We did not independently verify the statistical and cost data provided by IRS and FMS. To assess implementation of the advance tax refund program, we collaborated with TIGTA staff who reviewed various aspects of the program, such as the accuracy of IRS’s computer programming and taxpayer eligibility for advance refunds;analyzed advance tax refund procedures, including IRS procedures for meeting expected increases in telephone demand and FMS procedures for handling undeliverable refund checks, refund offsets, and claims for nonreceipt of refunds; discussed with officials of IRS’s Office of the Taxpayer Advocate, that office’s involvement in the advance tax refund program; and obtained statistics on undeliverable advance refund notices and checks; taxpayer contacts with IRS concerning advance tax refunds and the level of telephone service provided by IRS during the advance tax refund period; claims for nonreceipt of refunds; and duplicate, altered, and counterfeit advance tax refund checks. Over $36 Billion in Advance Tax Refunds Were Issued at a Cost of at Least $138 Million

Between July and December 2001, about $36.4 billion in advance tax refunds were issued to about 86 million taxpayers. However, according to the official, IRS did not track the number of taxpayers who were affected. Taxpayers and return preparers made various types of errors related to the rate reduction credit during the 2002 tax filing season. Am I eligible for an advance payment? Appendix III: Excerpts from the Tax Year 2001 Form 1040 Instructions Related to the Rate Reduction Credit

Appendix IV: Comments from the Internal Revenue Service

Appendix V: Comments from the Financial Management Service
Why GAO Did This Study

The Economic Growth and Tax Relief Reconciliation Act of 2001 replaced the 15-percent tax rate for individual taxpayers with a 10-percent rate. To stimulate the economy quickly, the act provided for an advance refund in 2001. Between July and December 2001, the Internal Revenue Service (IRS), working with the Department of the Treasury's Financial Management Service (FMS), mailed out 86 million advance refund checks totaling $36.4 billion. IRS spent $104 million to run the advance tax refund program, and FMS spent $34 million to issue checks; IRS expects to spend another $12 million during fiscal year 2002.

What GAO Found

Overall, GAO found that IRS and FMS did a good job carrying out the program. However, the advance refunds and related rate reduction led to increased errors during the 2002 tax-filing season because of taxpayer confusion about the tax credit. In GAO's view, an independent review of the computer programming used to carry out a major effort such as the advance tax refund program might help avoid future problems. At the same time, clearer tax return instructions might reduce the number of returns filed in error.