Applying Agreed-Upon Procedures
Federal Unemployment Taxes Gao ID: GAO-06-197R November 4, 2005We assisted the Department of Labor in ascertaining whether the net federal unemployment tax (FUTA) revenue distributed to the Unemployment Trust Fund (UTF) for the fiscal year ended September 30, 2005, is supported by the underlying records. We evaluated fiscal year 2005 activity affecting distributions to the 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 for performing and reporting the results of agreed-upon procedures. The procedures we agreed to perform relate to (1) transactions that represent the underlying basis of amounts distributed to the UTF and (2) key reconciliations of the Internal Revenue Service records to the Department of the Treasury records.
GAO-06-197R, Applying Agreed-Upon Procedures: Federal Unemployment Taxes
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November 4, 2005:
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
report, 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, 2005, is supported
by the underlying records. As agreed with your office, we evaluated
fiscal year 2005 activity affecting distributions to the 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 for 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 relate to (1) transactions that
represent the underlying basis of amounts distributed to the UTF and
(2) key reconciliations of the Internal Revenue Service records to the
Department of the Treasury records. The enclosure contains the agreed-
upon procedures and our findings and results from performing each of
the procedures.
We were not engaged to and did not conduct an examination, the
objective of which would have been the expression of an opinion on the
net amount of FUTA taxes distributed to the 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 October 27, 2005.
We provided a draft of this report to IRS for review and comment. IRS
agreed with the results and findings presented in this report.
This report 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
report is a matter of public record, and its distribution is not
limited. Copies are available to others upon request. This report is
also available at no charge on GAO's Web site at http://www.gao.gov. If
you have any questions, please call me at (202) 512-3406. Contact
points for our Offices of Congressional Relations and Public Affairs
may be found on the last page of this report.
Sincerely yours,
Signed by:
Steven J. Sebastian:
Director:
Financial Management and Assurance:
Enclosure:
Unemployment Trust Fund Procedures and Results:
I. Procedures on detailed transactions:
A. Obtain from the Internal Revenue Service (IRS) total Federal
Unemployment Tax (FUTA) collections and refunds reflecting the first 8
months of fiscal year 2005 posted to the master file.[Footnote 1]
Compare FUTA collections and refund data per the master file to
determine if they agree in all material respects[Footnote 2] to IRS's
general ledger.
Description of findings and results:
Total FUTA collections and refunds for the first 8 months of fiscal
year 2005 per IRS's master file materially agreed with 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 8
months of fiscal year 2005, using a confidence level of 80 percent, a
test materiality of $428 million, and an expected aggregate error
amount of $128 million.
Description of findings and results:
Use of DUS with a confidence level of 80 percent, a test materiality of
$428 million, and an expected aggregate error amount of $128 million
resulted in a sample of 38 transactions for the first 8 months of
fiscal year 2005. All of the 38 transactions represented FUTA
collections.[Footnote 3]
C. For each sampled FUTA tax collection transaction:
1. Trace collection transaction amounts from IRS's master files to
supporting documents (e.g., federal tax deposit coupons) to determine
whether collection amounts are accurately recorded.
Description of findings and results:
Based on supporting documentation, collection amounts were accurately
recorded for all 38 sampled FUTA collection transactions.
2. Compare the date in the master file with the date on source
documents to determine whether amounts were recorded to the appropriate
period.
Description of findings and results:
Based on supporting documentation, collection amounts were recorded to
the appropriate period for all 38 sampled FUTA collection transactions.
3. Inspect source documentation maintained in IRS's files (e.g., tax
returns) to determine whether the transactions were properly classified
as FUTA receipts.
Description of findings and results:
Based on supporting documentation, collection amounts were recorded in
the correct tax class[Footnote 4] for 37 of the 38 sampled
transactions. One sampled transaction, which was mistakenly reported as
a FUTA receipt by the taxpayer, should have been reported as a Federal
Insurance Contributions Act (FICA) tax payment (tax class 1). IRS
discovered the error and made the correction after our sample cutoff
date but before the end of the fiscal year.
Based on our testing results, the net most likely error for the first 8
months of fiscal year 2005 is $155 million. The net upper error limit
is $451 million.
4. Confirm FUTA transactions paid via the Electronic Federal Tax
Payment System (EFTPS)[Footnote 5] to determine whether the recorded
transactions are valid and reflect the proper amounts, are applied to
the proper tax period, and are properly classified as FUTA receipts.
Description of findings and results:
Of the 38 sampled FUTA collection transactions, 32 were paid via EFTPS.
The bank confirmations showed that 31 of the 32 transactions were valid
and had been recorded to the proper tax period and tax class and for
the proper amounts. The remaining sampled EFTPS transaction, which was
mistakenly reported as a FUTA receipt by the taxpayer, should have been
reported as a FICA tax payment (tax class 1). IRS discovered the error
and made the correction after our sample cutoff date but before the end
of the fiscal year. This is the same error noted above in procedure
I.C.3.
II. Analytical procedures:
A. Perform a predictive test on FUTA revenue collections and refunds
for the final four months of fiscal year 2005 and determine whether the
predicted FUTA collection and refund amounts vary materially[Footnote
6] from the actual FUTA revenue collection and refund amounts per IRS's
records for this period.
Description of findings and results:
The predicted FUTA revenue collection and refund data amounts for the
final 4 months of fiscal year 2005 did not materially vary from the
amounts for revenue collections and refunds per IRS's records for this
period.
III. Other FUTA procedures:
A. For each of the 12 months in fiscal year 2005, obtain supporting
documentation for monthly revenue reclassification adjustments
transmitted by IRS to the Financial Management Service (FMS). Compare
the supporting documentation with the reclassification adjustments
transmitted to FMS.
Description of findings and results:
Documentation was consistent with the monthly FUTA reclassification
adjustment amount transmitted to FMS for all 12 months of fiscal year
2005.
B. For each of the 12 months in fiscal year 2005, obtain supporting
documentation for the monthly entry of FUTA refund data into the
Government Online Accounting Link System (GOALS) to charge back the
Unemployment Trust Fund (UTF) account for FUTA tax refunds issued.
Compare the supporting documentation with the monthly entries reported
on GOALS.
Description of findings and results:
Documentation was consistent with the monthly FUTA refund amount
entered into GOALS to charge the UTF for FUTA tax refunds issued for
all 12 months of fiscal year 2005.
C. Compare fiscal year 2005 net FUTA collections per IRS's draft
statement of custodial activity and related footnote disclosures to (a)
the Department of the Treasury's Bureau of the Public Debt (BPD)
accounting records for UTF and (b) drafts of the Department of Labor's
(DOL) consolidated financial statements to determine whether any
significant variances exist.
Description of findings and results:
There were no significant variances[Footnote 7] between net FUTA
collections per IRS's draft statement of custodial activity and BPD's
accounting records for UTF. Similarly, there were no significant
variances between IRS's draft statement of custodial activity and
related footnote disclosures and drafts of DOL's fiscal year 2005
consolidated financial statements.
IV. Other procedures performed as part of the fiscal year 2005 IRS
financial statement audit:
A. From IRS's master files for the first 8 months of fiscal year 2005,
use DUS to select statistical samples of (1) total tax revenue receipts
and (2) refunds. For each sample item, compare the receipt or refund
amount, tax period, and tax class from source documentation with those
recorded in IRS's master files.
Description of findings and results:
The receipt or refund amount, tax period, and tax class from source
documentation for 158 revenue receipts and 48 refund sample
transactions were consistent with those recorded in IRS's master files.
B. Obtain selected IRS service center campuses' monthly Treasury FMS
224 reconciliations[Footnote 8] and determine whether IRS-reported
revenue receipts were properly classified and materially[Footnote 9]
reconciled to Treasury FMS records. For refunds, obtain selected IRS
service center campuses' monthly Treasury FMS 224 reconciliations and
determine whether IRS-reported total refunds (all tax classes)
materially reconciled to Treasury FMS records.
Description of findings and results:
Tax revenue receipts reported by selected IRS service center campuses
through the monthly Treasury FMS 224 reconciliation process were
properly classified and materially reconciled to Treasury FMS records.
Total refunds reported by selected IRS service center campuses through
the monthly Treasury FMS 224 reconciliation process materially
reconciled to Treasury FMS records.
C. Compare tax revenue receipt balances by tax class, including FUTA,
recorded in IRS's general ledger with IRS's master files and Treasury
records to determine if they agree in all material respects. For
refunds, compare total refund balances between the master files, the
general ledger, and Treasury records to determine if they agree in all
material respects.
Description of findings and results:
Tax receipt balances for all tax classes, including FUTA, per IRS's
general ledger, materially agreed with IRS's master files and Treasury
records.
Refund balances per IRS's general ledger materially agreed with the
master files and with Treasury records.
(196032):
FOOTNOTES
[1] The master file is a detailed database containing taxpayer
information.
[2] For this procedure, "material" is defined as $428 million. This
represents 1 percent of net Unemployment Trust Fund collections
reported for fiscal year 2004.
[3] Consequently, procedures agreed to regarding refund transactions
are not applicable.
[4] IRS assigns a tax class number to specific types of taxes. FUTA
taxes are tax class 8.
[5] EFTPS is a Financial Management Service system maintained by two
financial agents for the government. EFTPS is used for initiating tax
payments electronically. Employers who make federal tax deposits
exceeding $200,000 must use EFTPS to pay their FUTA taxes. 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.
[6] For this procedure, "material" is defined as $428 million.
[7] For this procedure, "significant" is defined as $428 million.
[8] At the end of each month, each IRS campus provides Treasury its FMS
224 (Statement of Transactions) generated from IRS's general ledger
reporting receipts and refunds journalized during the month. Treasury
reconciles the amounts on the FMS 224 with its records and provides IRS
a Statement of Differences for any differences identified.
[9] For this procedure and procedure IV.C, we define "material" as $20
billion. This represents 1 percent of the estimated total tax revenue
receipts to be collected by IRS in fiscal year 2005.
