Tax Administration:

Advance Tax Refund Program Was a Major Accomplishment, but Not Problem Free

GAO-02-827: Published: Aug 2, 2002. Publicly Released: Aug 2, 2002.

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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. 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.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: In January 2003, IRS conducted an internal review of its advance tax refund effort and issued a report of lessons learned titled "Lessons Learned from the IRS Implementation of the 2001 Advance Tax Refund and Tax Rate Reduction Credit Legislation." In its review of IRS's implementation of the 2003 Advance Child Tax Credit payment, GAO found that the second effort had gone more smoothly than the 2001 effort, and the Commissioner said IRS' internal report was a cornerstone in improving the ACTC process.

    Recommendation: To help identify the full range of challenges IRS faced with respect to the advance tax refunds and rate reduction credit and any changes in procedures or processes that might be warranted if it faced similar challenges in the future, the Commissioner of Internal Revenue should convene a study group to assess IRS's performance with respect to the advance tax refunds and rate reduction credit. That assessment should include the results of the work done by GAO and the Treasury Inspector General for Tax Administration, including the various observations identified in this report. To ensure that managers faced with similar challenges in the future have the benefit of this assessment, the results should be thoroughly documented.

    Agency Affected: Department of the Treasury: Internal Revenue Service


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