Applying Agreed-Upon Procedures
Federal Unemployment Taxes Gao ID: GAO-04-212R November 14, 2003We have performed the procedures contained in the enclosure to this report, which we agreed to perform, solely to assist 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, 2003, is supported by the underlying records. As agreed with the Inspector General, we evaluated fiscal year 2003 activity affecting distributions to the UTF.
The adequacy of the procedures to meet Labor's objectives is Labor's 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 UTF and (2) 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 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. We completed the agreed-upon procedures on October 31, 2003.
GAO-04-212R, Applying Agreed-Upon Procedures: Federal Unemployment Taxes
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November 14, 2003:
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, 2003, is supported
by the underlying records. As agreed with your office, we evaluated
fiscal year 2003 activity affecting distributions to the UTF.
In performing the agreed-upon procedures, we conducted our work in
accordance with 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 the UTF and (2) 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 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 31, 2003.
We provided a draft of this report to IRS officials, along with its
enclosure, for review and comment. They agreed with the results and
findings presented in this report. In response to our finding
concerning an error on monthly FUTA refund data entered into the
Government Online Accounting Link System (GOALS), IRS stated that it
has instituted additional internal control procedures to promptly
detect and correct any future errors.
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 home page at http://www.gao.gov.
If you have any questions, please call me at (202) 512-3406.
Sincerely yours,
Steven J. Sebastian:
Director:
Financial Management and Assurance:
Signed by Steven J. Sebastian:
Enclosure:
Unemployment Trust Fund Procedures and Results:
I. Detailed tests of transactions:
Obtain from IRS total FUTA collections and refunds activity posted to
the master file for the first 8 months of fiscal year 2003.[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 8 months of fiscal
year 2003 per IRS's master file materially reconciled to IRS's general
ledger.
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 2003, using a confidence level of 80 percent, a
test materiality of $333 million, and an expected aggregate error
amount of $99.9 million.
Description of findings and results:
Use of DUS with a confidence level of 80 percent, a test materiality
of $333 million, and an expected aggregate error amount of $99.9
million resulted in a sample of 45 transactions for the first 8 months
of fiscal year 2003. Of this total, 44 transactions represented
collections and 1 transaction represented refunds.
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 supporting
documents (e.g., federal tax deposit coupons).
Description of findings and results:
Based on supporting documentation, collection amounts were accurately
recorded for all 44 sampled FUTA collection transactions.
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 44 sampled FUTA collection transactions.
Determine whether the transactions were properly classified 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 44 sampled FUTA collection
transactions.
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 classified as FUTA receipts.
Description of findings and results:
Thirty-eight of the 44 sampled FUTA receipt transactions were paid via
the EFTPS. The bank confirmation showed that all 44 transactions were
valid and had been recorded to the proper tax period and tax class and
for the proper amounts.
For each sampled FUTA tax refund transaction:
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.
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 did not claim
an exempt wage payment.
For manual refunds,[Footnote 5] 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:
Perform analytical procedures on FUTA revenue collection and refund
data for the period not subject to detailed tests of transactions to
determine if reported fiscal year 2003 revenue collections and refunds
appear reasonable.
Description of findings and results:
We performed a predictive test on the final 4 months of fiscal year
2003 FUTA revenue collection and refund data. The predicted FUTA
revenue collection and refund data amounts for the final 4 months of
fiscal year 2003 did not materially vary from the actual amount of
revenue collections and refunds per the IRS's records for this period.
III. Other FUTA Procedures:
A. For each of the 12 months in fiscal year 2003, 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 the 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
2003.
For each of the 12 months in fiscal year 2003, obtain and review
supporting documentation for the monthly entry of FUTA refund data onto
the GOALS to charge back the Unemployment Trust Fund account for FUTA
tax refunds issued. Check to see that the supporting documentation
agrees with the monthly entries reported in the GOALS.
Description of findings and results:
Documentation supported the monthly FUTA refund amount entered in GOALS
to charge the UTF for FUTA tax refunds issued for 11 of the 12 months
of fiscal year 2003. For the month of May 2003, IRS incorrectly charged
the cumulative refund amount for the year through May 2003 of $73
million to the UTF instead of the amount for May 2003 of $11 million.
We brought this to the attention of the IRS and they made an adjustment
for May 2003. The adjustment was made during September 2003. Therefore,
there was no impact on FUTA reported amounts on the financial
statements.
Compare fiscal year 2003 net FUTA collections per the IRS's draft
statement of custodial activity and related footnote disclosures to (a)
the Treasury's Bureau of the Public Debt (BPD) accounting records for
the UTF and (b) drafts of the Department of Labor's (DOL) consolidated
financial statements. Obtain explanations/support for material
variances.
Description of findings and results:
There were no significant variances between net FUTA collections per
the IRS's draft statement of custodial activity and the BPD's
accounting records for the UTF. Similarly, there were no significant
variances between IRS's draft statement of custodial activity and
related footnote disclosures and drafts of the DOL's fiscal year 2003
consolidated financial statements.
Other procedures performed as part of the fiscal year 2003 IRS
financial statement audit:
From the IRS's master files for the first 8 months of fiscal year 2003,
use DUS to select statistical samples of (a) total tax revenue receipts
and (b) refunds. For each item in the samples of tax revenue receipts
and refunds, test that the collection or refund amount and tax class
from source documentation agrees with amounts recorded in IRS's master
files.
Description of findings and results:
Detailed testing of 169 revenue receipts and 50 refund sample
transactions:
showed that the collection or refund amount, tax period, and tax class
from source documents agreed with those recorded in the IRS master
files.
Review selected IRS 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 centers' monthly Treasury SF-224 reconciliations to
determine if IRS-reported total refunds (all tax classes)
materially[Footnote 6] reconciled to Treasury FMS records.[Footnote 7]
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.
Perform procedures to determine whether revenue receipt balances by tax
class per the 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.
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 with
Treasury records.
Refund balances per IRS's general ledger materially agreed with the
master file and with Treasury records.
(196006):
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 $333 million. This represents 1 percent of the UTF
collections made by federal and state government agencies for fiscal
year 2002.
[3] IRS assigns a tax class number to specific types of taxes. FUTA
taxes are tax class 8.
[4] The EFTPS is a system for initiating tax payments electronically.
Employers who make federal tax deposits exceeding $200,000 must use the
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 the EFTPS.
[5] A manual refund is a refund manually processed by an IRS employee
rather than through the IRS's manual automated process.
[6] For the purpose of this procedure and procedure IV.C, we define
material as $20 billion. This represents approximately 1 percent of the
total tax revenue receipts collected by the IRS in fiscal year 2003.
[7] The IRS maintains records of refund balances by tax class in its
master file, and reports this information monthly to Treasury via the
SF-224. Treasury provides the IRS with a Statement of Differences (TFS-
6652), which reports differences between total refunds reported by the
IRS on the SF-224 and the total refunds per Treasury records.
