Applying Agreed-Upon Procedures
Federal Unemployment Taxes Gao ID: GAO-02-381R February 15, 2002GAO performed detailed tests of transactions that represent the underlying basis of amounts distributed to the Unemployment Trust Fund (UTF) and reviewed key reconciliations of the Internal Revenue Service records to the Department of the Treasury records. GAO found that the net federal unemployment tax revenue distributed to UTF for fiscal year 2001 is supported by the underlying records.
GAO-02-381R, Applying Agreed-Upon Procedures: Federal Unemployment Taxes
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United States General Accounting Office:
Washington, DC 20548:
February 15, 2002:
The Honorable Gordon S. Heddell:
Inspector General:
Department of Labor:
Subject: Applying Agreed-Upon Procedures: Federal Unemployment Taxes:
Dear Mr. Heddell:
We have performed the procedures contained in the enclosure to this
letter, which we agreed to perform and with which you concurred,
solely to assist your office in ascertaining whether the net federal
unemployment tax (FUTA) revenue distributed to the Unemployment Trust
Fund (UTF) for the fiscal year ended September 30, 2001, is supported
by the underlying records. As agreed with your office, we evaluated
fiscal year 2001 activity affecting distributions to UTF.
In performing the agreed-upon procedures, we conducted our work in
accordance with U.S. generally accepted government auditing standards,
which incorporate financial audit and attestation standards
established by the American Institute of Certified Public Accountants.
These standards also provide guidance when performing and reporting
the results of agreed-upon procedures.
The adequacy of the procedures to meet your objectives is your
responsibility and we make no representation in that respect. The
procedures we agreed to perform include (1) detailed tests of
transactions that represent the underlying basis of amounts
distributed to UTF and (2) a review of key reconciliations of the
Internal Revenue Service (IRS) records to the Department of the
Treasury records. The enclosure contains the agreed-upon procedures
and our findings from performing each of the procedures.
We were not engaged to perform, and did not perform, an audit, the
objective of which would have been the expression of an opinion on the
net amount of FUTA taxes distributed to UTF. Accordingly, we do not
express such an opinion. Had we performed additional procedures, other
matters might have come to our attention that would have been reported
to you. We completed the agreed-upon procedures on February 1, 2002.
We provided a draft of this letter to IRS, along with its enclosure,
for review and comment. They agreed with the results and findings
presented in this letter.
This letter is intended solely for the use of the Office of Inspector
General of the Department of Labor and should not be used by those who
have not agreed to the procedures and have not taken responsibility
for the sufficiency of the procedures for their purposes. However,
this letter is a matter of public record and its distribution is not
limited. Consequently, copies are available to others upon request.
This letter will also be available on GAO's home page at [hyperlink,
http://www.gao.gov]. If you have any questions, please call me at
(202) 512-3406.
Sincerely yours,
Signed by:
Steven J. Sebastian:
Acting Director:
Financial Management and Assurance:
Enclosure:
[End of section]
Enclosure: Unemployment Trust Fund Procedures and Results:
I. Detailed Tests of Transactions:
A. Obtain from IRS total FUTA collections and refunds reflecting the
first 9 months of fiscal year 2001 activity recorded in the master
file[Footnote 1] Determine if FUTA collections and refund data per the
master file materially reconcile to the general ledger.[Footnote 2]
Description of findings and results:
Total FUTA collections and refunds for the first 9 months of fiscal
year 2001 per IRS's master file materially reconciled to IRS's general
ledger.
B. Use Dollar Unit Sampling (DUS) to select a sample of combined FUTA
collection and refund transactions from the master file for the first
9 months of fiscal year 2001, using a confidence level of 80 percent,
a test materiality of $334 million, and an expected aggregate error
amount of $100.1 million.
Description of findings and results:
Use of DUS with a confidence level of 80 percent, a test materiality
of $334 million, and an expected aggregate error amount of $100.1
million resulted in a sample of 47 transactions for the first 9 months
of fiscal year 2001. Of this total, 46 transactions represented
collections and 1 transaction represented refunds.
C. For each sampled FUTA tax collection transaction:
1. Determine if collection amounts are accurately recorded by tracing
collection transaction amounts from IRS's master files to deposit
confirmation documents (e.g., federal tax deposit coupons).
Description of findings and results:
Based on supporting documentation, collection amounts were accurately
recorded for all 46 sampled FUTA collection transactions.
2. Determine if amounts were recorded to the appropriate period by
reviewing the date on source documents.
Description of findings and results:
Based on supporting documentation, collection amounts were recorded to
the appropriate period for all 46 sampled FUTA collection transactions.
3. Determine whether the transactions were properly categorized as
FUTA receipts by reviewing source documentation maintained in IRS's
files (e.g., tax returns).
Description of findings and results:
Based on supporting documentation, collection amounts were recorded in
the correct tax class[Footnote 3] for all 46 sampled FUTA collection
transactions.
4. Confirm FUTA transactions paid via the Electronic Federal Tax
Payment System (EFTPS)[Footnote 4] to determine whether the recorded
transactions are valid and reflect the proper amounts, are applied to
the proper tax period, and are properly categorized as FUTA receipts.
Description of findings and results:
Thirty-nine of the 46 sampled FUTA receipt transactions were paid via
EFTPS. The bank confirmation showed that all 39 transactions were
valid and had been recorded to the proper tax period and tax class and
for the proper amounts. The other seven receipts were paid by check or
bank deposit, and supporting documentation confirmed that these
transactions were also valid and properly recorded.
D. For each sampled FUTA tax refund transaction:
1. Confirm sampled FUTA refund transactions with Treasury's Financial
Management Service (FMS) by checking that the amount of the refund is
correct and that it was recorded to the appropriate period and tax
class.
Description of findings and results:
For the one sampled FUTA refund transaction, confirmation with
Treasury's FMS showed that the amount of the refund was correct and
that it was recorded to the appropriate period and tax class.
2. For FUTA tax returns, determine whether the taxpayer provided a
written explanation for exempt payments and whether the explanation
meets IRS's criteria for FUTA exempt wage payments.
Description of findings and results:
For the one sampled FUTA refund transaction, the taxpayer claimed an
exempt wage payment and provided a written explanation that met IRS
criteria.
3. For manual refunds, check to see that the appropriate supporting
documentation is attached and that individuals who approved the manual
refunds were authorized to do so.
Description of findings and results:
The one sampled FUTA refund transaction was not a manual refund.
II. Analytical Procedures:
A. Perform a predictive test on FUTA revenue collection and refund
data for the final 3 months of fiscal year 2001 to determine if
reported fiscal year 2001 revenue collections and refunds appear
consistent and reasonable. Project the expected fourth quarter FUTA
revenue collection and refund amounts for fiscal year 2001, based on
fiscal year 2000 quarterly amounts, and compare the projection to
actual revenue collections and refunds. If a material variance exists,
discuss with IRS to obtain an explanation/support.
Description of findings and results:
The predicted fourth quarter FUTA revenue collection and refund
amounts for fiscal year 2001 did not materially vary from the actual
amount of revenue collections and refunds reported during this period.
B. Perform an analytical test comparing reported FUTA net revenue
collections as of the interim test period (June 30, 2001) and as of
the end of the fiscal year (September 30, 2001) to the respective
prior periods.
Description of findings and results:
FUTA net revenue collections as of the interim test period and the
fiscal year ended September 30, 2001, increased by $129.0 million and
$63.5 million respectively. Both of these variances are less than the
FUTA test materiality of $334 million.
III. Other FUTA Procedures:
A. For each of the 12 months in fiscal year 2001, obtain and review
supporting documentation for monthly revenue reclassification
adjustments transmitted by IRS to Treasury's FMS. Check to see that
the supporting documentation agrees with the reclassification
adjustment transmitted to FMS.
Description of findings and results:
Documentation supported the monthly FUTA reclassification adjustment
amount transmitted to Treasury's FMS for all 12 months of fiscal year
2001.
B. For each of the 12 months in fiscal year 2001, obtain and review
supporting documentation for the monthly entry of FUTA refund data
onto the Government Online Accounting Link System (GOALS) to charge
back the UTF account for FUTA tax refunds issued. Check to see that
the supporting documentation agrees with the monthly entries reported
in GOALS.
Description of findings and results:
Documentation supported the monthly FUTA refund amount entered on
GOALS to charge UTF for FUTA tax refunds issued for all 12 months of
fiscal year 2001.
C. Compare fiscal year 2001 net FUTA collections per IRS's statement
of custodial activity and related footnote disclosures to (a) the
Treasury's Bureau of the Public Debt (BPD) accounting records for UTF
and (b) drafts of the Department of Labor's (DOL) fiscal year 2001
consolidated financial statements. Obtain explanations/support for
material variances.
Description of findings and results:
There were no significant variances between net FUTA collections per
IRS's statement of custodial activity and BPD's accounting records for
UTF. Similarly, there were no significant variances between IRS's
statement of custodial activity and related footnote disclosures and
drafts of DOL's fiscal year 2001 consolidated financial statements.
IV. Other procedures performed as part of the fiscal year 2001 IRS
financial statement audit:
A. From IRS's master files for the first 9 months of fiscal year 2001,
use DUS to select statistical samples of total tax (1) revenue
receipts and (2) refunds. For each sample item, test that the
collection or refund amount, tax period, and tax class from source
documentation agrees with amounts recorded in IRS's master files.
Description of findings and results:
Detailed testing of 188 revenue receipts and 19 refund sample
transactions showed that the collection or refund amount, tax period,
and tax class from source documents agreed with amounts recorded in
the IRS master files.
B. Review selected IRS service center campuses' monthly Treasury SF-
224 reconciliations to determine if IRS-reported revenue receipts were
properly classified and reconciled to Treasury FMS records. For
refunds, review selected IRS service center campuses' monthly Treasury
SF-224 reconciliations to determine if IRS-reported total refunds (all
tax classes) materially[Footnote 5] reconciled to Treasury FMS
records.[Footnote 6]
Description of findings and results:
Tax revenue receipts reported by selected IRS service center campuses
through the monthly Treasury SF-224 reconciliation process were
properly classified and materially agreed with Treasury FMS records.
Total refunds reported by the selected IRS service center campuses
through the monthly Treasury SF-224 reconciliation process materially
agreed with Treasury FMS records.
C. Perform a proof of cash for fiscal year 2001 to determine whether
tax revenue receipt balances by tax class, including FUTA, per IRS's
general ledger, materially agree with IRS's master files and Treasury
records. For refunds, perform a comparison of total refund balances
between the master file, the general ledger, and Treasury records.
Also, compare FUTA refunds per the master file to the general ledger.
Description of findings and results:
Fiscal year-end tax receipt balances for all tax classes, including
FUTA, per IRS's general ledger materially agreed with IRS's master
files and with Treasury records.
Fiscal year-end refund balances per IRS's general ledger materially
agreed with the master file and with Treasury records.
[End of section]
Footnotes:
[1] The master file is a detailed database containing taxpayer
information.
[2] Except where noted for certain procedures, significant or material
is defined as $334 million. This represents 1 percent of the UTF
collections made by federal and state government agencies for fiscal
year 2000.
[3] IRS assigns a tax class number to specific types of taxes. FUTA
taxes are tax class 8.
[4] EFTPS is a system for initiating tax payments electronically. In
2001, employers were required to use EFTPS to pay their FUTA taxes if
they made federal tax deposits exceeding $200,000 in 1999 or were
required to use EFTPS in 2000. The $200,000 threshold includes all
federal tax deposits, such as deposits for employment tax, excise tax,
and corporate income tax. Taxpayers who are not required to make
electronic deposits may voluntarily participate in EFTPS.
[5] For the purpose of this procedure and procedure IV.C, we define
material as $22 billion. This represents 1 percent of the estimated
total tax revenue receipts to be collected by IRS for fiscal year 2001.
[6] IRS maintains records of refund balances by tax class in its
master file and reports this information monthly to Treasury on the SF-
224. Treasury provides IRS with a Statement of Differences (TFS-6652),
which reports differences between total refunds reported by IRS on the
SF-224 and the total refunds per Treasury records.
