Tax Administration: IRS Issued Advanced Child Tax Credit Payments
on Time but Should Study Lessons Learned (17-FEB-04, GAO-04-372).
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.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-372
ACCNO: A09296
TITLE: Tax Administration: IRS Issued Advanced Child Tax Credit
Payments on Time but Should Study Lessons Learned
DATE: 02/17/2004
SUBJECT: Advance payments
Federal taxes
Tax credit
Tax refunds
Taxpayers
Customer service
Telephone
Best practices methodology
IRS Child Tax Credit
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GAO-04-372
United States General Accounting Office
GAO
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
a
GAO-04-372
Highlights of GAO-04-372, a report to the Chairman and Ranking Minority
Member, Committee on Finance, United States Senate
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.
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.
February 2004
TAX ADMINISTRATION
IRS Issued Advance Child Tax Credit Payments on Time but Should Study Lessons
Learned
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.
Taxpayers' Call Attempts During the ACTC Payment Period
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 [email protected].
Contents
Letter 1
Results In Brief 2
Background 3
Billions of Dollars in Advance Payments Sent to Millions of
Taxpayers in a Timely Fashion 4
The Call Volume Increased and the Level of Service Declined but
IRS's Strategy To Deal with Calls May Have Mitigated the
Impact 5
IRS Estimated the ACTC Payment Effort Cost About $32 Million,
Which IRS Funded by Reallocating Resources 9
IRS Used Lessons Learned Which It Believes Helped the
Implementation of ACTC Go More Smoothly 12
Conclusions 15
Recommendation 16
Agency Comments and Our Evaluation 16
Appendixes
Appendix I: Objectives, Scope and Methodology 18
Appendix II: Comments from the Internal Revenue Service 20
Appendix III: GAO Contacts and Staff Acknowledgments 22 GAO Contacts 22
Acknowledgments 22
Tables Table 1: Costs Reported by IRS and FMS 10 Table 2: Lessons Learned
from the 2001 Advance Refund Effort and Use in the ACTC Payment Effort 13
Figures Figure 1: Taxpayers' Call Attempts During the ACTC Payment
Period 6
Figure 2: Assistor Level of Service Declined for a Few Weeks 7
Figure 3: Breakdown on Taxpayers' Attempts to Gain ACTC
Information 9
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A
United States General Accounting Office Washington, D.C. 20548
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 2001,1 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 20032 (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 Service3 (FMS) for implementing the ACTC payment effort,
including the impact of these costs on other IRS programs, and (4) the
1Pub. L. No. 107-16 (June 7, 2001).
2Pub .L. No. 108-27 (May 28, 2003).
3FMS 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.
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.4 Over
a 15day 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.5 In
order to accomplish this mandate, IRS used funds earmarked for other
programs.
4Two taxpayers who filed a joint return are considered one taxpayer for
this discussion because they would have been sent one check.
5The reliability of this estimate is discussed in a later section.
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 us6 and the Treasury Inspector General for
Tax Administration (TIGTA)7 as well as its own internal evaluation.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.
6U.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).
7Treasury 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).
8Internal 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).
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, 2003.9 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
9A taxpayer's social security number determined the order in which they
received their advance payment.
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.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.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
10The Treasury Offset Program involves a centralized database of
delinquent nontax debts referred to FMS for offset against federal
payments.
11The 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).
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
Number of calls
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
0 6/21/03 6/28/03 7/5/03 7/12/03 7/19/03 7/26/03 8/2/03 8/9/03 8/16/03
8/23/03 8/30/03 Week ending
Automated ACTC line
Other toll-free telephone lines
Total
Source: IRS.
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
Percentage receiving service
100
90
80
70
60
50
40
30
20
10
0 7/19/2003 7/26/2003 8/2/2003 8/9/2003 8/16/2003 8/23/2003 8/30/2003
9/6/2003
Week ending
Other toll-free call lines Automated ACTC line Source: IRS.
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
Attempts to reach IRS 6,000,000
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.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.
12Some 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.
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000 0 7/19/2003 7/26/2003 8/2/2003 8/9/2003 8/16/2003 8/23/2003 8/30/2003
Week ending
Internet attempts ACTC call attempts Source: IRS.
IRS Estimated the ACTC Payment Effort Cost About $32 Million, Which IRS
Funded by Reallocating Resources
Costs to IRS and FMS In order to implement the ACTC payment effort, IRS,
among other things, had to
o 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;
o develop an application on its Web site to help taxpayers determine
their eligibility for an advance payment and the amount of the payment;
o arrange for printing and mailing notices informing eligible taxpayers
that they would be receiving the payment;
o respond to telephone calls and correspondence from taxpayers concerning
the advance payment; and
o 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 IRS cost (in $ millions) FMS cost
(in $ millions)
Labor $ 4.8 $ .12
Postage 15.4 -
Printing of notices 1.6
Telecommunications 5.3 -
Contract 4.0 -
Check stock - .19
Other - .22
Total $ 31.1 $ .53
Source: IRS and FMS.
Note: IRS's cost figures are a combination of estimates and actual costs.
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:
o $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.
o $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.
o $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.13
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).
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) Use in the ACTC Payment Effort
l. Plan the project early before enactment of legislation. (IRS) 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.
2. Involve high-level officials and establish a venue for frequent
Meetings were held every 1 or 2 weeks, beginning on January 14,
communication (e.g., periodic meetings). (IRS) 2003, and included
programmers and high-level officials from all impacted functions.
3. Designate high-level managers with decision authority, including IRS
executives were instructed by the Deputy Commissioner to an attorney, who
can circumvent unintentional barriers, such as provide whatever was needed
for the ACTC implementation. An formal procedures. (IRS) attorney was
assigned to address any legal questions raised during
the meetings.
4. Test programming extensively, anticipating downstream Programming was
tested internally and externally.
processing problems, including those that may conflict with internal
procedures. (IRS, GAO, TIGTA)
5. Test forms and instructions extensively, relying on focus groups
Consulting firm was hired to review notice. Focus groups were not
or similar methods. (IRS, GAO) used. Sixteen drop-in paragraphs were
developed for the notices to address taxpayers' individual circumstances.
6. Provide adequate resources (i.e., funds and people) to See funding
sources discussed in previous section. accomplish the project. (IRS)
7. Refine relevant list of eligible taxpayer names and address The program
identified and eliminated taxpayers who no longer
information. (GAO) qualified for the Child Tax Credit. Allowed verbal
change of address from taxpayers over the phone for current address.
8. Anticipate system overload (e.g., phone inquiries) and effects on A
media strategy was prepared. Officials indicated that they took a
other tax work, including the regular filing season. (IRS, GAO, broad
strategic approach to telephone service.
TIGTA)
9. Involve Chief Financial Office (CFO) throughout the project. (IRS) CFO
was invited to all planning meetings.
10. Garner and focus all resources on accomplishing the task, including
working overtime, when necessary. (IRS)
Overtime was worked. IRS executives were instructed to provide all
necessary resources for the task.
11. Address problems quickly. (IRS) IRS managers maintained ongoing
dialogue with relevant stakeholders, including TIGTA, to identify and
address problems as they arose.
12. Emphasize the advance refund effort as "priority one." (IRS) The
importance of the ACTC payment effort was communicated to all employees.
Source: GAO, IRS, TIGTA.
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
o Over 4.4 million taxpayers who were entitled to a credit failed to
claim it on their return.
o 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.
o 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
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 [email protected] or me at (202) 512-9110 or
[email protected]. Other major contributors are acknowledged in appendix
III.
James R. White Director, Tax Issues
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
Appendix I
Objectives, Scope and Methodology
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.1 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.
1 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).
Appendix II
Comments from the Internal Revenue Service
Appendix II
Comments from the Internal Revenue Service
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.
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