Excise Taxes

Internal Control Weaknesses Affect Accuracy of Distributions to the Trust Funds Gao ID: AIMD-99-17 November 9, 1998

The Internal Revenue Service (IRS) lacks adequate controls over its process for certifying excise taxes for distribution to the federal government's trust funds. IRS failed to detect (1) taxpayer mistakes in preparing excise tax returns and (2) its own errors when entering tax return information in its master files and when preparing excise tax certifications. As a result, trust funds did not receive the appropriate amount of excise tax revenue. These errors are particularly important to the Highway Trust Fund, which receives more than half of the excise taxes that are accounted for by IRS. IRS has taken some steps to improve controls over the excise tax certification process. GAO recommends strengthening IRS' verification and review procedures to help ensure that trust funds receive the appropriate allocation of revenue.

GAO noted that: (1) IRS does not have adequate controls over its process for certifying excise taxes for distribution to the federal government trust funds; (2) the lack of fundamental internal controls resulted in errors in the certifications going undetected; (3) these errors ultimately affected the amounts distributed to the trust funds during fiscal year 1997; (4) IRS' ineffective controls over the certification process resulted in undetected: (a) mistakes by taxpayers in preparing excise tax returns; (b) input errors by IRS when entering excise tax return information in its master files; and (c) errors by IRS in preparing the excise tax certifications; (5) as a result of these errors, trust funds did not receive the appropriate amount of excise tax revenue; (6) these errors are particularly important to the Highway Trust Fund, which receives over half of the excise taxes that are accounted for by IRS; (7) these weaknesses were a contributing factor in the Department of Transportation's (DOT) Inspectors General's: (a) qualified opinion on the Highway Trust Fund financial statements; (b) disclaimer of opinion on the Federal Aviation Administration's financial statements; and (c) disclaimer of opinion on DOT's consolidated financial statements; (8) the errors GAO found relating to taxpayer mistakes, IRS data input, and certification preparation could have been detected or prevented by effective IRS procedures; and (9) IRS has taken some actions to improve certain controls over the excise tax certification process.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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