a

GAO

United States General Accounting Office

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

GAO-04-372
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Highlights of GAO-04-372, a report to the 

Chairman and Ranking Minority Member, 

Committee on Finance, United States 

Senate 

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 

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. 
Page i GAO-04-372 ACTC Payment Effort

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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Page 1 GAO-04-372 ACTC Payment Effort

United States General Accounting Office

Washington, D.C. 20548

A

February 17, 2004 Letr

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 

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.
Page 2 GAO-04-372 ACTC Payment Effort

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 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.5

 In order 

to accomplish this mandate, IRS used funds earmarked for other programs. 

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. 
Page 3 GAO-04-372 ACTC Payment Effort

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.

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). 
Page 4 GAO-04-372 ACTC Payment Effort

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 

9

A taxpayer’s social security number determined the order in which they received their 

advance payment. 
Page 5 GAO-04-372 ACTC Payment Effort

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 (midNovember, 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).
Page 6 GAO-04-372 ACTC Payment Effort

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

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 

6/21/03 6/28/03 7/5/03 7/12/03

Other toll-free telephone lines

Automated ACTC line

Total

7/19/03 7/26/03 8/2/03 8/9/03 8/16/03 8/23/03 8/30/03

Source: IRS.

Number of calls

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

Week ending
Page 7 GAO-04-372 ACTC Payment Effort

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

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 

0

10

20

30

40

50

60

70

80

90

100

7/19/2003 7/26/2003 8/2/2003 8/9/2003 8/16/2003 8/23/2003 8/30/2003 9/6/2003

Automated ACTC line

Other toll-free call lines

Percentage receiving service

Source: IRS.

Week ending
Page 8 GAO-04-372 ACTC Payment Effort

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.
Page 9 GAO-04-372 ACTC Payment Effort

Figure 3: Breakdown on Taxpayers’ Attempts to Gain ACTC Information

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.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. 

7/19/2003 7/26/2003 8/2/2003 8/9/2003 8/16/2003 8/23/2003 8/30/2003

Internet attempts

ACTC call attempts

Source: IRS.

Attempts to reach IRS

Week ending

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

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. 
Page 10 GAO-04-372 ACTC Payment Effort

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

Source: IRS and FMS.

Note: IRS’s cost figures are a combination of estimates and actual costs.

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
Page 11 GAO-04-372 ACTC Payment Effort

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.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).
Page 12 GAO-04-372 ACTC Payment Effort

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. 
Page 13 GAO-04-372 ACTC Payment Effort

Table 2: Lessons Learned from the 2001 Advance Refund Effort and Use in the ACTC Payment Effort

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. 

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 

communication (e.g., periodic meetings). (IRS) 

Meetings were held every 1 or 2 weeks, beginning on January 14, 

2003, and included programmers and high-level officials from all 

impacted functions. 

3. Designate high-level managers with decision authority, including 

an attorney, who can circumvent unintentional barriers, such as 

formal procedures. (IRS)

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.

4. Test programming extensively, anticipating downstream 

processing problems, including those that may conflict with internal 

procedures. (IRS, GAO, TIGTA)

Programming was tested internally and externally.

5. Test forms and instructions extensively, relying on focus groups 

or similar methods. (IRS, GAO)

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. 

6. Provide adequate resources (i.e., funds and people) to 

accomplish the project. (IRS) 

See funding sources discussed in previous section.

7. Refine relevant list of eligible taxpayer names and address 

information. (GAO)

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.

8. Anticipate system overload (e.g., phone inquiries) and effects on 

other tax work, including the regular filing season. (IRS, GAO, 

TIGTA)

A media strategy was prepared. Officials indicated that they took a 

broad strategic approach to telephone service.

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. 
Page 14 GAO-04-372 ACTC Payment Effort

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
Page 15 GAO-04-372 ACTC Payment Effort

• 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 
Page 16 GAO-04-372 ACTC Payment 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.
Page 17 GAO-04-372 ACTC Payment Effort

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 vanpeltj@gao.gov or me at (202) 512-9110 or 

whitej@gao.gov. Other major contributors are acknowledged in appendix 

III.

James R. White

Director, Tax Issues
Page 18 GAO-04-372 ACTC Payment Effort

Appendix I

Objectives, Scope and Methodology AAppenednxidexiIs

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

Page 19 GAO-04-372 ACTC Payment Effort

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). 
Page 20 GAO-04-372 ACTC Payment Effort

Appendix II

Comments from the Internal Revenue Service ApendxiI
Appendix II

Comments from the Internal Revenue Service

Page 21 GAO-04-372 ACTC Payment Effort
Page 22 GAO-04-372 ACTC Payment Effort

Appendix III

GAO Contacts and Staff Acknowledgments ApendxiI

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)
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