Tax Administration
IRS Issued Advanced Child Tax Credit Payments on Time but Should Study Lessons Learned Gao ID: GAO-04-372 February 17, 2004The Jobs and Growth Tax Relief Reconciliation Act of 2003 provided eligible taxpayers up to $400 in advance Child Tax Credit (ACTC) payments. GAO was asked for information on (1) the number, dollar amount, and timeliness of the ACTC payments, (2) the impact on the Internal Revenue Service's (IRS') toll-free telephone service, (3) the cost to IRS and the Financial Management Service (FMS) for implementing the advance payment effort, including the impact of these costs on other IRS programs, and (4) the extent to which IRS identified and used evaluations from the 2001 advance refund effort to implement the ACTC payment effort and whether an evaluation of the ACTC payment effort is planned.
Between July and December 2003, IRS, through FMS, issued over $14 billion in ACTC payments to more than 25 million taxpayers. IRS was able to issue the checks on schedule over a 15-day period ending August 8, 2003, to taxpayers who had filed by April 15, 2003. Other taxpayers received their checks later. The ACTC had an impact on IRS' toll-free telephone assistance service. Between late July, when the first notices of the advance payments were sent to taxpayers, and the middle of August, by which time the majority of notices had been sent, IRS experienced both a marked increase in the number of telephone call attempts from taxpayers and a corresponding decline in taxpayers' success in reaching an IRS assistor. IRS' strategy for dealing with the expected increase in taxpayer inquiries may have mitigated the impact of the ACTC payment effort on IRS' toll-free telephone service. According to IRS and FMS officials, implementing the ACTC payment effort cost about $32 million, nearly all incurred by IRS. In order to accomplish this mandate, IRS used funds earmarked for other programs. As a result, some of these programs, for example improvements to IRS' computer servers, were delayed slightly. IRS officials said they identified and used "lessons learned" from the evaluations of the 2001 advance refund effort done by GAO and the Treasury Inspector General for Tax Administration, and their own internal evaluation. With the exception of the telephone service, IRS officials believe the implementation of the ACTC has gone more smoothly because they used the lessons learned. Although IRS officials acknowledged the usefulness of the lessons learned evaluation, IRS had not committed to a similar evaluation of the ACTC effort at the time of our review.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-04-372, Tax Administration: IRS Issued Advanced Child Tax Credit Payments on Time but Should Study Lessons Learned
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Report to the Committee on Finance, U.S. Senate:
February 2004:
TAX ADMINISTRATION:
IRS Issued Advance Child Tax Credit Payments on Time but Should Study
Lessons Learned:
[Hyperlink, http: //www.gao.gov/cgi-bin/getrpt?GAO-04-372]:
GAO Highlights:
Highlights of GAO-04-372, a report to the Chairman and Ranking
Minority Member, Committee on Finance, United States Senate
Why GAO Did This Study:
The Jobs and Growth Tax Relief Reconciliation Act of 2003 provided
eligible taxpayers up to $400 in advance Child Tax Credit (ACTC)
payments. GAO was asked for information on (1) the number, dollar
amount, and timeliness of the ACTC payments, (2) the impact on the
Internal Revenue Service‘s (IRS‘s) toll-free telephone service, (3)
the cost to IRS and the Financial Management Service (FMS) for
implementing the advance payment effort, including the impact of these
costs on other IRS programs, and (4) the extent to which IRS
identified and used evaluations from the 2001 advance refund effort to
implement the ACTC payment effort and whether an evaluation of the
ACTC payment effort is planned.
What GAO Found:
Between July and December 2003, IRS, through FMS, issued over $14
billion in ACTC payments to more than 25 million taxpayers. IRS was
able to issue the checks on schedule over a 15-day period ending
August 8, 2003, to taxpayers who had filed by April 15, 2003. Other
taxpayers received their checks later.
The ACTC had an impact on IRS‘s toll-free telephone assistance
service. Between late July, when the first notices of the advance
payments were sent to taxpayers, and the middle of August, by which
time the majority of notices had been sent, IRS experienced both a
marked increase in the number of telephone call attempts from
taxpayers and a corresponding decline in taxpayers‘ success in
reaching an IRS assistor. IRS‘s strategy for dealing with the expected
increase in taxpayer inquiries may have mitigated the impact of the
ACTC payment effort on IRS‘s toll-free telephone service.
According to IRS and FMS officials, implementing the ACTC payment
effort cost about $32 million, nearly all incurred by IRS. In order to
accomplish this mandate, IRS used funds earmarked for other programs.
As a result, some of these programs, for example improvements to IRS‘s
computer servers, were delayed slightly.
IRS officials said they identified and used ’lessons learned“ from the
evaluations of the 2001 advance refund effort done by GAO and the
Treasury Inspector General for Tax Administration, and their own
internal evaluation. With the exception of the telephone service, IRS
officials believe the implementation of the ACTC has gone more
smoothly because they used the lessons learned. Although IRS officials
acknowledged the usefulness of the lessons learned evaluation, IRS had
not committed to a similar evaluation of the ACTC effort at the time
of our review.
What GAO Recommends:
GAO recommends the Commissioner of Internal Revenue conduct a modestly
scaled ’lessons learned“ evaluation of the ACTC payment effort similar
to the one conducted for the 2001 advance refund effort.
www.gao.gov/cgi-bin/getrpt?GAO-04-372
To view the full product, including the scope and methodology, click
on the link above. For more information, contact James White at (202)
512-9110 or whitej@gao.gov.
[End of section]
Contents:
Letter:
Results In Brief:
Background:
Billions of Dollars in Advance Payments Sent to Millions of Taxpayers
in a Timely Fashion:
The Call Volume Increased and the Level of Service Declined but IRS's
Strategy To Deal with Calls May Have Mitigated the Impact:
IRS Estimated the ACTC Payment Effort Cost About $32 Million, Which IRS
Funded by Reallocating Resources:
IRS Used Lessons Learned Which It Believes Helped the Implementation of
ACTC Go More Smoothly:
Conclusions:
Recommendation:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Objectives, Scope and Methodology:
Appendix II: Comments from the Internal Revenue Service:
Appendix III: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Acknowledgments:
Tables:
Table 1: Costs Reported by IRS and FMS:
Table 2: Lessons Learned from the 2001 Advance Refund Effort and Use in
the ACTC Payment Effort:
Figures:
Figure 1: Taxpayers' Call Attempts During the ACTC Payment Period:
Figure 2: Assistor Level of Service Declined for a Few Weeks:
Figure 3: Breakdown on Taxpayers' Attempts to Gain ACTC Information:
Letter February 17, 2004:
The Honorable Charles E. Grassley:
Chairman:
The Honorable Max Baucus:
Ranking Minority Member:
Committee on Finance:
United States Senate:
In recent years, Congress has twice authorized the issuance of advance
tax refund payments to provide taxpayers immediate tax relief before
they actually file their returns. Congress used this approach with the
Economic Growth and Tax Relief Reconciliation Act of 2001,[Footnote 1]
when it required the Internal Revenue Service (IRS) to issue taxpayers
advance refunds. Congress repeated this approach in 2003 when it passed
the Jobs and Growth Tax Relief Reconciliation Act of 2003[Footnote 2]
(the act), which, among other things, increased the upper limit of the
Child Tax Credit from $600 to $1,000 per child in the years 2003 and
2004. The act authorized IRS to send taxpayers a check in the amount of
the increase as a partial advance payment of their 2003 Child Tax
Credit. For eligible taxpayers who filed their 2002 tax returns by
April 15, 2003, the advance payment checks were to be sent out by
August 8, 2003. Taxpayers who filed an extension on their 2002 tax
returns could expect their advance payment checks 4 to 6 weeks after
the IRS received their 2002 tax return.
The 2001 advance refund effort generally went smoothly, but was not
problem free, so you asked us to provide information on IRS's efforts
to implement the advance Child Tax Credit (ACTC) payments.
Specifically, you asked us for information on (1) the number, dollar
amount, and timeliness of the advance payments, (2) the impact of the
ACTC payments on IRS's toll-free telephone operations, (3) the cost to
IRS and the Financial Management Service[Footnote 3] (FMS) for
implementing the ACTC payment effort, including the impact of these
costs on other IRS programs, and (4) the extent to which IRS identified
and used evaluations from the 2001 advance refund effort to implement
the ACTC payment effort, and whether an evaluation of the ACTC payment
effort is planned.
The information we report on the ACTC payment effort is based on
discussions with IRS and FMS officials; analyses of data on the volume
and timing of ACTC payments, on call volume, on taxpayers' success in
reaching an IRS telephone assistor, and on IRS's implementation costs;
and a review of IRS's use of the "lessons learned" from the 2001
advance refund effort. Our scope and methodology is discussed in
greater detail in appendix I. We conducted fieldwork between September
2003 and November 2003 in accordance with generally accepted government
auditing standards.
Results In Brief:
Between July and December 2003, IRS, through FMS, issued over $14
billion in ACTC payments to more than 25 million taxpayers.[Footnote 4]
Over a 15-day period ending August 8, 2003, IRS and FMS were able to
issue checks on schedule to all taxpayers who filed their 2002 tax
returns by April 15, 2003. For taxpayers who filed after April 15 but
before mid-November, IRS issued checks through December 31.
However, the ACTC payment effort had an impact on IRS's toll-free
telephone service. Between late July and early August, when notices of
ACTC payments were sent to taxpayers, IRS experienced both a marked
increase in the number of telephone call attempts from taxpayers and a
corresponding decline in taxpayers' success in reaching an IRS
assistor. IRS's strategy for dealing with the expected increase in
taxpayer inquiries was to (1) direct as many telephone inquiries as
possible to automated messages and (2) encourage taxpayers to use its
Web site for information and payment status. This strategy may have
mitigated the impact of the ACTC payment effort on IRS's toll-free
telephone service.
IRS and FMS officials told us they spent about $32 million to implement
the ACTC payment effort, of which 98 percent was incurred by
IRS.[Footnote 5] In order to accomplish this mandate, IRS used funds
earmarked for other programs. As a result, some of these programs, for
example improvements to IRS's computer servers, were slightly delayed.
IRS identified and used "lessons learned" from program evaluations of
its 2001 advance refund effort by us[Footnote 6] and the Treasury
Inspector General for Tax Administration (TIGTA)[Footnote 7] as well as
its own internal evaluation.[Footnote 8] With the exception of the
telephone service, IRS encountered few problems in issuing the ACTC
payment checks. IRS officials believe the implementation of the ACTC
has gone more smoothly, in part, because they used both the positive
and negative lessons learned from its 2001 advance refund effort.
Although acknowledging the usefulness of the lessons learned from the
2001 advance refund effort in implementing the ACTC payment effort, IRS
officials were not planning a similar evaluation of the ACTC effort at
the time we completed our work.
Because the evaluations of the 2001 advance refund effort contributed
to the smooth implementation of the ACTC payment effort, we recommend
that the IRS Commissioner conduct a modestly scaled "lessons learned"
evaluation of the ACTC payment effort similar to the one conducted for
the 2001 advance refund effort.
Background:
The act increased the upper limit of the Child Tax Credit from $600 to
$1,000 per child for 2003 and 2004. The act included a schedule that
detailed the amount of the Child Tax Credit from 2003 until 2010. Under
current law, the credit will remain at $1,000 in 2004, decrease to $700
for 2005 through 2008, and will increase to $800 in 2009 and to $1,000
in 2010. The ACTC payment was included in the President's fiscal year
2004 budget proposal, which was submitted to Congress on February 3,
2003.
To be eligible for the ACTC payment in 2003, taxpayers generally had to
have (1) claimed the Child Tax Credit on their 2002 tax return and (2)
a child born after 1986. The maximum ACTC payment amount was $400 per
child.
IRS has 25 telephone call centers around the country staffed with
assistors to answer taxpayer questions. When taxpayers call IRS, they
can get automated messages for some routine questions or concerns, or
can choose to speak with an IRS assistor. During periods of anticipated
heavy call volume, such as during the tax filing season, IRS employs
over 10,000 assistors to answer telephone inquiries. For the ACTC
payment effort, IRS established a special phone line with its own
telephone number to provide basic information to taxpayers about the
credit through an automated menu. One of the options on the automated
menu allowed taxpayers to be switched to an IRS assistor. The assistors
were supplied by IRS management with information addressing the
concerns IRS thought taxpayers would ask about most frequently.
In our August 2002 report, we recommended that IRS convene a study
group to assess its performance with respect to its 2001 advance refund
effort. We said that IRS should identify implementation issues with the
2001 advance refund effort that would be applicable to future, similar
tax programs. The 2001 advance refund effort was similar to the ACTC
payment effort in that IRS mailed out checks to taxpayers in an amount
that approximated the reduction of their tax liabilities in the current
year. As will be discussed in the body of this report, IRS assessed its
implementation of the 2001 advance refund effort and issued a report in
January 2003.
Billions of Dollars in Advance Payments Sent to Millions of Taxpayers
in a Timely Fashion:
Altogether, more than 25 million taxpayers received about $14 billion
in advance payments. IRS set up a schedule for mailing out ACTC
payments to taxpayers who filed their 2002 tax returns by April 15,
2003. IRS, through FMS, mailed out ACTC payments according to this
schedule between July 25 and August 8, 2003.[Footnote 9] Taxpayers who
filed their 2002 tax return after April 15, 2003, received their checks
approximately 6 weeks after their return was processed. No checks were
issued after December 31, 2003. IRS based its determination of whether
taxpayers were eligible to receive an ACTC payment based on the
information from their 2002 returns, such as the number and age of
their dependents. Therefore, taxpayers who did not file their return
within 6 weeks of the December 31 deadline (mid-November, 2003) did not
receive an advance payment, but, if eligible, will be able to claim the
full $1,000 credit when they file their 2003 tax returns in 2004.
The $14 billion in advance payments is the net amount taxpayers
received after offsets by IRS and FMS of about $824 million to collect
various types of taxpayer debt. IRS sent notices to all eligible
taxpayers a few days before it mailed the advance payment checks to
taxpayers. When appropriate, the notices included statements that the
amount of their advance payment would be reduced by either the amount
of federal tax or federal nontax debt (such as child support payments,
student loans, or state income tax) they owed. IRS offset ACTC
payments, either in whole or in part, by about $617 million to recover
delinquent federal tax. FMS offset about $207 million to collect the
federal nontax debt via the Treasury Offset Program.[Footnote 10]
The Call Volume Increased and the Level of Service Declined but IRS's
Strategy To Deal with Calls May Have Mitigated the Impact:
The mailing of ACTC notices and payments caused an increase in the
number of telephone calls IRS received and a decline in the assistors'
level of service, but the impact may have been mitigated by IRS's
strategy regarding taxpayer inquiries.[Footnote 11] IRS had a two-
pronged strategy for dealing with the anticipated taxpayer inquiries
following the announcement of the ACTC payments. Specifically, IRS
planned to (1) direct as many telephone inquiries as possible to
messages on its automated telephone system and (2) encourage taxpayers
to use its Web site for information and payment status.
IRS receives millions of calls from taxpayers each year requesting
assistance concerning tax law issues, the status of their refunds, and
other issues regarding their accounts. As shown in figure 1, in the
weeks immediately preceding the issuance of the first ACTC payment
checks, IRS was receiving approximately 1.5 million call attempts per
week to all its toll-free telephone lines. After IRS began sending ACTC
notices to taxpayers during the week ending July 19, 2003, call volume
to its toll-free telephone lines began to increase. Immediately
following the issuance of the first ACTC payment checks during the week
ending July 26, 2003, calls to IRS's toll-free telephone lines
increased to about 5 million. Although calls then rapidly declined, the
number of calls remained elevated until the week ending August 30,
2003.
Many of the additional calls were to IRS's dedicated ACTC line. Between
the weeks ending July 19 and August 30, 2003, IRS's ACTC line received
about 7.3 million telephone calls. About 3.9 million of the 7.3 million
calls, or 53 percent, were routed by IRS's telephone menu to automated
messages, thus reducing the number of calls directed to assistors.
Figure 1: Taxpayers' Call Attempts During the ACTC Payment Period:
[See PDF for image]
[End of figure]
Figure 1 also shows that calls to IRS's other telephone lines for
information increased. IRS does not have statistics on how many of the
total calls to other lines were related to ACTC payments. However, many
of the calls routed to assistors were ACTC-related. IRS officials
estimated that assistors on the other lines answered about 525,000
ACTC-related telephone calls during this period.
IRS uses several measures to gauge its performance in providing service
to callers on its toll-free telephone lines. One measure, the assistor
level of service, is the percentage of callers that IRS estimates
wanted to speak to an assistor who actually got through and received
service. The level of service provided on the special toll-free ACTC
telephone line began to decline the week the first advance payments
were mailed and remained low for a week after the last payments were
mailed to those taxpayers who had filed by April 15 (see fig. 2). For 3
weeks, the assistor level of service was less than 20 percent.
Figure 2: Assistor Level of Service Declined for a Few Weeks:
[See PDF for image]
[End of figure]
The level of service for all toll-free telephone lines also was
affected, falling from about 90 percent to as low as about 40 percent.
The level of service for all toll-free telephone lines returned to its
normal level during the week ending August 30, 2003. To address the
expected increase in telephone calls, IRS paid telephone assistors
overtime and extended seasonal employees past their normal time. IRS
did not hire new assistors, but it is unclear that hiring and training
new employees for a few weeks would have been cost beneficial.
However, another measure of telephone service was not affected as much.
Of the more than 6 million calls to the ACTC telephone line for the 5-
week period from July 19 through August 16, only 117,000 callers, or
1.9 percent, received busy signals.
In addition to the ACTC telephone line, IRS set up a special feature on
its Web site to provide taxpayers information on their ACTC payments.
Approximately 10.6 million attempts were made to access IRS's ACTC Web
feature for information during the 5-week period ending August 30,
2003, although about 2 million of these attempts were not successful.
IRS officials believe the ACTC Web feature reduced ACTC related calls
to its toll-free telephone system because of the large number of
contacts. IRS does not have an estimate of the manner in which
taxpayers used both services, that is, the number of taxpayers who used
the Web site but still called IRS, or the number of calls eliminated by
the Web feature. However, IRS officials told us that, in speaking with
tax practitioners, they heard that many taxpayers used the feature on
IRS's Web site instead of calling IRS to get information. Figure 3
shows a breakdown of how taxpayers attempted to gain information on the
ACTC.
Figure 3: Breakdown on Taxpayers' Attempts to Gain ACTC Information:
[See PDF for image]
[End of figure]
IRS Estimated the ACTC Payment Effort Cost About $32 Million, Which IRS
Funded by Reallocating Resources:
IRS and FMS officials told us they spent about $32 million, 98 percent
of which was incurred by IRS, to implement the ACTC payment
effort.[Footnote 12] IRS's cost figures are a combination of estimates
and actual costs. Congress did not appropriate funds to IRS
specifically for the agency to implement the ACTC payment effort. As a
result, IRS funded this effort by reallocating funds from other
programs or operations, as well as by shifting staff resources to deal
with the ACTC payments.
Costs to IRS and FMS:
In order to implement the ACTC payment effort, IRS, among other things,
had to:
* develop the computer programming necessary to determine taxpayer
eligibility for an advance payment and the amount of the payment,
including any related federal tax offset;
* develop an application on its Web site to help taxpayers determine
their eligibility for an advance payment and the amount of the payment;
* arrange for printing and mailing notices informing eligible taxpayers
that they would be receiving the payment;
* respond to telephone calls and correspondence from taxpayers
concerning the advance payment; and:
* resolve undelivered and returned advance payment checks.
In addition, FMS spent about half a million dollars on items related to
issuing advance payment checks, including labor, check stock, and other
expenses (see table 1). IRS reimbursed FMS for postage costs, and those
costs are included in the costs in table 1. Overall, IRS incurred about
$31.1 million, or 98 percent of the total costs for implementing the
ACTC payment effort.
Table 1: Costs Reported by IRS and FMS:
Item: Labor;
IRS cost (in $ millions): $ 4.8;
FMS cost (in $ millions): $ .12.
Item: Postage;
IRS cost (in $ millions): 15.4;
FMS cost (in $ millions): N/A.
Item: Printing of notices;
IRS cost (in $ millions): 1.6;
FMS cost (in $ millions): N/A.
Item: Telecommunications;
IRS cost (in $ millions): 5.3;
FMS cost (in $ millions): N/A.
Item: Contract;
IRS cost (in $ millions): 4.0;
FMS cost (in $ millions): N/A.
Item: Check stock;
IRS cost (in $ millions): N/A;
FMS cost (in $ millions): .19.
Item: Other;
IRS cost (in $ millions): N/A;
FMS cost (in $ millions): .22.
Total;
IRS cost (in $ millions): $ 31.1;
FMS cost (in $ millions): $ .53.
Source: IRS and FMS.
Note: IRS's cost figures are a combination of estimates and actual
costs.
[End of table]
By early June, IRS developed the necessary computer programming to
implement the ACTC payment effort. By mid-June, it had tested the
programming, with help from contractors.
Funding the ACTC Effort Caused Some Delays in Other Activities:
Because Congress did not appropriate funds to IRS for the
implementation of the ACTC payment effort, IRS officials said they
funded this effort by reallocating funds from other programs or
operations, as well as shifting staff resources to deal with the ACTC
payment effort. More specifically, IRS officials funded the ACTC
payment effort as follows:
* $11.6 million in unobligated funds, which were monies that were not
spent by IRS in fiscal year 2002 and were available to spend in fiscal
year 2003.
* $10.2 million from IRS's existing postage budget. This figure
represents the money that was allocated to IRS's postage machines and
that was then reallocated to the ACTC payment effort. As a result, some
mailings that were not time-critical were delayed until the beginning
of fiscal year 2004.
* $9.3 million from allocating money originally intended for updating
information systems. By allocating those monies to the ACTC payment
effort, the updates were delayed about 1 month, until the beginning of
fiscal year 2004.
Taken by itself, absorbing the cost of the ACTC payment effort had a
minimal impact on IRS's other activities. However, IRS has typically
had to absorb the costs of other initiatives each year. For example, in
2002 IRS faced unbudgeted cost increases related to rent, pay raises,
security, and postage rate increases.[Footnote 13]
IRS Used Lessons Learned Which It Believes Helped the Implementation of
ACTC Go More Smoothly:
IRS identified lessons learned from the evaluations of the 2001 advance
refund effort and used the lessons when implementing the ACTC payment
effort. With the exception of telephone service, IRS officials believe
the implementation of the ACTC payment effort has gone more smoothly,
in part, because they used both the positive and negative lessons
learned from the 2001 effort. Although acknowledging that identifying
and using lessons learned was valuable, IRS officials had not yet
committed to conducting a lessons learned evaluation of the ACTC
payment effort at the time of our review.
IRS Identified and Used Lessons Learned from the 2001 Advance Refund
Effort:
In our review of IRS's implementation of the 2001 advance refund
effort, we recommended that IRS identify any changes in procedures or
processes that might be warranted if it faced similar challenges in the
future. IRS conducted such an evaluation and issued a report in January
2003. IRS officials said that the cost of the evaluation was modest,
and the report synthesized the responses of 19 executive and front-line
managers who were interviewed about their experience in implementing
the 2001 advance refund effort.
In table 2, we summarize the lessons learned identified by managers
from the 2001 advance refund effort and merged them with the lessons we
and TIGTA identified. Some of the lessons learned, such as early
planning, were positive lessons about actions that IRS managers
believed contributed to the overall success of the effort. The table
also identifies the actions taken to use these lessons in the ACTC
payment effort.
Table 2: Lessons Learned from the 2001 Advance Refund Effort and Use in
the ACTC Payment Effort:
Lessons Learned from the 2001 Advance Refund Effort (Sources):
l. Plan the project early before enactment of legislation. (IRS);
Use in the ACTC Payment Effort:
Planning began in January 2003, 5 months before the Jobs and Growth
Tax Relief Reconciliation Act of 2003 was signed into law on May 28,
2003.
Lessons Learned from the 2001 Advance Refund Effort (Sources):
2. Involve high-level officials and establish a venue for frequent
communication (e.g., periodic meetings). (IRS);
Use in the ACTC Payment Effort:
Meetings were held every 1 or 2 weeks, beginning on January 14, 2003,
and included programmers and high-level officials from all impacted
functions.
Lessons Learned from the 2001 Advance Refund Effort (Sources):
3. Designate high-level managers with decision authority, including an
attorney, who can circumvent unintentional barriers, such as formal
procedures. (IRS);
Use in the ACTC Payment Effort:
IRS executives were instructed by the Deputy Commissioner to provide
whatever was needed for the ACTC implementation. An attorney was
assigned to address any legal questions raised during the meetings.
Lessons Learned from the 2001 Advance Refund Effort (Sources):
4. Test programming extensively, anticipating downstream processing
problems, including those that may conflict with internal procedures.
(IRS, GAO, TIGTA);
Use in the ACTC Payment Effort:
Programming was tested internally and externally.
Lessons Learned from the 2001 Advance Refund Effort (Sources):
5. Test forms and instructions extensively, relying on focus groups or
similar methods. (IRS, GAO);
Use in the ACTC Payment Effort:
Consulting firm was hired to review notice. Focus groups were not
used. Sixteen drop-in paragraphs were developed for the notices to
address taxpayers' individual circumstances.
Lessons Learned from the 2001 Advance Refund Effort (Sources):
6. Provide adequate resources (i.e., funds and people) to accomplish
the project. (IRS);
Use in the ACTC Payment Effort:
See funding sources discussed in previous section.
Lessons Learned from the 2001 Advance Refund Effort (Sources):
7. Refine relevant list of eligible taxpayer names and address
information. (GAO);
Use in the ACTC Payment Effort:
The program identified and eliminated taxpayers who no longer
qualified for the Child Tax Credit. Allowed verbal change of address
from taxpayers over the phone for current address.
Lessons Learned from the 2001 Advance Refund Effort (Sources):
8. Anticipate system overload (e.g., phone inquiries) and effects on
other tax work, including the regular filing season. (IRS, GAO, TIGTA);
Use in the ACTC Payment Effort:
A media strategy was prepared. Officials indicated that they took a
broad strategic approach to telephone service.
Lessons Learned from the 2001 Advance Refund Effort (Sources):
9. Involve Chief Financial Office (CFO) throughout the project. (IRS);
Use in the ACTC Payment Effort:
CFO was invited to all planning meetings.
Lessons Learned from the 2001 Advance Refund Effort (Sources):
10. Garner and focus all resources on accomplishing the task,
including working overtime, when necessary. (IRS);
Use in the ACTC Payment Effort:
Overtime was worked. IRS executives were instructed to provide all
necessary resources for the task.
Lessons Learned from the 2001 Advance Refund Effort (Sources):
11. Address problems quickly. (IRS);
Use in the ACTC Payment Effort:
IRS managers maintained ongoing dialogue with relevant stakeholders,
including TIGTA, to identify and address problems as they arose.
Lessons Learned from the 2001 Advance Refund Effort (Sources):
12. Emphasize the advance refund effort as "priority one." (IRS);
Use in the ACTC Payment Effort:
The importance of the ACTC payment effort was communicated to all
employees.
Source: GAO, IRS, TIGTA.
[End of table]
For example, in our report on the 2001 advance refund effort, we noted
that IRS's notices and instructions for the 2001 advance refund could
have been clearer. IRS's 2001 instructions for the Form 1040 did not
use consistent terminology when referring to the advance refund,
emphasize the existence of a new credit on the first page of the
instructions, or provide all relevant information in the section
discussing the advance refund. IRS considered our concerns when
preparing the 2003 tax return forms and instructions. The forms and
instructions use consistent terminology when referring to the ACTC
payment, highlight the ACTC payment on the cover, and include relevant
information in the section discussing the ACTC payment. In addition,
IRS hired a consulting firm to provide guidance on the process used for
developing notices.
IRS Officials Believe ACTC Payment Effort Has Gone More Smoothly in
Part Due to Lessons Learned:
IRS officials said that from their perspective, the process of issuing
the ACTC payments has gone more smoothly than the 2001 advance refund
effort and they believe taxpayers have had fewer problems. IRS
officials did not have to build a process from scratch for managing the
effort--they were able to build on their prior experience by focusing
on the management activities that had worked well in the 2001 effort.
For example, IRS officials told us that convening frequent meetings
involving high-level stakeholders was important in communicating the
status of the effort, the resources needed, and any problems that
needed to be resolved.
While neither IRS nor GAO has directly contacted taxpayers to discuss
their experience with the ACTC payment effort, available evidence
suggests that IRS has experienced few problems in sending out the ACTC
payment notices and checks. For example, the Office of Taxpayer
Advocate (OTA) told us that, although it did not track the number of
phone calls it received regarding ACTC payments, OTA staff believe its
call volume related to taxpayer inquiries regarding ACTC payments was
lower than it was when the 2001 advance refund effort was introduced.
Although at the time of our review OTA had not done an analysis of the
calls they received, the lower call volume may have been resulted from
IRS's efforts to write clearer notices. In addition, IRS data suggest
that IRS was about as successful in the ACTC payment effort as it was
in the 2001 advance refund effort in mailing checks to the correct
address. Both efforts resulted in less than 1 percent of checks being
returned as undeliverable.
One lesson that IRS learned is that taxpayers may experience more
problems when they begin filing their 2003 tax returns, which are due
April 15, 2004. Although IRS instructed taxpayers to keep their ACTC
notices for reference when filing their returns, IRS officials expect
many taxpayers will throw them away or lose them before the filing
season. This could lead to problems similar to those we identified with
the 2001 advance refund effort. We found that taxpayers were confused
about the amount of the rate reduction credit they had received as an
advance refund and how to properly report this on their tax return. For
example:
* Over 4.4 million taxpayers who were entitled to a credit failed to
claim it on their return.
* Almost 1.8 million taxpayers who had received the maximum advance
refund and so were not entitled to a credit claimed the credit on their
return.
* Over 800,000 taxpayers who were entitled to and claimed a credit
incorrectly computed the amount to which they were entitled.
IRS officials believe the efforts they made to draft clearer notices
and instructions as described above will help mitigate these problems.
In addition to benefiting from the evaluations of the 2001 advance
refund effort, IRS officials cited other factors that contributed to a
smooth implementation. These factors included the experience of having
successfully completed a previous advance payment effort and fewer
recipients of the ACTC payment than there were of the 2001 advance
refund.
IRS Has Not Yet Committed to Repeating the Lessons Learned Process:
At the time of our review, IRS officials said they had not yet decided
whether to undertake a lessons learned evaluation of the ACTC payment
effort as they had done for the 2001 advance refund effort. In their
opinion, the effort has gone very smoothly and they were unsure whether
anything would be gained by a formal evaluation of the process.
However, as pointed out in IRS's lessons learned report, higher ranking
officials provided most of the positive responses regarding the 2001
advance refund effort, while front-line managers were the most likely
to point out problems with the process. As a result, an evaluation of
the ACTC payment process involving all levels of IRS managers could
identify lessons not currently evident to IRS senior managers that
could be used in implementing future efforts. In addition, even if a
lessons learned evaluation only identified positive lessons, such an
effort would still be useful because managers would know which actions
they should be sure to incorporate into any new efforts.
Conclusions:
ACTC payments were sent to 25 million taxpayers. IRS officials
acknowledged that using the evaluations of the 2001 advance refund
effort was partly responsible for the smooth implementation of the 2003
ACTC payment effort. It is possible that such an evaluation of the 2003
ACTC payment effort would also yield benefits if IRS is asked to carry
out a similar effort in the future. This could be the case even if the
lessons learned from such an evaluation are about which implementation
steps worked well. The costs of an evaluation of the same magnitude as
the one covering the 2001 advance refund effort would be quite modest.
IRS staff who were involved in the planning and implementation of this
effort are in the best position to assess both the positive and
negative aspects of IRS's performance and suggest alternative
approaches for handling the challenges involved in such an effort.
Recommendation:
We recommend that the Commissioner of Internal Revenue conduct a
modestly scaled "lessons learned" evaluation of the ACTC payment effort
similar to the one conducted for the 2001 advance refund effort.
Agency Comments and Our Evaluation:
We received written comments on a draft of this report from the
Commissioner of Internal Revenue, which is reprinted in appendix II.
The Commissioner agreed with our assessment of IRS's implementation of
the ACTC payment effort, including our conclusion that the dramatic
increase in taxpayer contacts over a short period of time resulted in a
brief decline in telephone service. The Commissioner also said that
IRS's lessons learned report on the 2001 advance refund effort was a
cornerstone of the improvement for the ACTC payment effort, and agreed
with our recommendation that the IRS should conduct a similar
assessment of the implementation of the ACTC payment effort.
As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
from its issue date. At that time, we will send copies to the Chairman
and Ranking Minority Member of the House Committee on Ways and Means
and the Chairman and Ranking Minority Member of its Subcommittee on
Oversight; the Secretary of the Treasury; the Commissioner of Internal
Revenue; the Director of the Office of Management and Budget; and other
interested parties. We will make copies available to others on request.
In addition, the report will be available at no charge on the GAO Web
site at [Hyperlink, http: //www.gao.gov].
This report was prepared under the direction of Jonda Van Pelt,
Assistant Director. If you have any questions regarding this report,
please contact her at (415) 904-2186 or [Hyperlink, vanpeltj@gao.gov]
or me at (202) 512-9110 or [Hyperlink, whitej@gao.gov]. Other major
contributors are acknowledged in appendix III.
Signed by:
James R. White:
Director, Tax Issues:
[End of section]
Appendixes:
Appendix I: Objectives, Scope and Methodology:
Our objectives were to provide information on (1) the number, dollar
amount, and timeliness of the advance payments, (2) the impact of the
ACTC payments on IRS's toll-free telephone operations, (3) the cost to
IRS and FMS for implementing the ACTC payment effort, including the
impact of these costs on other IRS programs, and (4) the extent to
which IRS identified and used evaluations from the 2001 advance refund
effort to implement the ACTC payment effort, and whether an evaluation
of the ACTC payment effort is planned.
From IRS and FMS, we obtained information on the number, dollar amount,
and timeliness of the advance payments issued, including the number and
dollar value of offsets deducted from the advance payments as a result
of taxpayers' tax and other federal debts.
To identify the impact this effort had on IRS's toll-free operations,
we obtained statistical information from IRS on the impact of the ACTC
on its toll-free telephone operations. Specifically, we obtained (1)
the costs of training telephone operators to answer questions about the
ACTC payments, (2) the costs of hiring new telephone operators to
handle the increased number of calls due to the implementation of the
ACTC payment effort, and (3) the number of calls that IRS received
about the advance payments and the number of taxpayers who were unable
to speak to an IRS assistor. In addition, we obtained data on how IRS
used a special feature on its Web site to mitigate the impact of its
toll-free telephone service.
We obtained from IRS and FMS the costs to implement the ACTC payment
effort. From IRS we also obtained information on how it used funds
earmarked for other programs to implement this effort. We discussed
with IRS officials the impact that reallocating funds had on other IRS
activities.
To determine what lessons IRS learned from the 2001 advance refund
effort, we analyzed the lessons learned from evaluations done by IRS's
internal study group, TIGTA, and GAO on the advance refund effort in
2001. We discussed with IRS officials how they used the lessons learned
to implement the ACTC payment effort.
We relied on statistical and cost data provided by IRS and FMS to
report the $14 billion in ACTC payments to more than 25 million
taxpayers, the $32 million to implement the ACTC payment program, the
$824 million in offsets, and the $11.6 million, $10.2 million, and $9.3
million funding figures associated with the reallocation of funds from
other programs and operations. To determine the reliability of the
statistical and cost data we present in this report, we reviewed the
results of our most recent audit of IRS's financial statements. In our
recently completed audit of IRS's fiscal year 2003 financial
statements, we gave IRS an unqualified opinion on the financial
statements, but we also reported the continued existence of several
material internal control weaknesses that could have impacted the
validity of the ACTC payments that we report. Specifically, we found
material internal control weaknesses in (1) tax revenue and refunds,
(2) unpaid tax assessments, and (3) computer security which had the
potential to impact the validity of the disbursements for the ACTC.
These weaknesses could impact the ability of IRS to have reasonable
assurance that (1) the individuals who received the payments should
have received them or should have received them in the amount paid and
(2) all individuals entitled to receive ACTC payments did, in fact,
receive payments. However, as part of the fiscal year 2003 financial
audit, we performed sufficient procedures to validate that $14 billion
was paid out under the ACTC payment effort. As a result, we believe
that IRS's data on the amount disbursed and the number of taxpayers who
received ACTC payments are sufficiently reliable for our reporting
effort. In our fiscal year 2003 financial audit, we also found that IRS
continues to lack a cost accounting system capable of accurately and
timely tracking and reporting the costs of its various programs and
projects, meaning that IRS's cost amounts may not reflect the true cost
of administering the ACTC payment. In a recent report, we assessed the
methodologies IRS used for computing its current suite of performance
measures, including its telephone service.[Footnote 14] At that time,
we reported that some of its performance measures had attributes of
successful performance measures including objectivity and reliability,
although in some cases, the measures could be further refined. Even
recognizing the limitations of these measures, we have determined that
the data we are using are sufficiently reliable and useful for
reporting on IRS's implementation of the ACTC payments.
This report covers the time frame from January 2003 to December 2003,
from IRS's initial planning for the ACTC payments to when all of the
advance payment checks had been issued. We did our work at IRS's
National Office in Washington, D.C. and at the IRS campus in Atlanta,
Ga. We conducted fieldwork between September 2003 and November 2003.
Our work was performed in accordance with generally accepted government
auditing standards.
[End of section]
Appendix II: Comments from the Internal Revenue Service:
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224:
COMMISSIONER:
February 11, 2004:
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 agree with your assessment of our successful implementation of the
Advance Child Tax Credit (ACTC) provision of the Jobs and Growth Tax
Relief Reconciliation Act of 2003. Each piece of new legislation
presents unique challenges to the IRS. I am pleased your report
recognizes that we accurately and timely issued over $14 billion in
payments to more than 25 million taxpayers. This accomplishment is the
result of diligent staff work, detailed planning, and close
coordination with our partners at the Financial Management Service and
Treasury's Office of Tax Policy. I am pleased these efforts
successfully delivered the tax relief intended by Congress.
Our implementation strategy enabled us to proactively communicate with
taxpayers eligible for this tax relief. The message we sent to the
public stressed, "You don't need to contact us. You'll automatically
get a check if you qualify." In addition to the wide-scale media
attention and targeted IRS News Releases, we also sent each qualifying
taxpayer a notice informing them of their eligibility, providing the
amount of the anticipated advance payment and stressing they needed to
take no action to receive their check. The notice directed questions
and requests for additional information to a special section of the IRS
website or to a special ACTC 1-800 toll-free telephone number. The
"Where's My Advance Child Tax Credit?" feature on www.irs.gov and the
ACTC 1-800 toll-free number allowed users to determine their
eligibility and to find out the amount and scheduled mailing date of
their check. These two special features provided service to over 15.5
million taxpayers.
Our proactive measures provided accurate and timely information to
millions of taxpayers eliminating their need to receive personal
service from a Customer Service Representative. Despite the success of
these efforts many taxpayers still wished to contact us. The issuance
of billions of dollars in tax relief captures public interest and
prompts them to contact us any way they can. We anticipated and
accurately projected the impact of these contacts. However, I agree
with your conclusion that this dramatic increase in contacts compressed
into a short period of time resulted in a brief decline in telephone
service.
We will continue to proactively assist ACTC recipients. We anticipate
many ACTC recipients will need to verify the amount of their advanced
credit prior to filing their 2003 tax return. As part of our "1040
Central "web page, we have a section titled "Your 2003 Advance Child
Tax Credit." This section gives the taxpayer the amount of their ACTC
credit along with instructions on how to figure their Child Tax Credit
on their 2003 tax return. Providing this information in the fast and
easily accessible web environment helps taxpayers file accurate
returns. In the first 18 days of "Your 2003 Advance Child Tax Credit"
feature, it has received over 1.2 million inquiries. As tax return
processing gets underway, we are targeting "Quick Alerts" to tax return
preparers and the electronic filing community to stress the importance
of accurately computing the Child Tax Credit. We are also covering this
important point with the public through News Releases related to the
filing of 2003 tax returns.
Your observation that we have improved our process of implementing new
legislation is accurate. As a result of our increased experience,
internal review, and the insight provided by the General Accounting
Office and the Treasury Inspector General for Tax Administration, we
were better prepared to develop a comprehensive implementation plan for
the Jobs and Growth Tax Relief Reconciliation Act of 2003. As you
noted, our internal report, "Lessons Learned from the IRS
Implementation of the 2001 Advance Tax Refund and Tax Rate Reduction
Credit Legislation," was a cornerstone in our improvement process.
My response to your recommendation is as follows:
Recommendation:
GAO recommends that the Commissioner of Internal Revenue conduct a
modestly scaled "lessons learned" evaluation of the ACTC payment effort
similar to the one conducted for the 2001 advanced refund effort.
Response:
I agree with your recommendation. The Commissioner, Wage and Investment
Division will conduct a "lessons learned" assessment of our
implementation actions of the Advance Child Tax Credit provision for
the Jobs and Growth Tax Relief Reconciliation Act of 2003. We
anticipate completing the "lessons learned" report by December 15,
2004.
If you have any questions, please call Floyd Williams, Director,
Legislative Affairs, at (202) 622-3720.
Sincerely,
Signed for:
Mark W. Everson:
[End of section]
Appendix III: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
James White, (202) 512-9110 Jonda Van Pelt, (415) 904-2186:
Acknowledgments:
In addition to those named above, Evan Gilman, Tre Forlano, Ron
Heisterkamp, Susan Mak, Larry Malenich, Edward Nannenhorn, Cheryl
Peterson, Amy Rosewarne, and Jeff Schmerling made key contributions to
this report.
(450253):
FOOTNOTES
[1] Pub. L. No. 107-16 (June 7, 2001).
[2] Pub .L. No. 108-27 (May 28, 2003).
[3] FMS is the federal agency responsible for providing central payment
services to federal program agencies, operating the federal
government's collections and deposit systems, providing governmentwide
accounting and reporting services, and managing the collection of
delinquent debt.
[4] Two taxpayers who filed a joint return are considered one taxpayer
for this discussion because they would have been sent one check.
[5] The reliability of this estimate is discussed in a later section.
[6] U.S. General Accounting Office, Tax Administration: Advance Tax
Refund Program Was a Major Accomplishment, But Not Problem Free, GAO-
02-827 (Washington, D.C.: Aug. 2, 2002).
[7] Treasury Inspector General for Tax Administration, Advance Refunds
Were Accurately Calculated and Issued to Eligible Taxpayers, But Some
Undelivered Refunds Were Unnecessarily Delayed, 2002-40-116
(Washington, D.C: June 2002).
[8] Internal Revenue Service, Lessons Learned from the IRS
Implementation of the Advance Tax Refund and Tax Rate Reduction Credit
Legislation, Project Report 3-02-19-2-018 (Washington, D.C.: January
2003).
[9] A taxpayer's social security number determined the order in which
they received their advance payment.
[10] The Treasury Offset Program involves a centralized database of
delinquent nontax debts referred to FMS for offset against federal
payments.
[11] The performance measure level of service is intended to show IRS's
effectiveness in providing callers with access to an assistor.
Essentially, it is the total number of taxpayers who obtain pertinent
information (that is, talk to an assistor or access pertinent automated
messages) divided by the total number of taxpayers who seek information
(that is, talk to an assistor, access pertinent automated messages,
receive a busy signal, receive a message that assistors are not
currently available, and who hang up before receiving service).
[12] Some costs, such as labor costs, were estimated by IRS, while
others, such as postage and telecommunications fees, were actual costs.
However, as we have reported before (U.S. General Accounting Office,
Financial Audit: IRS's Fiscal Years 2003 and 2002 Financial Statements
(GAO-04-126, November 2003)), IRS does not have a cost accounting
system capable of providing timely and reliable cost information
related to its activities and programs, so the $32 million estimate may
not accurately reflect the true costs of implementing the ACTC payment
effort.
[13] U.S. General Accounting Office, Internal Revenue Service:
Assessment of Budget Request for Fiscal Year 2003 and Interim Results
of 2002 Tax Filing Season, GAO-02-580T (Washington, D.C.: Apr. 9,
2002).
[14] U.S. General Accounting Office, Tax Administration: IRS Needs to
Further Refine Its Tax Filing Season Performance Measures, GAO-03-143
(Washington, D.C.: Nov. 22, 2002).
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