Applying Agreed-Upon Procedures
Highway Trust Fund Excise Taxes Gao ID: GAO-03-360R January 23, 2003We evaluated fiscal year 2002 activity affecting distributions to the Highway Trust Fund (HTF).
The Treasury Office of Tax Analysis' (OTA) fiscal year 2002 estimates of transfers from the HTF to the Aquatic Resources Trust Fund and the Land and Water Conservation Fund contained an additional transfer of $115.5 million from the HTF to the general fund. OTA officials advised us that this was the result of an update to Treasury's interpretation of Section 9503 of The Internal Revenue Code. Treasury's most recent interpretation appears to be consistent with the Code. As a result of this interpretation, net excise tax distributions to the HTF for fiscal year 2002 and for future years were, and will continue to be, less than what they would have been under the previous interpretation.
GAO-03-360R, Applying Agreed-Upon Procedures: Highway Trust Fund Excise Taxes
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GAO-03-360R:
United States General Accounting Office:
Washington, DC 20548:
January 23, 2003:
The Honorable Kenneth M. Mead:
Inspector General:
Department of Transportation:
Subject: Applying Agreed-Upon Procedures: Highway Trust Fund Excise
Taxes:
Dear Mr. Mead:
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 excise tax
revenue distributed to the Highway Trust Fund (HTF) for the fiscal year
ended September 30, 2002, is supported by the underlying records. As
agreed with your office, we evaluated fiscal year 2002 activity
affecting distributions to the HTF.
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 include (1) detailed tests of
transactions that represent the underlying basis of amounts distributed
to the HTF, (2) review of the Internal Revenue Service‘s (IRS)
quarterly HTF certifications, (3) review of the Department of the
Treasury Financial Management Service (FMS) adjustments to the HTF for
fiscal year 2002, (4) review of certain procedures in the Treasury
Office of Tax Analysis‘ (OTA) process for estimating amounts to be
distributed to the HTF for the fourth quarter of fiscal year 2002, (5)
comparison of net excise tax distributions to the HTF during fiscal
year 2002 and amounts reported in the financial statements prepared by
the Bureau of the Public Debt (BPD) for the HTF and the HTF‘s draft
financial statements, and (6) review of key reconciliations of IRS
records to Treasury records. The enclosure contains the agreed-upon
procedures and our findings from performing each of the procedures.
While performing these procedures, we became aware of a change that we
wanted to bring to your attention. Specifically, OTA‘s fiscal year 2002
estimates of transfers from the HTF to the Aquatic Resources Trust Fund
and the Land and Water Conservation Fund contained an additional
transfer of $115.5 million from the HTF to the general fund. OTA
officials advised us that this was the result of an update to
Treasury‘s interpretation of Section 9503 of the Internal Revenue Code.
Treasury‘s most recent interpretation appears to be consistent with the
Code. As a result of this interpretation, net excise tax distributions
to the HTF for fiscal year 2002 and for future years were, and will
continue to be, less than what they would have been under the previous
interpretation.
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
amount of net excise taxes distributed to the HTF. 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. [Footnote 1] We completed the agreed-upon procedures
on January 10, 2003.
We provided a draft of this report to IRS and Treasury officials, along
with its enclosure, for review and comment. They 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 Transportation 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 purpose.
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 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:
Director:
Financial Management and Assurance:
Enclosure:
[End of correspondence]
Enclosure:
Highway Trust Fund Excise Tax Procedures and Results:
I. Detailed tests of transactions that represent the underlying basis of
amounts distributed to the HTF in fiscal year 2002:
A. Nonrepresentative selection of tax returns from the quarter ended
September 30, 2001 [Footnote 2].
1. For the quarter ending September 30, 2001, select the 30 largest
excise tax returns containing excise taxes related primarily to the HTF
and the Airport and Airway Trust Fund (AATF), on the basis of total tax
liability [Footnote 3] amount from IRS‘s master file. [Footnote 4]
Description of findings and results:
We selected the 31 largest excise tax returns from the quarter ended
September 30, 2001, for testing. [Footnote 5] The selection was based
on the total tax liability amount and the type of taxes owed, for each
return, from IRS‘s master file.
The total tax liability amount related to these 31 returns was
approximately $8.1 billion, or 64 percent of the total excise tax
liability amount ($12.6 billion [Footnote 6]) for all excise tax types
for the quarter ended September 30, 2001.
Of these 31 returns, 25 contained primarily HTF-related taxes and 6
contained primarily AATF taxes.
2. For each of 25 returns related primarily to the HTF, we performed the
following procedures, which resulted in our testing approximately $6.6
billion in prorated collections [Footnote 7] affecting fiscal year 2002
distributions to the HTF:
(a) Trace the liability amount for abstracts [Footnote 8] 59, 60, and
62 from the tax return to IRS's master file.
Description of findings and results:
The liability amount for abstracts 59, 60, and 62 on the tax returns
agreed with IRS‘s master file for 24 of the 25 selected items. On one
return, IRS netted credits for abstracts 59, 60, and 62 into abstract
60. This resulted in a difference between the liability amounts, per
abstract, on the tax return and the master file, but had no effect on
the overall liability of the three abstracts combined. This is also
discussed in the description of findings and results for Step 2 (c).
(b) Check the mathematical accuracy of the taxpayer‘s calculations on
the tax return for the selected abstracts.
Description of findings and results:
The taxpayers‘ calculations on all 25 selected returns were
mathematically correct.
(c) Recompute the prorated collection amount for the selected abstracts
based on information from the master file and compare this amount to
the amount from the Collection Certification System audit file.
[Footnote 9]
Description of findings and results:
The recomputed prorated collection amounts for the three selected
abstracts agreed with amounts in IRS‘s Collection Certification System
audit file for 23 of the 25 returns. On the remaining two returns, IRS
made data entry errors when recording credits claimed by the taxpayer.
On one return, IRS did not record a credit the taxpayer claimed for
aviation fuel. As a result, IRS understated prorated collections to the
HTF by approximately $2.3 million. [Footnote 10] On the other return,
IRS combined the credit amounts for abstracts 59, 60, and 62 and
recorded the total into abstract 60. This resulted in the individual
prorated collection amounts for the three abstracts being misstated.
However, there was no significant effect on IRS-certified amounts to
the HTF since all three abstracts are related to the HTF. [Footnote 11]
IRS corrected these errors after we brought them to its attention. The
corrections were included in IRS‘s subsequent trust fund certifications
for fiscal year 2002. Consequently, there was no net impact on fiscal
year 2002 distributions to the HTF resulting from these errors.
B. Dollar unit sample (DUS) of transactions from the quarters ended
December 31, 2001, and March 31, 2002:
1. Sampling.
(a) Obtain excise tax assessments and collection data from IRS's master
file for the first 6 months of fiscal year 2002. Determine if excise tax
collections per master file agree with IRS's general ledger. Reconcile
total excise tax collections from the master file to total excise tax
collections from the Collection Certification System audit files to
determine if they materially [Footnote 12] agree.
Description of findings and results:
Excise tax collections for the first 6 months of fiscal year 2002 per
the master file materially agreed with IRS‘s general ledger and with
total excise tax collections from the Collection Certification System.
(b) Select a random attribute sample of 78 excise tax assessments from
IRS‘s master file. [Footnote 13] Compare assessment and receipt
information for each sample item from the master file to the assessment
and receipt information in the Collection Certification System to
determine if assessments and receipts from the master file are
contained in the Collection Certification System.
Description of findings and results:
For each sample item, assessments and receipts from the master file were
contained in the Collection Certification System.
(c) To determine if the Collection Certification System properly
summarized the prorated collections, total the prorated collections for
selected abstracts [Footnote 14] from the audit files and compare these
amounts to amounts in the Reports of Excise Tax Collection. [Footnote
15]
Description of findings and results:
The Collection Certification System properly summarized the prorated
collections for all of the selected abstracts related to the HTF and the
AATF. Prorated collections for the above-mentioned trust funds from the
audit files agreed with the corresponding amounts in the Reports of
Excise Tax Collection.
(d) Separate the total population of prorated collections from the
audit files into the following distinct populations: (1) HTF, (2) AATF,
and (3) other excise tax abstracts. Use DUS to select a sample of
prorated excise tax collections from the HTF population.
Description of findings and results:
Use of DUS with a confidence level of 80 percent, a test materiality of
$315 million, and an expected aggregate error amount of $94.5 million
resulted in a sample of 94 [Footnote 16] prorated collections for the
first 6 months of fiscal year 2002.
(e) Select samples of prorated excise tax collections from the two non-
HTF populations.
Description of findings and results:
Use of DUS with a confidence level of 80 percent, a test materiality of
$91 million, and an expected aggregate error amount of $27.3 million
resulted in a sample of 62 [Footnote 17] prorated collections for the
first 6 months of fiscal year 2002 for the AATF.
A random attribute sample of 45 items from the population of prorated
tax collections related to all excise taxes other than the HTF and the
AATF was selected for testing. [Footnote 18]
2. Detailed tests of transactions.
(a) For each prorated excise tax collection sampled from the HTF
population:
* Check to see that the assessment amount on the tax return, for the
sampled abstract, agrees with the amount recorded in IRS's master file.
Description of findings and results:
The assessment amounts on the tax returns agreed with the amounts
recorded in IRS‘s master file for 76 of the 94 sampled items. On 18 of
the sampled items, IRS data entry errors erroneously decreased the
assessment amount for the abstract. As a result, the prorated amounts
for these sample items were understated by an aggregate amount of
$10.5 million. [Footnote 19]
IRS became aware of and corrected these errors. The correction was
included in IRS‘s trust fund certification total for the quarter ended
June 30, 2002. Consequently, there was no net impact on fiscal year
2002 distributions to the HTF resulting from these errors.
* Check the mathematical accuracy of the taxpayers' calculations on the
tax returns for the related abstract.
Description of findings and results:
The taxpayers‘ calculations on the tax returns for the related abstracts
were mathematically correct for all of the sampled abstracts.
* Recompute the prorated collection amount based on information from
the master file and compare this amount to the sample items selected
from the Collection Certification System audit file. [Footnote 20]
Description of findings and results:
The recomputed prorated collection based on information from the
master file agreed with the amounts in all of the sampled items.
(b) Perform detailed testing on the two samples of prorated collections
from the non-HTF populations to determine if they contain any HTF
excise tax collections.
Description of findings and results:
The two samples of prorated collections from the non-HTF populations
did not contain any HTF excise tax collections.
(c) Evaluate the results of conducting steps (a) and (b).
Description of findings and results:
For the first 6 months of fiscal year 2002, the net most likely error is
($14.1 million) with an upper error limit of ($198.2 million) at the 80
percent confidence level. Collections go through additional
calculations to produce certification amounts for distribution.
Consequently, the magnitude of the error cannot be quantified with
respect to the impact on recorded distributions to the HTF.
II. Review of IRS‘s quarterly HTF certifications:
A. Receipt certifications.
Perform the following steps on IRS‘s HTF receipt certifications for the
quarters ended September 30, 2001, December 31, 2001, March 31, 2002,
and June 30, 2002: [Footnote 21]
1. Inspect the certification letters [Footnote 22] for authorizing
signatures.
Description of findings and results:
The HTF certification letters for all four quarters had authorizing
signatures.
2. Determine if evidence exists that the supervisor or another analyst
checked the certification letters and supporting worksheets.
Description of findings and results:
There was evidence that another analyst and a supervisor checked the
certification letters and supporting worksheets for all four quarters.
3. Recalculate the totals on the certification letters to determine if
they are mathematically correct.
Description of findings and results:
The totals on the certification letters for all four quarters were
mathematically correct.
4. Trace the certified amounts for diesel fuel tax (abstract 60),
gasoline tax (abstract 62), and tax on 10 percent gasohol (abstract
59)23 from the certification letters back to the Reports of Excise Tax
Collection. [Footnote 24]
Description of findings and results:
The certified amounts for diesel fuel tax (abstract 60), gasoline tax
(abstract 62), and tax on 10 percent gasohol (abstract 59) per the
certification letters agreed with the related Reports of Excise Tax
Collection for all four quarters.
However, IRS omitted $847.5 million in excise tax collections from its
normal receipt certification for the quarter ended March 31, 2002,
because of processing delays. Specifically, IRS did not record
information from two large excise tax returns into its master file in
time for inclusion in the Report of Excise Tax Collection. As a result,
IRS performed a supplemental certification in order to timely certify
an additional $714.1 million to the Highway Account and $133.4 million
to the Mass Transit Account. We (1) recalculated the totals on the
supplemental certification letters and (2) traced the certified amounts
for diesel fuel tax (abstract 60), gasoline tax (abstract 62), and tax
on 10 percent gasohol (abstract 59) from the supplemental certification
letters back to the two supporting tax returns. We did not find any
discrepancies.
5. Review the Reports of Excise Tax Collection used in the
certification to determine if they contain significant [Footnote 25]
collections from prior quarters.
Description of findings and results:
IRS-certified collections to the HTF did not contain significant prior
quarter collections in any of the four quarters.
6. Heavy vehicle use taxes, which go to the HTF, are reported on Form
2290 and are not included in the Collection Certification System. Trace
these amounts from the Highway Account certification letters to the
master file.
Description of findings and results:
Heavy vehicle use tax per the Highway Account certification letters
agreed with the master file for all four quarters.
7. Review the distribution rates used by IRS to determine whether the
distribution rates for diesel fuel tax (abstract 60), gasoline tax
(abstract 62), and tax on 10 percent gasohol (abstract 59) agree with
the applicable laws. [Footnote 26]
Description of findings and results:
We saw no evidence that the distribution rates used by IRS for diesel
fuel tax (abstract 60), gasoline tax (abstract 62), and tax on 10
percent gasohol (abstract 59) did not agree with the applicable laws in
effect during the four quarters.
B. Refund/credit reclassification. [Footnote 27]
Perform the following steps on IRS‘s HTF refund/credit certifications
for the quarters ended December 31, 2001, March 31, 2002, June 30,
2002, and September 30, 2002: [Footnote 28]
1. Inspect the certification letters for authorizing signatures.
Description of findings and results:
The certification letters for all four quarters had authorizing
signatures.
2. Determine if evidence exists that the certification letters and
accompanying schedules [Footnote 29] were checked by the supervisor or
another analyst.
Description of findings and results:
There was evidence that another analyst and a supervisor checked the
certification letters and accompanying schedules for all four quarters.
3. Recalculate the totals on the certification letters and accompanying
schedules to determine if they are mathematically correct.
Description of findings and results:
The totals on the certification letters and accompanying schedules were
mathematically correct for all four quarters.
4. Trace the refund and credit amounts for diesel and gasoline
[Footnote 30] from the schedules accompanying the certification letters
to other summary refund/credit schedules. These other refund/credit
summary schedules summarize refund and credit data obtained from
service center campuses‘ records.
Description of findings and results:
The refund and credit amounts for gasoline tax and diesel tax on the
schedules accompanying the certification letters agreed with the
amounts on the summary schedules for the quarters ended March 31, 2002,
and June 30, 2002. IRS‘s certification letter for the quarter ended
December 31, 2001, included erroneous amounts for gasohol and bus
diesel fuel refunds. As a result, IRS overstated its HTF refund
certification by approximately $81 million. After we brought this to
its attention, IRS made a correction on the subsequent certification.
As a result, there was no net impact on fiscal year 2002 distributions
to the HTF.
On IRS‘s refund and credit certification for the quarter ended
September 30, 2002, the IRS analyst entered data from the summary
schedules into the wrong sections of a schedule accompanying the
certification letter. As a result, IRS reported $152.2 million in HTF
refunds as credits and $38.4 million in HTF credits as refunds. There
was no impact on distributions to the HTF because the BPD deducts the
total amount of refunds and credits in calculating distributions to the
trust fund.
III. Review of FMS adjustments:
Perform the following steps on FMS adjustments to the HTF excise tax
distributions for the quarters ended September 30, 2001, December 31,
2001, March 31, 2002, and June 30, 2002.
A. Compare the FMS adjustments made to the HTF for fiscal year 2002 with
original OTA estimates and IRS-certified amounts to see if they agree
with the supporting schedules. [Footnote 31]
Description of findings and results:
For the FMS adjustments made to the HTF accounts (Highway and Mass
Transit), the original OTA estimates and IRS-certified amounts agreed
with the supporting schedules for all four quarters.
B. Recompute the difference between the OTA estimates and final IRS-
certified amounts to see if the amounts agree with the differences
computed by FMS.
Description of findings and results:
The independently recalculated differences between the OTA estimates and
the final IRS-certified amounts for the Highway Account agreed with the
differences computed by FMS for all four quarters.
These amounts were: [Footnote 32]
* for the quarter ended September 30, 2001, $81,501,000;
* for the quarter ended December 31, 2001, ($29,699,000);
* for the quarter ended March 31, 2002, $7,806,000; and;
* for the quarter ended June 30, 2002, ($378,864,000).
The independently recalculated differences between the OTA estimates and
the final IRS-certified amounts for the Mass Transit Account agreed
with the differences computed by FMS for all four quarters.
These amounts were:
* for the quarter ended September 30, 2001, $11,830,000;
* for the quarter ended December 31, 2001, $52,115,000;
* for the quarter ended March 31, 2002, ($1,262,000); and;
* for the quarter ended June 30, 2002, ($9,697,000).
IV. Procedures performed on excise tax distributions to the HTF for the
quarter ended September 30, 2002:
A. Determine if OTA‘s process for identifying and incorporating into
its trust fund estimates [Footnote 33] the effect of new legislation on
excise tax receipts was in place during fiscal year 2002.
Description of findings and results:
OTA‘s process for identifying and incorporating into its trust fund
estimates the effect of new legislation on excise tax receipts was in
place during fiscal year 2002. OTA prepares a tax rate table [Footnote
34] to capture information relating to legislation that affects tax
rates, tax basis, accounts, and deposit rules in effect during the tax
period.
B. Determine if there is evidence of review of the transfer forms and
supporting schedules.
Description of findings and results:
There was evidence that another OTA economist reviewed the transfer
forms and supporting schedules for the semimonthly transfers affecting
distributions to the HTF for the quarter ended September 30, 2002.
C. Recalculate the totals on the transfer forms to determine if they are
mathematically correct.
Description of findings and results:
The totals on the transfer forms affecting distributions to the HTF for
the quarter ended September 30, 2002, were mathematically correct.
D. Trace the transfer amounts for diesel fuel tax (abstract 60),
gasoline tax (abstract 62), tax on 10 percent gasohol (abstract 59),
and heavy vehicle use tax, [Footnote 35] from the transfer letter,
through the supporting schedules and back to the related source
documents. [Footnote 36]
Description of findings and results:
The transfer amounts for diesel fuel tax (abstract 60), gasoline tax
(abstract 62), tax on 10 percent gasohol (abstract 59), and heavy
vehicle use tax from the transfer forms affecting distributions to the
HTF for the quarter ended September 30, 2002, agreed with the
supporting schedules and source documents.
V. Other procedures:
A. Compare total fiscal year 2002 excise taxes distributed to the HTF
with (1) draft HTF fiscal year 2002 financial statements and (2) BPD
fiscal year 2002 financial statements for the HTF to determine if they
agree.
Description of findings and results:
Fiscal year 2002 excise taxes of $32.2 billion distributed to the HTF
agreed with the amount reported on the draft HTF financial statements
but did not agree with the amount reported on the BPD fiscal year 2002
financial statements for the HTF. The BPD fiscal year 2002 financial
statements for the HTF reported excise tax distributions to the HTF of
$32.6 billion. The difference is due to the $388.6 million downward FMS
adjustment for the quarter ended June 30, 2002 -- $378.9 million to the
Highway Account and $9.7 million to the Mass Transit Account, which FMS
recorded in December 2002. This was after the November 1, 2002, issue
date of BPD‘s financial statements for the HTF.
B. Procedures performed as part of fiscal year 2002 IRS financial
statement audit:
1. From IRS‘s master files for the first 8 months of fiscal year 2002,
use DUS to select statistical samples of (1) total tax revenue receipts
and (2) refunds. For each sample item, test that the collection or
refund amount, tax period, and tax class [Footnote 37] from source
documentation agree with the information recorded in IRS‘s master
files.
Description of findings and results:
Detailed testing of 153 revenue receipts and 50 refund sample
transactions showed that the collection or refund amount, tax period,
and tax class from source documents agreed with the information
recorded in IRS‘s master files.
2. 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 38] reconciled to Treasury FMS
records. [Footnote 39]
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.
3. Perform procedures to determine whether tax revenue receipt balances
by tax class, including excise taxes, 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
excise tax refunds per the master file to the general ledger.
Description of findings and results:
Tax receipt balances for all tax classes, including excise taxes, per
IRS‘s general ledger, materially agreed with IRS‘s master files and
with Treasury records.
Refund balances per IRS‘s general ledger materially agreed with the
master file and with Treasury records.
[End of enclosure]
Footnotes:
[1] In our report on the results of our audit of IRS‘s fiscal year 2002
financial statements, we noted a material weakness in IRS‘s financial
reporting process (Financial Audit: IRS‘s Fiscal Year 2002 and 2001
Financial Statements, GAO-03-243, November 15, 2002). A component of
this process includes IRS‘s ability to allocate excise tax collections
to the appropriate trust funds at the time deposits are made. This
condition affects the adequacy of the distributions of federal excise
tax revenue to recipient trust funds and is a continuation of an issue
that we have reported on in prior years.
[2] Since certifications are not completed until 6 months after the end
of the quarter, the certification and corresponding FMS adjustment for
the quarter ended September 30, 2001, were completed in March 2002, and
thus affected fiscal year 2002 distributions to the HTF.
[3] Although the certifications are based on amounts collected, we used
the tax liability amounts to identify the taxpayers paying the largest
amounts of excise taxes. Our review shows that these taxpayers
generally pay their excise taxes in full each quarter.
[4] The master file is a detailed database containing taxpayer
information.
[5] Per our agreement with the Department of Transportation Inspector
General regarding the AATF agreed-upon procedures, we selected one
additional AATF related return in order to test a minimum of six AATF
returns.
[6] Per IRS, this was the total excise tax liability amount, from its
master file, for the quarter ended September 30, 2001.
[7] IRS certifies to trust funds the amount of actual excise taxes
collected. Because there are occasions in which taxpayers have not
fully paid their tax liability at the time of IRS‘s certification, IRS
must allocate the amount of payments actually received among the
different excise taxes reported as owed on the taxpayer‘s return. This
proration is based on (1) the amount of tax reported by the taxpayer or
assessment amount and (2) the amount of taxpayer payments and credits.
IRS‘s Collection Certification System prorates a taxpayer‘s payments
proportionately among all taxes reported on the tax return. For
example, if a taxpayer reports that it owes $4 million for gasoline
tax, $2 million for diesel fuel tax, and $1 million for gasohol tax on
its Form 720 Quarterly Federal Excise Tax Return, but has paid IRS only
$3.5 million at the time IRS performs its certification, the program
prorates the $3.5 million in the following manner: $2 million to
gasoline tax, $1 million to diesel fuel tax, and $500,000 to gasohol
tax.
[8] The abstract numbers identify the tax type (e.g., gasoline and
ticket tax) and are used as the basis for determining the distribution
of the excise taxes to the various trust funds. Abstract numbers are
preprinted on the Form 720 Quarterly Federal Excise Tax Return and are
used by the taxpayer to report excise tax assessments. If the return
was related to the HTF, we selected (1) tax on 10 percent gasohol
(abstract 59), (2) diesel fuel tax (abstract 60), and (3) gasoline tax
(abstract 62). If the return was related to the AATF, we selected (1)
tax on transportation of persons by air-ticket tax (abstract 26), (2)
tax on use of international air facilities (abstract 27), and (3) tax
on transportation of property by air (abstract 28). The tax amounts
related to the selected abstracts for each trust fund are the largest
tax amounts reported on the taxpayer‘s excise tax return and make up
over 87 percent of the total amount certified to the HTF and over 90
percent of the total amount certified to the AATF.
[9] The Collection Certification System produces what IRS refers to as
"audit files." These audit files contain the individual prorated
collections, by abstract and taxpayer identification number, that make
up the certified total amounts for each abstract.
[10] As explained in footnote 7, IRS prorates the amount of excise tax
collections based on (1) the amount of tax reported by the taxpayer or
assessment amount and (2) the amount of taxpayer payments and credits.
When IRS omitted the credit, it understated the amount available for
allocation. As a result, IRS understated the prorated collections to
the HTF.
[11] IRS calculates certified collections to the HTF using the total
prorated collection amount, tax rate, and distribution rates to trust
funds and trust fund accounts, for each tax type. Although the prorated
collections amounts are primarily distributed to the HTF for all three
of the abstracts, the distribution rates vary. For 10 percent gasohol
(abstract 59), the distribution rates are 7.64 cents/gallon to the
Highway Account, 2.86 cents/gallon to the Mass Transit Account, 0.1
cents/gallon to the Leaking Underground Storage Tank Trust Fund, and
2.5 cents/gallon to the General Fund. For diesel fuel (abstract 60) the
distribution rates are 21.44 cents/gallon to the Highway Account, 2.86
cents/gallon to the Mass Transit Account, and 0.1 cents/gallon to the
Leaking Underground Storage Tank Trust Fund. For gasoline (abstract 62)
the distribution rates are 15.44 cents/gallon to the Highway Account,
2.86 cents/gallon to the Mass Transit Account, and 0.1 cents/gallon to
the Leaking Underground Storage Tank Trust Fund.
[12] For the purpose of this reconciliation, material is defined as 1
percent of the total Form 720-related excise tax collections, related
to the quarters ended December 31, 2001, and March 31, 2002. For fiscal
year 2002, the materiality amount was $210 million for the two quarters
combined.
[13] For this sample, if one or no errors were found in testing the 78
items, we would be 90 percent confident that the error rate in the
population would not exceed 5 percent.
[14] The selected abstracts include the following: (1) tax on 10
percent gasohol (abstract 59), (2) diesel fuel tax (abstract 60), (3)
gasoline tax (abstract 62), (4) tax on transportation of persons by air
(abstract 26), (5) tax on use of international air facilities (abstract
27), (6) tax on transportation of property by air (abstract 28), and
(7) tax on aviation fuel for commercial use (abstract 77). The tax
amounts for the three HTF-related abstracts make up over 87 percent of
the total amount certified to the HTF and the tax amounts for the four
AATF-related abstracts make up over 96 percent of the total amounts
certified to the AATF.
[15] The Report of Excise Tax Collection contains prorated collections,
classified by abstracts, that serve as the basis for IRS‘s quarterly
trust fund certifications.
[16] The planned sample size using DUS was 136 items. DUS selects
dollars versus specific transaction items by dividing the population by
dollar intervals. The dollar interval for the HTF was $116 million.
Accordingly, any item with a dollar value matching or exceeding the
sampling interval would be selected, whereas items less than the
sampling interval might not be selected. For example, an item of $232
million would cover two dollar-intervals, but represent one sample
item. Due to large dollar items covering more than one interval, the 94
unique sampled transactions selected represent 136 dollar-intervals.
[17] The planned sample size using DUS was 111 items. As explained in
footnote 16, DUS selects dollars versus specific transaction items by
dividing the population by dollar intervals. The dollar interval for
the AATF was $34 million. Due to large dollar items covering more than
one interval, the 62 unique sampled transactions selected represent 111
dollar-intervals.
[18] For this sample, if no errors are found in testing the 45 items,
we would be 90 percent confident that the error rate in the population
would not exceed 5 percent.
[19] As explained in footnote 7, IRS prorates the amount of excise tax
collections based on (1) the amount of tax reported by the taxpayer or
assessment amount and (2) the amount of taxpayer payments and credits.
Since IRS‘s Collection Certification System is programmed to allocate no
more than 100 percent of the tax assessment, decreasing the assessment
amount will decrease the amount available for allocation. For example,
if the taxpayer reports that it owes $1 million for gasoline tax and
paid $1 million, but IRS erroneously decreases the tax owed by $200,000,
IRS‘s Collection Certification System will allocate only $800,000 to
gasoline tax.
[20] The purpose of this test is to determine whether the Collection
Certification System prorates correctly. This test is not intended to
determine whether amounts provided to the system are correct.
[21] Since certifications are not completed until 6 months after the
end of the quarter, the certification and corresponding FMS adjustment
for the quarter ended September 30, 2002, will not be completed in time
to affect the recorded fiscal year 2002 distributions to the HTF.
[22] IRS prepares two certification letters for the HTF each quarter:
one for the Highway Account and the other for the Mass Transit Account.
[23] The certified amounts for diesel fuel tax (abstract 60), gasoline
tax (abstract 62), and tax on 10 percent gasohol (abstract 59), along
with the heavy vehicle use tax (traced separately), make up over 90
percent of the total amount certified to the HTF.
[24] IRS uses data from two of these reports, covering sequential
processing intervals, for each quarterly certification. Collections are
classified by abstract on the report when the related Form 720 tax
return has been recorded in IRS‘s master file during the processing
interval covered by the report. The second of the two reports used may
contain collections related to previous quarters not classified by
abstract until the current quarter because the related return was not
recorded on the master file until the current quarter.
[25] For this test, ’significant“ is defined as $90 million. This
represents approximately 1 percent of the total amount certified to the
HTF for a quarter.
[26] IRS calculates certified collections to the Highway Account and
the Mass Transit Account using the total prorated collection amount,
tax rate, and distribution rates applicable to each account.
[27] IRS performs a quarterly reclassification of excise tax refunds
and credits originally entered into its master file as a personal or
corporate refund/credit. IRS refers to these reclassifications as
"refund/credit certifications." These amounts do not represent the
total excise tax refund/credit activity to the trust funds. Other
routine excise tax refunds and credits (e.g., overpayments), which are
claimed on taxpayers‘ Form 720 excise tax returns, are included in
IRS‘s excise tax receipt certification to trust funds.
[28] In order to meet certain reporting deadlines, IRS-certified
refunds and credits for the fourth quarter of fiscal year 2002 as of
September 6, 2002.
[29] IRS attaches a separate schedule to the HTF refund/credit
certification letter that includes the detailed excise tax amounts that
support the total amount shown on the letter. IRS compiles the amounts
on these schedules from service center campus systems and its Interim
Revenue Accounting Control System. IRS has 10 service center campuses
that process tax returns and tax receipts.
[30] The certified refund/credit amounts for diesel and gasoline make
up at least 88 percent of the total certified refund/credit amount for
the HTF.
[31] An FMS accountant compiles this schedule, called the Subsidiary
Quarterly Account of Estimates and Actual Related Excise Taxes
Appropriated to the Highway Account. It computes the difference between
IRS-certified amounts and the OTA estimate for excise taxes,
individually and in total, that relate to the Highway Account. A
similar schedule is prepared for the Mass Transit Account. The
schedules, along with OTA transfer forms and IRS certifications, support
the FMS adjustment.
[32] A positive amount indicates that the FMS adjustment increased
excise taxes distributed to the trust fund. A negative amount, shown in
parentheses, indicates that the FMS adjustment decreased excise taxes
distributed to the trust fund.
[33] OTA makes semimonthly estimates of excise tax collections for
transfer to trust funds.
[34] OTA communicates this information to interested parties at
Treasury, the Federal Highway Administration, the Federal Transit
Administration, and the Department of Transportation. IRS uses the tax
and distribution rates from this table in its subsequent certification
of collections to trust funds.
[35] The transfer amounts for diesel fuel tax (abstract 60), gasoline
tax (abstract 62), tax on 10 percent gasohol (abstract 59), and heavy
vehicle use tax made up over 92 percent of the total amount transferred
to the HTF during the fourth quarter of fiscal year 2002.
[36] The source documents include the IRS report of excise taxes used
to derive the percentages applied to reported receipts, the Daily
Treasury Statement, the Monthly Treasury Statement, and the excise tax
rate table.
[37] IRS assigns a tax class number to specific types of taxes. Excise
taxes are tax class 4.
[38] For the purpose of this procedure and procedure V.B.3, we define
material as $20 billion. This represents 1 percent of the total tax
revenue receipts collected by IRS in fiscal year 2002.
[39] 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.
[End of section]
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