘s plans for handling
the increased telephone assistance demand included both automation and
increased staffing, IRS‘s plans for handling the additional demand in
the 2002 tax filing season focused on automated assistance. IRS
implemented an automated interactive telephone application that
provided callers with the amount of their advance refund based on the
SSN and personal identification data the caller input. According to IRS
officials, when IRS began planning for staffing for the 2002 filing
season”around June 2001”the potential effect of the rate reduction
credit on the filing season was unknown. Officials said that although
IRS planned for some increased staff time to handle potential demand to
be generated by the rate reduction credit, the plans did not anticipate
the level of demand that was caused by the error notices.
Various Problems Related to the Rate Reduction Credit Were Identified
Early in the 2002 Filing Season:
TIGTA identified and IRS corrected two problems related to the rate
reduction credit that could have resulted in (1) taxpayers receiving a
rate reduction credit to which they were not entitled or (2) taxpayers
receiving erroneous information via IRS‘s TeleTax number concerning
whether or not they received an advance tax refund. In addition, IRS
identified another problem that may have resulted in as many as 15,000
taxpayers receiving as much as $4.5 million in erroneous refunds due to
rate reduction credits to which they were not entitled.
One problem identified by TIGTA involved the lack of advance tax refund
data in IRS‘s National Account Profile (NAP) [Footnote 27] for certain
taxpayers. The taxpayers involved were those who had filed joint
returns for tax year 2000 with a deceased spouse on which the deceased
spouse was the primary taxpayer and the surviving spouse was the
secondary taxpayer. [Footnote 28] In those cases, because of a computer
programming oversight, no advance refund amount was placed on the
surviving spouse‘s NAP account. Thus, if the surviving spouse filed a
tax year 2001 return and correctly claimed no rate reduction credit,
IRS‘s records would have erroneously indicated that the taxpayer had
not received an advance refund, and IRS would have adjusted the
taxpayer‘s return to include a credit. According to TIGTA, IRS
corrected this problem by January 11, 2002, thus preventing about
217,000 taxpayers from receiving up to $50 million in rate reduction
credits to which they were not entitled.
Another problem identified by TIGTA, which it attributed to a
misinterpretation of programming requirements, involved IRS‘s failure to
add information in the NAP for taxpayers who did not receive an advance
tax refund. As a result, if these taxpayers called IRS‘s automated
telephone system, they would have been told that no information was
available regarding their advance tax refund, rather than being told
that they did not receive an advance tax refund. According to TIGTA, it
notified IRS of this problem, which could have affected as many as 35
million taxpayers, on January 8, 2002, and IRS made the necessary
corrections by January 15.
During the filing season, IRS‘s computer system was generating rate
reduction credits for some taxpayers who had already received the
maximum advance tax refund. This occurred when a taxpayer received an
advance tax refund based on a tax year 2000 return on which the taxpayer
used a taxpayer identification number other than an SSN, such as an
Individual Taxpayer Identification Number (ITIN), [Footnote 29] and
subsequently filed a tax year 2001 return using an SSN. Because IRS‘s
records showed no advance tax refund associated with the SSN the
taxpayer used on the 2001 return, IRS‘s computer system indicated that
the taxpayer was entitled to a rate reduction credit on the 2001 return
but had failed to claim it. Thus, the computer automatically generated
a rate reduction credit for the taxpayer.
According to IRS officials, this problem was brought to IRS‘s attention
by IRS field staff. They estimated that it would affect no more than
about 15,000 taxpayers, who in a worst-case scenario may have received
an additional $300 credit, for a total of $4.5 million in potentially
erroneous rate reduction credits. According to the officials, IRS will
not attempt to recover any erroneous payments resulting from this
problem because it would not be cost-effective to do so. The officials
noted, among other things, that since IRS, not the taxpayers, was at
fault, IRS would have to attempt to recover the erroneous payments
through civil court rather than tax court.
Additional Rate Reduction Credit to Be Allowed:
According to IRS officials, an additional rate reduction credit will be
allowed to as many as 2.5 million taxpayers. When IRS originally
reviewed these taxpayers‘ returns, it was determined that the taxpayers
had underclaimed the amount of their rate reduction credits. However,
IRS did not correct the errors because the amount underclaimed was less
than a specified amount. It is IRS‘s policy to not make a tax change
based on correction of a credit either in favor of the taxpayer or the
government if the tax change is less than a specified amount. According
to IRS, this policy applies to all credits, not just the rate reduction
credit, and was implemented both for budgetary reasons and to ensure
timely return processing.
IRS had originally decided to follow this policy with respect to the
rate reduction credit. However, during its review of the 2002 filing
season, TIGTA pointed out that the policy seemed inequitable because the
specified amount below which IRS did not issue an advance tax refund
was substantially less than the specified amount below which IRS did not
correct an underclaimed rate reduction credit. [Footnote 30] As a
result, some taxpayers could receive a small advance tax refund, while
other taxpayers could not receive a similar small refund based on an
underclaimed rate reduction credit on their 2001 tax return. IRS
subsequently stated that it would allow the underclaimed credit and any
interest to the affected taxpayers by the end of calendar year 2002.
Issues Encountered During the Advance Tax Refund Program Could Provide
Useful Guidance for the Future:
On the basis of our work and TIGTA‘s, we had some observations that IRS
may find useful if faced with similar challenges in the future. For
example, several problems related to the advance tax refunds and the
rate reduction credit were avoided because TIGTA identified and quickly
notified IRS of programming errors. While this may indicate
deficiencies in IRS‘s process for testing program changes, the work
needed to make that determination was beyond the scope of this report.
What TIGTA‘s findings do indicate is the value of enlisting the
assistance of an outside party, such as TIGTA, to review the
programming for a major unplanned effort that has to be implemented in
a short period of time. This would provide an independent review with
an eye toward identifying any potential problems that could either
negatively impact taxpayers or create unnecessary work for IRS.
Although IRS took several steps after the filing season began in
response to the large number of rate reduction credit errors, some of
those errors might have been prevented if the instructions for Forms
1040, 1040A, and 1040EZ had been more clear. In that regard, in April
9, 2002, testimony before the Subcommittee on Oversight of the House
Committee on Ways and Means, the President and Chief Executive Officer
of H&R Block (the largest tax preparation company in the U.S.), said
the following:
’This year‘s main problem is the Rate Reduction Credit, where multiple
terms (…rebates,‘ …advance payments,‘ …refund advances,‘ …rate
reduction credits‘) and instructions that confused taxpayers and even
tax preparers resulted in many rejected [electronic filings] and over
three million errors.“
Besides the confusing terminology mentioned by H&R Block, we identified
the following three aspects of IRS‘s instructions that, in retrospect,
could have been clearer:
* Because taxpayers might use their prior year‘s tax return as a guide
in preparing their current year‘s return, it is important that changes
to the tax form, such as the new line added for the rate reduction
credit, be clearly highlighted. Although IRS mentioned the new credit
on the front page of the tax form instructions, it was done in a way
that we believe could easily be missed (see app. III for a copy of the
front page with our highlighting of the language in question). What IRS
emphasized was the fact that tax rates had changed, which is not
information that taxpayers need to know in completing their returns
since the effect of that change happens automatically when they use the
tax table or tax rate schedules to compute their taxes. What was more
important to emphasize was the fact that there was a new credit on the
tax return that they might be eligible for.
* The tax form instructions indicate that if a taxpayer received ’before
offset“ an advance tax refund of either $600, $500, or $300 based on
his or her filing status, the taxpayer would not be entitled to a rate
reduction credit. There is no further explanation in the instructions
of the meaning of ’before offset,“ a term that may not have been clear
to all taxpayers. The instructions might have been clearer if IRS had
included the explanation provided on its Web site. On the Web site, IRS
explains that if taxpayers had their advance tax refund ’offset“ to pay
back taxes, other government debts, or past due child support, they
could not claim the rate reduction credit for the amount that was
offset. Because many taxpayers may not have had access to the Web site
or known of the extent of rate reduction credit information available,
it would have been advantageous to include a similar explanation in the
instructions.
* To its credit, IRS, expecting that many taxpayers would not remember
the amount of their advance tax refund, established an interactive
application as part of TeleTax that taxpayers could use to find out the
amount of their advance. Although the instructions for Forms 1040,
1040A, and 1040EZ included reference to the interactive application,
the reference was in a general section of the instructions dealing with
TeleTax rather than in the section of the instructions dealing with the
rate reduction credit (see app. III for copies of the relevant pages in
the Form 1040 instructions with our highlighting of the relevant data
on those pages).
In addition to clearer instructions, an IRS official indicated that IRS
could have done a better job of getting information on the rate
reduction credit to the public before the filing season. In that
regard, IRS had decided not to send notices to taxpayers reminding them
of the amount of the advance tax refund they received due to cost
considerations. Although sending such a notice would have resulted in
additional cost, it may have lessened the confusion experienced by
taxpayers when it came time to determine whether or not they qualified
for the rate reduction credit and subsequently may have reduced the
costs IRS incurred to identify and correct rate reduction credit
errors, send error notices to the affected taxpayers, and provide
related telephone assistance.
A final issue with respect to guidance for the future is IRS‘s lack of
plans to do a ’lessons learned“ review of the advance tax refund
initiative. According to IRS officials, other than a critique of the
filing season, which is done annually and will no doubt include a
review of problems that taxpayers experienced with the rate reduction
credit, IRS has no plans to conduct a comprehensive analysis of the
advance tax refund initiative. Both the Government Performance and
Results Act of 1993 [Footnote 31] and IRS guidance stress that analysis
is a key part of understanding performance and identifying improvement
options. Such an analysis would benefit IRS management if it became
necessary to deal with similar challenges in the future.
Conclusions:
IRS and FMS should be commended for the extensive amount of work they
accomplished in a short period of time to issue 86 million advance tax
refund checks. While there are bound to be implementation issues in any
effort of this magnitude, IRS responded to problems quickly so that
only a small percentage of advance refund checks were affected.
Although taxpayers experienced problems in reaching IRS by telephone,
IRS probably did as good as it could considering the increased demand
for assistance, the number of staff available, and the fact that the
advance tax refund was a one-time event that made it unrealistic to
hire and train additional staff.
Although this report discusses various implementation issues related to
the advance tax refund program and the rate reduction credit, we are not
recommending any specific corrective actions related to those issues.
Because our review focused on the advance tax refund program, we have
no basis for knowing whether the identified issues were unique to that
program or more widespread and, not knowing that, we have no basis for
recommending specific changes to IRS‘s policies or procedures.
The various observations we identified in the prior section of this
report should be useful to IRS if faced with similar challenges in the
future. However, IRS staff who were involved in planning and
implementing the advance tax refund program, including those aspects
related to the rate reduction credit, are in an even better position
than either us or TIGTA to assess IRS‘s performance and suggest
alternative approaches for handling the challenges involved in such an
effort. That kind of in-house assessment, while including the results
of work done by us and TIGTA, could delve into details that we did not,
such as IRS‘s testing of programming changes and its decision to not
send notices to taxpayers reminding them of the amount of advance tax
refund they received.
Recommendation for Executive Action:
To help identify the full range of challenges IRS faced with respect to
the advance tax refunds and rate reduction credit and any changes in
procedures or processes that might be warranted if it faced similar
challenges in the future, we recommend that the Commissioner of Internal
Revenue convene a study group to assess IRS‘s performance with respect
to the advance tax refunds and rate reduction credit. That assessment
should include the results of work done by us and TIGTA, including the
various observations identified in this report. To ensure that managers
faced with similar challenges in the future have the benefit of this
assessment, the results should be thoroughly documented.
Agency Comments:
We requested comments on a draft of this report from IRS and FMS. We
obtained written comments in a July 26, 2002, letter from the
Commissioner of Internal Revenue (see app. IV) and in a July 24, 2002,
letter from the Commissioner of FMS (see app. V).
The Commissioner of Internal Revenue said that the report ’is an
accurate and balanced reflection of our efforts in administering the
new law“ and that the ’documentation provided by your report, and a
series of reports by TIGTA, are a strong foundation for an assessment
of lessons learned.“ The Commissioner said that he asked the
Commissioner of IRS's Wage and Investment Division to conduct a brief
review to identify lessons learned and that ’his synopsis will
supplement the documentation already available and serve as a historic
reference for future guidance.“ Such a review and documentation would
be responsive to our recommendation.
The Commissioner of FMS expressed the belief that the advance tax
refund program was a model initiative that demonstrated that federal
agencies are capable of implementing major programs on short notice
efficiently and cost-effectively.
We are sending copies of this report to the Chairman and Ranking
Minority Member of the House Committee on Ways and Means. We are
also sending copies to the Secretary of the Treasury; the Commissioner
of Internal Revenue; the Commissioner of FMS; the Director, Office of
Management and Budget; and other interested parties. In addition, the
report will be available at no charge on GAO‘s Web site at [hyperlink,
http://www.gao.gov].
This report was prepared under the direction of David J. Attianese,
Assistant Director. If you have any questions regarding this report,
please contact Mr. Attianese or me at (202) 512-9110. Key contributors
to this report were Robert C. McKay and Ronald W. Jones.
Signed by:
James R. White:
Director, Tax Issues:
[End of section]
Appendix I: Duplicate, Altered, and Counterfeit Advance Tax Refund
Checks:
Once the advance tax refunds were issued between July and December
2001, there were some problems identified involving duplicate, altered,
and counterfeit checks. However, in light of the overall number of
advance refund checks issued”about 86 million”these problems were
relatively minor.
One problem identified within the first 2 weeks of the advance tax
refund payment period and promptly corrected involved duplicate checks
sent to taxpayers by one of the three Defense Finance and Accounting
Service (DFAS) centers that assisted the Financial Management Service
(FMS) in issuing the checks. This problem surfaced because two
taxpayers who had received duplicate checks tried to cash the second
check and a third taxpayer notified the Internal Revenue Service (IRS)
about receiving duplicate checks. Once the problem was identified, FMS
decided to no longer use the particular DFAS center from which the
duplicate checks had emanated. As of May 2002, FMS had identified 27
instances of such duplicate checks.
According to an FMS official, of the 27 taxpayers who received duplicate
checks, 24 taxpayers have either fully repaid the extra payment or have
returned the duplicate check. As of May 1, 2002, 1 taxpayer had
partially repaid the extra check, and FMS was in the process of
recovering the duplicate payments from the other 2 taxpayers.
Another problem related to the advance tax refunds involved either
altered or counterfeit checks. FMS‘s Check Reconciliation Branch detects
altered and counterfeit checks during routine reconciliation of agency
payment records with bank records. Other altered or counterfeit checks
may be identified by banks when the checks are presented to be cashed.
According to FMS, as of March 1, 2002, there were 165 advance refund
checks that were found to be either altered or counterfeit as follows:
* 47 altered checks with a combined value of $138,405 and;
* 118 counterfeit checks with a combined value of $75,640.
According to FMS, 162 of the 165 altered and counterfeit checks were
referred to the United States Secret Service for investigation. We do
not know the results of any such investigations.
[End of section]
Appendix II: Taxpayer Advocate Service Involvement with the Advance Tax
Refunds and Rate Reduction Credit:
The Taxpayer Advocate Service (TAS), which helps taxpayers solve
problems with the Internal revenue Service (IRS) and recommends changes
that will prevent them, was involved in the advance tax refund program
since its inception. Originally, when asked to comment on the notices
that were to go out to taxpayers, TAS offered suggestions to improve
notice clarity. Once the notices and refund checks were sent out, TAS
handled telephone calls and correspondence from taxpayers and their
congressional representatives concerning the refunds and the related
rate reduction credit on the 2001 tax return. In some instances, TAS
opened cases to address the taxpayers‘ concerns. However, before
sending out the initial advance tax refund checks, IRS decided, after
inquiry from TAS, that no checks would be sent to taxpayers ahead of
their scheduled delivery date, even for cases involving potential
hardship.
Although TAS had no nationwide data concerning the number of taxpayer
calls related to the advance tax refunds, such data was tracked by eight
local TAS offices, as well as by TAS offices in 5 of 10 IRS campuses.
Through April 2002, these offices collectively had received over 4,200
calls from taxpayers related to the advance tax refunds. According to
TAS officials, the most frequent questions asked by taxpayers who made
these calls were as follows:
* When will I receive the advance payment? Am I eligible for an advance
payment?
* What amount of advance payment will I receive?
* Why am I not going to receive an advance payment?
* Was this an advance payment or a rebate of tax already paid?
* Various questions concerning offsets for back taxes and child support,
innocent spouse, etc.
According to TAS staff at one campus, some taxpayers told them that they
had called TAS with these types of questions because they had difficulty
reaching IRS‘s regular telephone assistors.
According to TAS national office staff, as of May 2002, TAS had opened a
total of 3,246 cases nationwide related to the advance tax refunds and
the subsequent rate reduction credit, about 500 of which had been opened
since the start of calendar year 2002. Of the total cases opened, about
2,170 (67 percent) involved congressional contacts, which automatically
result in the opening of a TAS case. Other cases that were opened
involved either an injured spouse or a potential hardship situation.
In reviewing TAS cases at one of the IRS campuses, we found that
taxpayers who had either no taxable income in 2000 or not enough taxable
income to make them eligible for the full amount of the advance tax
refund authorized by law were questioning why they had received no
advance refund or less than the full amount. Other taxpayers had
contacted TAS to provide a change of address or to check on the status
of their advance refund check.
[End of section]
Appendix III: Excerpts from the Tax Year 2001 Form 1040 Instructions
Related to the Rate Reduction Credit:
[See PDF for image]
This appendix contains illustrations of the IRS 2001 1040 Instructions,
with the following excerpts highlighted:
* Tax Rates Reduced! Most of the tax rates have been reduced. Some
people may also be able to claim the rate reduction credit. See page
14.
* 2001 advance payment (rebate) information: Find out the amount of
your advance payment (before offset). You may need this information to
complete the Rate Reduction Credit Worksheet on page 36.
* Rate Reduction Credit Worksheet - Line 47:
Before you begin:
- If you received (before offset) an advance payment of your 2001 taxes
equal to the amount shown below for your 2001 filing status, stop. You
cannot take the credit because you have received the maximum amount of
the credit: Single or married filing separately: $300; Head of
household: $500; Married filing jointly or qualifying Widow(er): $600.
- If you, or your spouse if filing a joint return, can be claimed as a
dependent on another person's return, stop. You cannot take the credit.
- If you receive (before offset) an advance payment and you filed a
joint return for 2000, you and your spouse are considered to have
received one-half of the payment.
Tip: If you received Notice 1275, 1277, or 1278, have it available. The
notice shows the amount of your advance payment.
Worksheet:
1. Enter the amount from Form 1040, line 39. If line 39 is zero or
blank, stop. You cannot take the credit.
2. Enter the amount shown below for your filing status:
* Single or married filing separately: $6,000;
* Head of household: $10,000;
* Married filing jointly or qualifying Widow(er): $12,000.
3. Is the amount on line 1 less than the amount on line 2?
* If No: Enter $300 if single or married filing separately; $500 if
head of household; $600 if married filing jointly or qualifying
widow(er).
* If Yes: Multiply the amount on line 1 by 5% (.05). Enter the result.
4. Enter the amount from Form 1040, line 42.
5. Add the amounts from Form 1040, lines 43 through 46. Enter the
result.
6. Subtract line 5 from line 4. If the result is zero or less, stop.
You cannot take the credit.
7. Enter the smaller of line 3 or line 6.
8. Enter the amount, if any, of your advance payment (before offset).
If filing a joint return, include your spouse's advance payment with
yours.
9. Rate reduction credit: Subtract line 8 from line 7. Enter the result
here and, if more than zero, on Form 1040, line 47. If line 8 is more
than line 7, you do not have to pay back the difference.
Need more information or forms? See page 7.
[End of section]
Appendix IV: Comments from the Internal Revenue Service:
Department Of The Treasury:
Commissioner:
Internal Revenue Service:
Washington, D.C. 20224:
July 26, 2002:
Mr. James R. White:
Director, Tax Issues:
U.S. General Accounting Office:
441 G Street, N.W.
Washington, D.C. 20548:
Dear Mr. White:
I consider the successful implementation of the provisions of the
Economic Growth and Tax Relief Reconciliation Act of 2001 (the Act), as
one of our most notable achievements of the past year. The Act's unique
approach, designed to provide immediate tax relief and an economic
stimulus, required us to respond quickly to the provisions. Our effort
required extensive internal and external coordination to meet the
mandated deadlines for issuing the advance refund checks, providing
information to the public and accommodating the changes necessary for a
successful 2002 filing season.
I have reviewed the draft report, "Advance Tax Refund Program Was a
Major Accomplishment, but not Problem Free" and would like to commend
you and your staff. I believe the report is an accurate and balanced
reflection of our efforts in administering the new law. You recognized
the scope and complexity of our effort and made meaningful
observations. While your report recognizes the problems we encountered,
it also highlights our quick response to correct or minimize their
impact.
The collaborative efforts of the General Accounting Office and Treasury
Inspector General for Tax Administration (TIGTA) were beneficial
throughout our implementation and administration of the Act. I believe
this mutual effort is a good example of government working at its best.
I agree the observations in the report are beneficial should we be
responsible for administering a similar process in the future. I
believe your recommendation has merit, and we will comply with it as I
have outlined below.
Recommendation:
To help identify the full range of challenges IRS faced with respect to
the advance tax refunds and the rate reduction credits, and any changes
in the procedures or processes that might be warranted if it faced
similar challenges in the future, we recommend that the Commissioner of
the Internal Revenue convene a study group to assess IRS' performance
with respect to the advance tax refunds and the rate reduction credit.
That assessment should include the results of the work done by us and
TIGTA, including the various observations identified in this report. To
ensure that managers faced with similar challenges in the future have
the benefit of this assessment, the results should be documented.
Response:
Your report recognizes many of the unique challenges presented by the
provisions of the Act. The documentation provided by your report, and a
series of reports by TIGTA, are a strong foundation for an assessment
of lessons learned. I asked the Commissioner, Wage and Investment
Division to conduct a brief review to identify lessons learned. His
synopsis will supplement the documentation already available and serve
as a historic reference for future guidance.
If you have questions or comments about this letter, please call Floyd
Williams, Director, Legislative Affairs, at (202) 622-3720.
Sincerely,
Signed by:
Charles O. Rossotti:
[End of section]
Appendix V: Comments from the Financial Management Service:
Department Of The Treasury:
Commissioner:
Financial Management Service:
Washington, D.C. 20227:
July 24, 2002:
Mr. James R. White:
Director, Tax Issues:
General Accounting Office:
441 G Street, NW:
Washington, D.C. 20548:
Dear Mr. White:
This letter is in response to your request to Secretary O'Neill for
comments on the draft of the General Accounting Office (GAO) Report GAO-
02-827, "Tax Administration - Advance Tax Refund Program Was a Major
Accomplishment, but not Problem Free," dated August 2002.
The Financial Management Service (FMS) believes this was an extremely
successful program. With the assistance of the Defense Finance and
Accounting Service (DFAS), FMS issued over 86 million advance refund
checks totaling $36.5 billion from July to December 2001. This
extraordinary effort represented in excess of 30% of our routine check
production volume, but was accomplished without any interruption of our
normal workload.
The number of checks returned as undeliverable was less than 1 percent,
well below the normal rate for tax refunds. FMS offset more than 1.4
million advance refund payments to cover debts owed by delinquent
taxpayers with no reported instances of checks being offset
inappropriately.
Page 3 of the report references 34,000 refund checks that were not
reissued in a timely manner as of late October 2001, which implies that
FMS had delayed issuing checks. It is suggested that the wording be
revised to, "As of late October, IRS had identified about 34,000 of
these checks which it had not recertified to FMS for reissuance."
Thank you for the opportunity to review the draft report. As the report
did not specifically cite FMS for any weaknesses, we have no further
comment other than to state we believe that the Advance Tax Refunds
program was a model initiative which demonstrated Federal agencies are
capable of implementing major programs on short notice efficiently and
cost effectively.
Sincerely,
Signed by:
Richard L. Gregg:
cc: Donald Hammond
[End of section]
Footnotes:
[1] Pub. L. No. 107-16, 115 Stat. 38.
[2] Internal Revenue Code Section 6428.
[3] A rate reduction credit would reduce a taxpayer‘s 2001 tax
liability and could result in a tax refund once the 2001 return was
filed.
[4] These figures as well as the figures for undeliverable checks
discussed later include some regular refunds mailed during this period.
The amount of regular refunds included in the figures is unknown.
However, because most regular refunds would have been paid before the
advance tax refund checks were issued, the amount of regular refunds
included in the advance tax refund figures should be relatively small
in relation to the total.
[5] We did not specifically test the accuracy of the cost information
provided; however, our audits of IRS‘s annual financial statements have
raised concerns regarding IRS‘s ability to identify all costs
associated with a given program or activity. See U.S. General Accounting
Office, Financial Audit: IRS‘s Fiscal Years 2001 and 2000 Financial
Statements, GAO-02-414 (Washington, D.C.: Feb. 27, 2002).
[6] While Most Taxpayers Received Accurate and Timely Notification of
Their Advance Refunds, Millions Did Not (TIGTA, 2002-40-016, Oct. 24,
2001) and Advance Refunds Were Accurately Calculated and Issued to
Eligible Taxpayers, But Some Undelivered Refunds Were Unnecessarily
Delayed (TIGTA, 2002-40-116, June 26, 2002).
[7] Despite Some Problems, the Internal Revenue Service Properly
Identified Returns With Rate Reduction Credit Errors During the 2002
Filing Season (TIGTA, 2002-40-142, Aug. 2002).
[8] IRS identified about 34 million taxpayers who were ineligible for
an advance tax refund.
[9] IRS‘s issuance of these notices was consistent with guidance in the
conference report on the Economic Growth and Tax Relief Reconciliation
Act of 2001. In the hope of decreasing the number of telephone calls to
IRS, the conferees said that they anticipated IRS would send notices
about 1 month after the law‘s enactment informing taxpayers ’of the
computation of their checks and the approximate date by which they can
expect to receive their check.“
[10] Due to the large volume of advance tax refund checks expected to
be issued each week, FMS arranged for DFAS to assist in issuing these
checks. DFAS regularly issues payments on behalf of the Department of
Defense for military and civilian pay, military retirement, and
contractor and vendor payments.
[11] Because April 15, 2001, fell on a Sunday, the deadline for filing
tax year 2000 individual income tax returns was extended to April 16,
2001.
[12] U.S. General Accounting Office, Financial Audit: IRS‘s Fiscal
Years 2001 and 2000 Financial Statements, GAO-02-414 (Washington, D.C.:
Feb. 27, 2002).
[13] According to TIGTA, its objectives with respect to the advance tax
refund program were to (1) determine whether IRS timely and accurately
notified taxpayers about their advance refunds; (2) determine whether
IRS accurately calculated and issued advance refunds to eligible
taxpayers; and (3) evaluate IRS‘s actions to prevent issuance of
advance refunds after the December 31, 2001, legislative deadline.
[14] Two taxpayers who filed a joint return are considered one taxpayer
for this discussion because they would have been sent one check.
[15] The Treasury Offset Program involves a centralized database of
delinquent debts referred to FMS for offset against federal payments
and includes federal nontax debts, state tax debts, and child support
debts.
[16] IRS is currently testing a procedure whereby IRS notices can be
associated with the related check and thus mailed with the check.
[17] IRS also expected to incur at least $12 million in costs during
fiscal year 2002 to handle undelivered advance tax refund checks,
identify and correct rate reduction credit errors made on tax year 2001
returns, and respond to taxpayer calls for assistance related to the
rate reduction credit. This estimate did not include the costs of
programming and testing for the 2002 filing season or the addition of
the rate reduction credit line on the individual income tax forms.
According to an IRS official, since there was time to include the rate
reduction credit in the regular programming and forms changes for the
2002 filing season, it would be difficult to separate out the costs for
the rate reduction credit.
[18] According to TIGTA, it analyzed a 0.1 percent sample of tax year
2000 individual tax accounts and ’did not identify any ineligible
taxpayers who received a rebate and found that 99.9 percent of the
advance refunds were calculated correctly.“
[19] This does not mean that every advance refund issued during the
year fully complied with all of the criteria we tested for. Our test
was designed to identify whether or not IRS was substantially compliant
with the Economic Growth and Tax Relief Reconciliation Act of 2001 for
advance refunds issued in fiscal year 2001. As such, we selected our
sample using a stratified classical variable sampling approach with a
confidence level of 95 percent.
[20] This delay only affected the notices; it did not affect timely
mailing of the refund checks.
[21] According to FMS, (1) some checks are correctly delivered but
returned by the payees for various reasons and (2) IRS may issue a stop
payment that causes the check to be returned.
[22] The analysis was based on assumptions about June 2001 call demand
and an analysis of historical data on the effect of previous offset
notices on call demand. The analysis projected that IRS would receive
about 37.9 million additional call attempts during the first 3 months
of the advance refund period and about 15.3 million additional calls
during the last 3 months.
[23] TeleTax provides automated account information and recorded
information on about 150 tax topics.
[24] U.S. General Accounting Office, IRS Telephone Assistance: Quality
of Service Mixed in the 2000 Filing Season and Below IRS‘ Long-Term
Goal, GAO-01-189 (Washington, D.C.: Apr. 6, 2001).
[25] Because these electronic submissions were rejected and thus never
processed by IRS, these errors are not included in the statistics in
table 3.
[26] Handle time is the total of the time (1) an assistor spends
talking to the taxpayer, (2) the taxpayer is on hold, and (3) the
assistor is in ’wrap status,“ which is the time between when the
assistor hangs up at the end of the call and when the assistor
indicates readiness to receive another call.
[27] NAP is an IRS database with information on taxpayers‘ names,
addresses, and SSNs. To help determine whether taxpayers were correctly
claiming the rate reduction credit on their 2001 tax returns, IRS was
to include information on advance tax refund payments in the NAP.
[28] The primary taxpayer is the individual whose name is included
first on a jointly filed individual tax return. The secondary taxpayer
is the person whose name is listed second.
[29] An ITIN is a 9-digit tax processing number issued by IRS to
nonresident and resident aliens who do not have and are currently not
eligible to get an SSN.
[30] These specified amounts are for IRS official use only.
[31] P.L. 103-62.
[End of section]
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