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Payments on Time but Should Study Lessons Learned' which was released 
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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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