Management Report
Improvements Needed in Controls over IRS's Excise Tax Certification Process
Gao ID: GAO-03-687R July 23, 2003
The Internal Revenue Service (IRS), along with other components of the Department of the Treasury, collects and distributes excise tax receipts to government trust funds. As the nation's tax collector, IRS plays a critical role in this process. Consequently, trust funds and their administrators depend on IRS to have sound procedures and controls over this process to ensure that excise taxes are appropriately distributed. This report is a follow-up to two reports we recently issued discussing procedures we performed to assist the Department of Transportation's Office of Inspector General (Transportation IG) in ascertaining whether the net excise tax collections and excise tax certifications reported by IRS for the fiscal year ended September 30, 2002, were supported by underlying records. The agreed-upon procedures, along with our audit of IRS's fiscal year 2002 financial statements, provided a sufficient basis to assist the Transportation IG in forming an opinion on the departmentwide financial statements and the financial statements of the trust funds administered by the department, including the Highway Trust Fund and the Airport and Airway Trust Fund.
IRS's internal controls over its process for certifying excise taxes for distribution to federal government trust funds are not fully effective in ensuring that the appropriate amounts are distributed to the trust funds. Our work identified several internal control issues that affected the amounts distributed to trust funds quarterly and that could have affected total fiscal year distributions if IRS had not corrected errors resulting from these control issues after we brought them to its attention. We identified several issues. IRS lacked effective procedures to timely detect errors made by employees when entering excise tax return information into its information systems. IRS did not detect such errors until months after they occurred. As a result, IRS understated certified collections to the Highway Trust Fund for the quarters ended December 31, 2001, and March 31, 2002. Although IRS subsequently identified and corrected the errors, it would not have had adequate time to correct them if these errors had occurred later in the fiscal year. Had that been the case, the amount of excise taxes distributed to the Highway Trust Fund would have been less than it should have been for fiscal year 2002. IRS lacked effective supervisory review to timely detect errors made in the preparation of excise tax certifications. As a result, amounts certified to trust funds were misstated for certain quarters during both fiscal years 2002 and 2001. IRS corrected the errors in the certifications after we brought them to its attention. Had we not identified the errors during our review and notified IRS, the amounts distributed to the Highway Trust Fund would have been approximately $81 million less than they should have been during fiscal year 2002 and approximately $1 million less than they should have been during fiscal year 2001. IRS did not effectively coordinate with other components of Treasury involved in the excise tax distribution process when it implemented changes to its method for recording excise tax credits in fiscal year 2002. As a result, IRS's system-generated certification data were not in a format usable by the Financial Management Service (FMS) or the Bureau of the Public Debt (BPD) to facilitate the recording of adjustments to trust funds. To make the data usable to FMS and BPD, IRS had to add steps to its certification process to generate the information in the previous reporting format. These added steps made IRS's already complex certification process even more cumbersome, increasing both the likelihood that errors could be made and that they could go undetected by supervisory review. In addition to these issues, we continued to find that IRS did not promptly certify excise tax collections to the trust funds. Under IRS's current certification process, excise tax receipts for the fourth quarter of the fiscal year, which ends September 30, are not certified until the following March. Because the Department of Transportation's financial statements are currently required to be issued by February 1 of the following year,5 adjustments to initial distributions of excise tax receipts for the last quarter of the fiscal year, based on IRS's certification, are not recorded in time to be reflected in the trust funds' financial statements. However, this lag time in making final adjustments will become more of an issue this year. Beginning with its fiscal year 2004 accountability report, the Department of Transportation, along with the other CFO Act agencies, will be required to issue its report, including its audited financial statements, by November 15, 2004.
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.
Director:
Team:
Phone:
GAO-03-687R, Management Report: Improvements Needed in Controls over IRS's Excise Tax Certification Process
This is the accessible text file for GAO report number GAO-03-687R
entitled 'Management Report: Improvements Needed in Controls over IRS's
Excise Tax Certification Process' which was released on July 23, 2003.
This text file was formatted by the U.S. General Accounting Office
(GAO) to be accessible to users with visual impairments, as part of a
longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
July 23, 2003:
The Honorable Mark W. Everson:
Commissioner of Internal Revenue:
Subject: Management Report: Improvements Needed in Controls over IRS's
Excise Tax Certification Process:
Dear Mr. Everson:
The Internal Revenue Service (IRS), along with other components of the
Department of the Treasury, collects and distributes excise tax
receipts to government trust funds. As the nation's tax collector, IRS
plays a critical role in this process. Consequently, trust funds and
their administrators depend on IRS to have sound procedures and
controls over this process to ensure that excise taxes are
appropriately distributed.
This report is a follow-up to two reports we recently issued discussing
procedures we performed to assist the Department of Transportation's
Office of Inspector General (Transportation IG) in ascertaining whether
the net excise tax collections and excise tax certifications reported
by IRS for the fiscal year ended September 30, 2002, were supported by
underlying records.[Footnote 1] The agreed-upon procedures, along with
our audit of IRS's fiscal year 2002 financial statements,[Footnote 2]
provided a sufficient basis to assist the Transportation IG in forming
an opinion on the departmentwide financial statements and the financial
statements of the trust funds administered by the department, including
the Highway Trust Fund and the Airport and Airway Trust Fund.[Footnote
3]
In our reports discussing the results of the agreed-upon procedures we
performed in fiscal year 2002, we described errors we identified in the
certification and distribution process. However, we did not discuss the
underlying internal control weaknesses that allowed these errors to go
undetected, nor did we discuss actions needed to address these
weaknesses.[Footnote 4] This report discusses these weaknesses and
presents our recommendations for corrective action.
:
Results in Brief:
:
IRS's internal controls over its process for certifying excise taxes
for distribution to federal government trust funds are not fully
effective in ensuring that the appropriate amounts are distributed to
the trust funds. Our work identified several internal control issues
that affected the amounts distributed to trust funds quarterly and that
could have affected total fiscal year distributions if IRS had not
corrected errors resulting from these control issues after we brought
them to its attention. The issues we identified include the following:
:
IRS lacked effective procedures to timely detect errors made by
employees when entering excise tax return information into its
information systems. IRS did not detect such errors until months after
they occurred. As a result, IRS understated certified collections to
the Highway Trust Fund for the quarters ended December 31, 2001, and
March 31, 2002. Although IRS subsequently identified and corrected the
errors, it would not have had adequate time to correct them if these
errors had occurred later in the fiscal year. Had that been the case,
the amount of excise taxes distributed to the Highway Trust Fund would
have been less than it should have been for fiscal year 2002.
:
IRS lacked effective supervisory review to timely detect errors made in
the preparation of excise tax certifications. As a result, amounts
certified to trust funds were misstated for certain quarters during
both fiscal years 2002 and 2001. IRS corrected the errors in the
certifications after we brought them to its attention. Had we not
identified the errors during our review and notified IRS, the amounts
distributed to the Highway Trust Fund would have been approximately $81
million less than they should have been during fiscal year 2002 and
approximately $1 million less than they should have been during fiscal
year 2001.
:
IRS did not effectively coordinate with other components of Treasury
involved in the excise tax distribution process when it implemented
changes to its method for recording excise tax credits in fiscal year
2002. As a result, IRS's system-generated certification data were not
in a format usable by the Financial Management Service (FMS) or the
Bureau of the Public Debt (BPD) to facilitate the recording of
adjustments to trust funds. To make the data usable to FMS and BPD, IRS
had to add steps to its certification process to generate the
information in the previous reporting format. These added steps made
IRS's already complex certification process even more cumbersome,
increasing both the likelihood that errors could be made and that they
could go undetected by supervisory review.
:
In addition to these issues, we continued to find that IRS did not
promptly certify excise tax collections to the trust funds. Under IRS's
current certification process, excise tax receipts for the fourth
quarter of the fiscal year, which ends September 30, are not certified
until the following March. Because the Department of Transportation's
financial statements are currently required to be issued by:
February 1 of the following year,[Footnote 5] adjustments to initial
distributions of excise tax receipts for the last quarter of the fiscal
year, based on IRS's certification, are not recorded in time to be
reflected in the trust funds' financial statements. However, this lag
time in making final adjustments will become more of an issue this
year. Beginning with its fiscal year 2004 accountability report, the
Department of Transportation, along with the other CFO Act agencies,
will be required to issue its report, including its audited financial
statements, by November 15, 2004.[Footnote 6]
:
To help the transition to this earlier reporting date, the department
is planning to accelerate the issuance of its fiscal year 2003
accountability report to December 2003. If the Department of
Transportation accelerates its reporting date to December 2003 or
earlier, certifications for the third and fourth quarters of the fiscal
year would be completed too late for any adjustment to distributions
resulting from the certifications to be made and reflected on the trust
funds' financial statements under IRS's existing process. As a result,
the amount of annual excise tax revenue distributed to the trust funds
may not reflect the true amount that should have been distributed,
potentially resulting in significantly inaccurate distributions and, in
the case of the Highway Trust Fund, incorrect allocations of revenues
to states.[Footnote 7]
:
IRS has taken some actions to improve controls over the excise tax
certification process, but additional action is needed to address the
internal control issues we identified. We are making recommendations to
further strengthen IRS's verification and review procedures to help
ensure that trust funds receive the appropriate allocation of revenue
in a timely manner and to assist IRS in considering changes to its
procedures to accelerate the timing of its excise tax certifications.
:
In its comments, IRS generally agreed with our recommendations and
described actions it was taking or planned to take to address the
internal control issues described in this report. At the end of our
discussion on each of these issues, we have summarized IRS's related
comments and provided our evaluation.
:
Background:
:
The federal government levies excise taxes on entities and individuals
for the purpose of financing general federal activities and specific
government programs. Several bureaus and offices within Treasury
collected a total of about $69 billion in excise taxes in fiscal year
2002. IRS accounted for the majority, collecting about $52 billion in
excise taxes on the purchase, use, or inventory of various types of
goods and services, such as gasoline and airline tickets. The
processing of excise tax returns is centralized at IRS's Cincinnati
Campus. The various excise taxes accounted for by IRS are deposited
into the general fund[Footnote 8] of the Treasury and subsequently into
seven different trust funds, which are administered by six federal
agencies or entities. The largest of these trust funds are the Highway
Trust Fund and the Airport and Airway Trust Fund, both of which are
administered by the Department of Transportation. For fiscal year 2002,
the Highway Trust Fund received about $32.2 billion in excise tax
revenues and the Airport and Airway Trust Fund received about $8.9
billion.
:
Because it collects federal tax revenue and then distributes it to
these government trust funds, Treasury is considered a servicing
organization by trust fund administrators as well as by the auditors of
these agencies. Consequently, the trust fund administrators and their
auditors need to rely on Treasury, through its various bureaus and
offices, including IRS, to properly account for and distribute amounts
transferred from the government's general fund to their trust funds.
:
Payers of excise taxes generally are required to make semimonthly
deposits to cover their quarterly tax liability. The excise taxes are
deposited into the general fund as they are received. Taxpayers are not
required to provide information at the time they make their excise tax
payments that would allow Treasury to immediately apply the payments to
the appropriate trust fund based on amount owed and paid. The
information that ultimately determines how these receipts are
distributed is generally submitted by taxpayers on Form 720, Quarterly
Federal Excise Tax Return.[Footnote 9] Because data are not available
to allocate excise taxes to the appropriate trust funds when taxpayers
make their excise tax deposits, Treasury uses a process to estimate the
initial distribution of excise taxes.
:
Treasury's Office of Tax Analysis (OTA) prepares semimonthly estimates
based on historical IRS certification data and actual total current
excise tax revenue collections. FMS uses these estimates to prepare
entries for the initial distributions to the trust funds, which are
recorded by BPD in the books and records of the trust funds maintained
by Treasury. Subsequent to this initial distribution, IRS certifies
quarterly the amounts that should have been distributed to the excise
tax-related trust funds based on the tax returns. FMS then uses these
certifications to prepare adjustments to the initial trust fund
distributions for each quarter, and BPD records the amounts on the
trust fund books and records. Figure 1 provides an overview of the
entire process of collecting, distributing, and certifying excise tax
revenue reported to trust funds.
:
Figure 1: Overview of the Process for Distribution of Excise Tax
Revenue to Trust Funds:
[See PDF for image]
[End of figure]
IRS currently certifies collections for each quarter approximately 5
and one-half months after the end of the quarter. IRS relies on a
combination of manual and automated procedures to prepare its
certification of excise taxes to be distributed to the trust funds.
This process is complex and cumbersome. IRS calculates the trust fund
distributions based on assessment, credit,[Footnote 10] and payment
information in the master file.[Footnote 11] When taxpayers make their
excise tax deposits, IRS enters payment information into the taxpayers'
master file accounts. As quarterly excise tax returns are received, IRS
enters the liability amounts by type of excise tax, such as gasoline
tax, into taxpayers' master file accounts. The tax types are identified
by certain numbers preprinted on the Form 720. IRS uses one set of
numbers for tax assessments, referred to as abstracts, and another set
for tax credits, referred to as credit reference numbers. For example,
abstract 62 represents gasoline tax, and credit reference number 362
represents a credit claimed on gasoline tax. IRS uses these numbers to
identify excise tax type information in its master file, and it is
these numbers that ultimately determine how amounts are distributed to
the appropriate trust funds.
:
IRS electronically transmits excise tax information from the master
file to its Collection Certification System. The Collection
Certification System uses the information to prorate[Footnote 12]
collections among the different excise taxes. The system then
summarizes the amount of prorated collections, by tax type, on the
Report of Excise Tax Collection. IRS uses the information from these
reports as the basis for calculating the gross certified
amount[Footnote 13] for each type of tax. IRS analysts enter the
information from the Reports of Excise Tax Collection onto a series of
interconnected electronic spreadsheets, which further combine prorated
collection data and then allocate the gross prorated amount, for each
type of tax, among the general fund, trust funds, and trust fund
accounts.[Footnote 14] Analysts then record the allocated amount for
each tax onto excise tax distribution certification letters.
:
IRS submits the certification letter to FMS, which uses it to prepare
adjustments to the initial distributions to bring them in line with the
IRS-certified amounts.[Footnote 15] FMS sends these adjustments to BPD,
which records the entries in the books and records of the trust funds
maintained by Treasury. Figure 2 shows IRS's process for certifying
trust fund distributions.
Figure 2: Overview of IRS Process for Certifying Excise Tax
Collections:
[See PDF for image]
[End of figure]
In addition to its certification of excise tax receipts to trust funds,
IRS performs a quarterly reclassification of excise tax refunds and
credits. As part of its normal processing procedures, IRS initially
records some excise tax refunds and credits as personal or corporate
refunds and credits. These are refund and credit claims made by
corporations or individuals who do not normally file excise tax returns
but are entitled to claim excise tax-related credits on their corporate
or personal income tax returns.[Footnote 16] IRS must subsequently
reclassify these credit claims to properly reflect them as excise tax
credits. IRS refers to these reclassifications as the excise tax
refund/credit certification. IRS compiles the certification based on
information from submission processing campus[Footnote 17] systems. IRS
submits refund/credit certification letters to BPD, which uses them to
prepare adjustments to reduce distributions to trust funds.
Objectives, Scope, and Methodology:
The objective of the agreed-upon procedures work was to assist the
Transportation IG in ascertaining whether the net excise tax
collections and excise tax certifications reported by IRS for the
fiscal year ended September 30, 2002, were supported by the underlying
records. The objectives of this report are to (1) discuss the
underlying internal control issues that allowed errors identified in
the agreed-upon procedures work to occur, (2) discuss timing issues
that have the potential to affect the accuracy of excise tax
distributions, and (3) provide recommendations for effectively
addressing these issues.
We conducted our work primarily from March 2002 through January 2003,
with some follow-up work through April 2003, in accordance with U.S.
generally accepted government auditing standards. We requested comments
on a draft of this report from the Commissioner of IRS. We received
written comments from the Deputy Commissioner for Operations Support
and have reprinted the comments in enclosure I of this report. Further
details on our scope and methodology are contained in enclosure II of
this report.
Data Entry Errors Continue to Go Undetected:
In conducting the agreed-upon procedures review for fiscal year 2002,
we found that IRS made data entry errors affecting the accuracy of
taxpayer account information in IRS's master file, and that these
errors were not detected by existing review procedures. The lack of
effective review procedures over the entry of excise tax data increases
the risk that erroneous information will be used to prepare the
quarterly excise tax certifications, resulting in incorrect
distributions to trust funds.
GAO's Standards for Internal Control in the Federal Government requires
agencies to implement internal control procedures to ensure the
accurate and timely recording of transactions and events.[Footnote 18]
It also states that internal controls should be designed to ensure that
ongoing monitoring occurs in the course of normal operations.
In a previous review,[Footnote 19] we reported weaknesses in IRS's
procedures for detecting data entry errors related to information
reported on Form 720 excise tax returns. We recommended that IRS
establish review procedures to ensure the accuracy of excise tax
information entered into the master file. In response, IRS established
post-input review procedures for excise tax returns that report a tax
liability of $1 million or more to verify that information on the
returns matches data entered into the master file. However, IRS does
not have comparable procedures for reviewing excise tax data entered
using another excise tax-related form, Form 8849, Claim for Refund of
Excise Taxes.[Footnote 20]
:
On January 1, 2002, IRS implemented new procedures for recording excise
tax refunds and credits claimed by taxpayers. As part of this change,
IRS established a new set of credit reference numbers to identify the
type of excise tax refund or credit within a taxpayer's master file
account. For example, a claim for a $200,000 refund on gasoline tax
would be recorded as $200,000 to credit reference number 362. Under
IRS's prior procedures, it would have recorded this refund as a
negative $200,000 under the abstract number 62. This new procedure
affected how IRS recorded and summarized credit information necessary
for excise tax certifications, but did not change how the credits
should affect the taxpayer's ultimate excise tax liability.
:
However, in testing a statistical sample of excise tax collections from
the first 6 months of fiscal year 2002, we identified 17 instances in
which IRS personnel entered the credit information into the taxpayer's
master file account using both the old and new method, which resulted
in IRS counting these credits twice in the certification process. We
estimate that the net most likely error associated with counting
credits twice is an understatement of $14.1 million, but the
understatement could be as high as $198.2 million. Although we
projected the effect of these errors on the population of items tested,
we are not able to project the effect on the certification results
because of the additional procedures IRS performs on the data to derive
certified amounts. However, the effect of double-counting credits
resulted in distributing smaller amounts to the Highway Trust Fund than
should have been distributed for the quarters ended December 31, 2001,
and March 31, 2002.
:
Although IRS ultimately detected and corrected these errors, they were
detected months later by personnel at IRS headquarters and not by
reviewers at IRS's Cincinnati Compliance Campus. According to IRS, the
errors were attributable to one individual in the Cincinnati Compliance
Campus's Excise Tax Unit who did not fully comprehend the new
procedures. We found that IRS did not have effective controls in its
Cincinnati Excise Tax Unit to timely detect and correct such data entry
errors. Some of these errors went uncorrected for 5 months or longer,
and the corrections were not fully reflected until IRS completed its
certification to the Highway Trust Fund for the quarter ending June 30,
2002. Thus, for the quarters ended December 31, 2001, and March 31,
2002, these errors resulted in amounts IRS certified to the Highway
Trust Fund being understated. Because IRS made these corrections in
time for their inclusion on the final certification reflected in the
trust fund's fiscal year-end financial statements, there was no net
effect on distributions to the Highway Trust Fund for fiscal year 2002.
Had these errors occurred later in the year, IRS would not have had the
time to make corrections, and the amount of excise taxes distributed to
the Highway Trust Fund would have been less than they should have been
for fiscal year 2002.
:
Having effective procedures to timely detect and correct data entry
errors is essential to maintaining accurate excise tax information in
IRS's master file. Since the excise tax data from IRS's master file
serve as the basis for its certification of receipts to trust funds,
the lack of these procedures could lead to erroneous excise tax data in
IRS's master file, resulting in inaccurate certifications and
distributions to trust funds.
:
Recommendation:
:
We recommend that you direct IRS management to develop and implement
post-input review procedures to verify the accuracy of excise tax
credit information in the master file. In establishing these
procedures, IRS could consider establishing a dollar threshold, similar
to the threshold it established for its reviews of excise tax
assessment information on the Form 720 excise tax returns, that would
trigger post-input verification of excise tax credit information.
:
IRS's Comments and Our Evaluation:
:
IRS agreed with our recommendation. In its response, IRS stated that it
was working with the Cincinnati Compliance Campus to develop and
implement post-input review procedures to verify the accuracy of excise
tax credit information posted to the master file. We will evaluate the
effectiveness of IRS's efforts in conjunction with our fiscal year 2003
agreed-upon procedures review.
:
Excise Tax Certification Errors Continue to Go Undetected:
In conducting the agreed-upon procedures review for fiscal year 2002,
we identified errors on IRS's excise tax certifications that were not
detected by supervisory review. The lack of effective supervisory
review increases the risk that errors will be made in the preparation
of excise tax certifications and that such errors will not be detected
on a timely basis, resulting in incorrect excise tax distributions to
the trust funds.
GAO's Standards for Internal Control in the Federal Government requires
agencies to implement internal control procedures to ensure the
accurate and timely recording of transactions and events. In addition,
Standards for Internal Control in the Federal Government requires that
qualified and continual supervision be provided to ensure that internal
control objectives are achieved.
As discussed previously, IRS relies on a combination of manual and
automated procedures to prepare its excise tax certifications. This
process is very complex, cumbersome, and prone to error. In prior
reviews,[Footnote 21] we reported weaknesses in IRS's controls over its
certification process. At that time, we recommended that IRS (1)
develop, document, and implement detailed written procedures for
summarizing data used to prepare trust fund certifications, (2)
establish procedures requiring IRS personnel to review distribution
rates provided by OTA before those rates are used in the certification,
and (3) implement review procedures over its process for summarizing
data used in its certifications. In response to our prior
recommendations, IRS created a checklist to guide reviewers and
document the review of the certification results. In addition, IRS
finalized written procedures for its certification process in November
2002.
Although the checklist assists IRS reviewers in identifying simple
mathematical errors, we continued to find logical and analytical errors
in fiscal year 2002 that were not detected by supervisory review. For
example, a report used by an IRS analyst to prepare the refund
certification for the quarter ended December 31, 2001, contained
erroneous amounts for gasohol and bus diesel fuel tax refunds. As a
result, IRS overstated its refund certification for the Highway Trust
Fund for the quarter by approximately $81 million. We readily
identified the error because the reported amounts for one of these
taxes varied significantly from previous quarters. Nevertheless, IRS
did not detect the error even though the certification results passed
through multiple levels of review. Had IRS not made a correction after
we brought the matter to its attention, distributions to the Highway
Trust Fund would have been approximately $81 million less than they
should have been in fiscal year 2002.
In another instance, we discovered that IRS reported refund amounts as
credits and credit amounts as refunds on its refund/credit
certification letters for both the Highway Trust Fund and the Airport
and Airway Trust Fund for the quarter ended September 30, 2002.
Generally, IRS-certified refunds for the Highway Trust Fund are one and
a half times as large as the certified credits for the fund. To have a
situation where the opposite occurred should have alerted the reviewer
to a potential error. Although we readily identified the errors during
our review of the schedule accompanying the certification letter, IRS
did not detect the errors through its review process. These errors did
not affect the accuracy of the distributions to the Highway Trust Fund
or the Airport and Airway Trust Fund in fiscal year 2002 because BPD
adjusts trust fund distributions using the combined amount of refunds
and credits. However, this is an example of a logical error that was
not detected by IRS reviews.
We had identified similar problems in our fiscal year 2001 review.
Specifically, IRS also reported refunds as credits and credits as
refunds on its refund/credit certification for the quarter ended March
31, 2001. Also, in our fiscal year 2001 review, we found that IRS used
the wrong excise tax and distribution rates for 10 percent gasohol on
its Highway Trust Fund receipt certification for the quarter ended
March 31, 2001. The IRS analyst used the excise tax and distribution
rate table that was in effect on December 22, 2000, rather than the
rate table that became effective on January 1, 2001. Consequently, IRS
misstated certified collections to both the Highway Account and the
Mass Transit Account of the Highway Trust Fund, resulting in about $1
million less being distributed to the Highway Trust Fund.
In response to our finding that it had reversed reported refund and
credit amounts in 2002, IRS added another step to the review checklist
to prevent this error. However, while the checklist can assist
reviewers in verifying certification results, it cannot substitute for
an in-depth understanding of the certification process. For example,
although the checklist contains a specific procedure to verify that the
analyst used the correct tax and distribution rate for each type of
taxable good or service (e.g., for gasohol), it does not assist a
reviewer in determining whether the analyst used the correct rate table
(e.g., for the correct time period). Adding another step to the
checklist each time a new problem surfaces will not ensure that proper
reviews of the certification results are conducted.
While we do not specifically know why IRS's supervisory review
procedures failed to detect these errors, we did note a lack of
consistency in the supervisory review responsibility. Specifically,
during fiscal year 2002, four different officials were responsible for
reviewing the certifications. A comprehensive understanding of IRS's
certification process is essential to detecting logical and analytical
errors made by analysts. Absent this understanding, officials
responsible for reviewing excise tax certifications may continue to
lack the ability to perform an effective review of the certifications.
Given the errors we continue to find in our review of IRS's
certification process and their potential to significantly affect the
accuracy of the associated distributions to trust funds, more needs to
be done to ensure that supervisory reviews over the certifications are
effective.
Recommendations:
We recommend that you direct IRS management to:
investigate why certification errors continue to go undetected through
IRS's review procedures and:
develop and implement an action plan to improve the certification
review process.
IRS's Comments and Our Evaluation:
IRS agreed with our recommendations. In its response, IRS stated that
it has a new management team in place to review the current excise tax
certification process and to develop an action plan for improving the
certification reviews. We will evaluate the effectiveness of IRS's
efforts in conjunction with our fiscal year 2003 agreed-upon procedures
review.
Changes to Certification Process Were Not Effectively Coordinated:
As discussed earlier, the collection, distribution, and certification
of excise tax revenues to trust funds are performed by four component
entities within Treasury---OTA, FMS, BPD, and IRS. Coordination among
these entities is essential to ensure the proper distribution of excise
tax revenue to trust funds. In a prior review, we reported a deficiency
in IRS's procedures for using OTA information in its certification
process. Specifically, we reported that IRS used tax and distribution
rates from OTA without first verifying their accuracy.[Footnote 22] In
response, IRS established an informal working group within Treasury
specifically to discuss and coordinate issues related to trust fund tax
revenue distributions. However, in conducting our agreed-upon
procedures review for fiscal year 2002, we noted that effective
coordination was not always achieved.
As we previously discussed, IRS, as part of its receipt certification
process in prior years, deducted credits claimed by taxpayers from
their excise tax liability before applying their payments to the
liability amount. Thus, IRS-certified excise tax receipts were reduced
by credit claims. However, IRS believed that the information would be
more useful, both internally and to the Department of Transportation,
if it summarized and reported these credits separately rather then
applying them against the tax liability amount. Therefore, in fiscal
year 2002, IRS developed changes to the way it records credit
information in its computer systems, as well as to the way it accounts
for and reports this information in its certifications.
On January 1, 2002, IRS implemented these procedural and system changes
to its method for recording and summarizing excise tax credits,
including changes to its procedures for recording taxpayer refund
claims submitted on Form 8849. Although IRS officials told us that they
had notified the Treasury working group of the planned changes, this
notification was not documented in the form of a letter, memorandum, or
minutes to the Treasury working group meeting. Further, IRS did not
obtain written affirmation from FMS or BPD that these entities
understood the effect these changes would have on the information
reported to them. In fact, FMS and BPD were unable to use the revised
form of certification information to make necessary adjustments to the
trust fund distributions. Consequently, IRS had to add steps to its
certification process to revert to its previous reporting format in
order to make its certification data usable to these entities. As a
result, IRS further complicated its already complex certification
process. Although we did not identify any certification errors directly
attributable to the changes in procedure, the added complexity
increases the likelihood that errors could be made and go undetected by
IRS's current review procedures.
Recommendation:
We recommend that you direct IRS management to communicate in writing
any potential changes in IRS's certification process to other Treasury
entities that use the certification information, and to obtain
concurrence from these entities prior to implementing such changes.
IRS's Comments and Our Evaluation:
IRS agreed with our recommendation. In its response, IRS stated that it
plans to provide documented recommendations to the excise tax working
group for potential changes to the certification process. We will
evaluate the effectiveness of IRS's actions in conjunction with our
fiscal year 2003 agreed-upon procedures review.
Certification Time Frame Will Not Accommodate Accelerated Reporting:
As discussed previously, under IRS's current certification process, IRS
certifies collections for each quarter about 5 and one-half months
after the quarter ends. As a result of this delay, excise tax receipts
for the fourth quarter of fiscal year 2002, which ended September 30,
2002, were not certified until March 2003. Consequently, adjustments to
initial distributions of excise tax receipts for the fourth quarter
that were based on IRS's certification were not recorded in time to be
reflected in the trust funds' financial statements for fiscal year
2002, which OMB required to be issued by February 1, 2003.
Beginning with agencies' fiscal year 2004 performance and
accountability reports, OMB will require the issuance of these reports,
including the agencies' audited financial statements, by November 15.
To prepare for this, the Department of Transportation is planning to
accelerate its fiscal year 2003 reporting date to December 2003. This
accelerated reporting date will exacerbate the effects of the lag
between the collection of excise tax receipts and their subsequent
certification by IRS. As a result, under the current certification time
frame, IRS's certification for the third quarter, historically
completed in December, would not be completed in time for any
adjustments to the initial distribution to the trust funds to be made
and reflected on the trust funds' financial statements for fiscal year
2003. Because the certification of fourth quarter excise tax receipts
also would not be completed prior to the issuance of the financial
statements, this means that 6 months of excise tax distributions
reported in the trust funds' financial statements would not have been
certified by IRS, increasing the potential for significantly inaccurate
distributions.
We believe the opportunity exists for IRS to accelerate the timing of
its excise tax receipt certifications. IRS has indicated that it needs
the 5 and one-half month period between the end of a quarter and
completion of the certification to allow for submission and processing
of returns and for recording, reviewing, and analyzing payment and tax
return data. However, our review of IRS's certification data for 4
quarters[Footnote 23] shows IRS has historically received and recorded
at least 90 percent of the Form 720 excise tax returns related to the
Highway Trust Fund and the Airport and Airway Trust Fund 2 months prior
to its cutoff for initiating the certification. Our analysis further
shows that fewer than 100 of the largest payers of excise taxes--those
with liabilities of $10 million or more per quarter--account for over
91 percent of certified receipts to the Highway Trust Fund and over 85
percent of certified receipts to the Airport and Airway Trust Fund.
The combination of (1) excise taxes reported in tax returns with
liability amounts below $10 million that are received and recorded by
IRS 2 months prior to its certification cutoff and (2) excise taxes
reported in tax returns with liability amounts of $10 million or more
accounts for more than 96 percent of the taxes IRS certified to both
the Highway Trust Fund and the Airport and Airway Trust Fund for those
quarters. Therefore, IRS could accelerate the timing of its
certifications of excise tax receipts to the Highway Trust Fund and the
Airport and Airway Trust Fund by at least 2 months by implementing
procedures to ensure that it has timely received and recorded tax
returns from the largest payers of excise taxes.
In each of the 4 quarters we reviewed, IRS data indicate that it has
generally received over 70 percent of the large returns 2 weeks after
the return due date. By taking a more proactive approach--tracking the
status of these taxpayers' returns, following up with those who have
not filed timely to encourage filing, and ensuring prompt processing of
large returns--we believe IRS should be able to accelerate completion
of its certification of excise tax receipts without significantly
increasing the potential for large amounts of quarterly receipts to go
uncertified.
Unless IRS establishes procedures to allow it to significantly
accelerate its certification of excise tax revenues to trust funds, the
amount of annual excise tax revenues reported by the Department of
Transportation for the Highway Trust Fund and the Airport and Airway
Trust Fund for fiscal year 2003 and beyond will include 6 months of
excise tax revenue distributions based on estimates. To the extent
these estimates differ significantly from the actual amounts that
should have been distributed to the trust funds, the result could be
both significantly inaccurate distributions and, in the case of the
Highway Trust Fund, incorrect allocations of revenues to
states.[Footnote 24]
Recommendations:
To enable IRS to accelerate its excise tax receipt certification
process, we recommend that you direct IRS management to implement
procedures to proactively ensure the timely receipt and recording of
the largest excise tax returns. Specifically, IRS management should
develop and implement procedures at the Cincinnati Campus to
annually identify excise taxpayers with the largest excise tax
liabilities affecting the Highway Trust Fund and the Airport and Airway
Trust Fund. In identifying these taxpayers, IRS should consider the
potential effect on trust fund distributions if one or more of these
taxpayers' returns were omitted from its certification;
track the status of tax return filings for the largest payers of excise
taxes and contact these taxpayers if the submission processing campus
has not received their tax returns by 2 weeks after the due date; and:
monitor the receipt and processing status of these large returns to
ensure that they are promptly recorded in IRS's master file prior to
certifying excise tax distributions.
IRS's Comments and Our Evaluation:
IRS agreed with this issue and indicated that it is taking action to
address our findings. In its response, IRS stated that it would
identify and provide a list of the top 100 excise taxpayers to the
Cincinnati Submission Processing and Compliance Campuses for the
identification and expedited processing of these taxpayers' returns.
Additionally, IRS stated it was working with the Cincinnati Compliance
Campus to implement additional monitoring of the top 100 excise
taxpayers to ensure timely receipt of excise tax returns and will
conduct an analysis of these taxpayers' receipt pattern to support
modifying IRS's current timeline for contacting the taxpayers for
submission of their returns.
While IRS does not plan to accelerate its certification of excise tax
receipts to trust funds for the third quarter of fiscal year 2003, it
stated that it would conduct "mock" nonpublished certifications to
determine the impact of an accelerated 4-month certification on all
trust funds. In our discussions with IRS officials, they have stated
that IRS plans to share this information with the Department of
Transportation's auditors so that they can determine the extent to
which adjustments may be required to reported excise tax revenues on
the trust funds' fiscal year 2003 financial statements. We will
evaluate IRS's actions in conjunction with our fiscal year 2003 agreed-
upon procedures review.
This report contains recommendations to you. The head of a federal
agency is required by 31 U.S.C. 720 to submit a written statement on
actions taken on these recommendations. You should send your statement
to the Senate Committee on Governmental Affairs and the House Committee
on Government Reform within 60 days after the date of this report. A
written statement also must be sent to the House and Senate Committees
on Appropriations with the agency's first request for appropriations
made over 60 days after the date of this report.
This report is intended for use by the management of IRS. We are
sending copies to the Chairmen and Ranking Minority Members of the
Senate Committee on Appropriations; Senate Committee on Finance; Senate
Committee on Governmental Affairs; Senate Committee on the Budget;
Subcommittee on Transportation, Treasury and General Government, Senate
Committee on Appropriations; Subcommittee on Taxation and IRS
Oversight, Senate Committee on Finance; and the Subcommittee on
Oversight of Government Management, the Federal Workforce, and the
District of Columbia, Senate Committee on Government Affairs. We are
also sending copies to the Chairmen and Ranking Minority Members of the
House Committee on Appropriations; House Committee on Ways and Means;
House Committee on Government Reform; House Committee on the Budget;
Subcommittee on Transportation, Treasury, and Independent Agencies,
House Committee on Appropriations; Subcommittee on Government
Efficiency and Financial Management, House Committee on Government
Reform; and the Subcommittee on Oversight, House Committee on Ways and
Means. In addition, we are sending copies of this report to the
Chairman and Vice Chairman of the Joint Committee on Taxation, the
Director of the Office of Management and Budget, the Secretary of the
Treasury, the Secretary of Transportation, and the Inspector General of
the Department of Transportation. Copies will be made available to
others upon request. The report is also available at no charge on GAO's
Internet site, at http://www.gao.gov.
We acknowledge and appreciate the cooperation and assistance provided
by IRS officials and staff during our fiscal year 2002 review. If you
have any questions or need assistance in addressing these matters,
please contact Charles Payton, Assistant Director, at (213) 830-1084.
Sincerely yours,
Steven J. Sebastian:
Director:
Financial Management and Assurance:
Signed by Steven J. Sebastian:
Enclosure I:
Comments from the Internal Revenue Service:
DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE WASHINGTON, D.C.
20224:
DEPUTY COMMISSIONER:
JUL 16 2003:
Mr. Steven J. Sebastian Director:
Financial Management and Assurance U.S. General Accounting Office:
441 G Street, N.W. Washington, D.C. 20548:
Dear Mr. Sebastian:
I reviewed the General Accounting Office (GAO) draft report titled,
Improvements Needed In Controls Over IRS's Excise Tax Certification
Process (GAO-03-687R, June 2003). Over the last several years, we have
adopted numerous improvements to ensure the adequacy of our excise tax
certification process and internal controls. We have an excellent
program in place to monitor our performance in these areas. For
example, we:
* Developed and published Internal Revenue Manual (IRM) 1.8.3,
Procedures for the Certifications, Refunds and Credits, documenting
excise tax certification reporting activities:
* Coordinated with the Cincinnati field personnel to develop and
implement post-processing procedures for claims related to excise tax
returns:
* Trained supervisors to look for relevant items when reviewing and
approving excise tax trust fund certifications:
* Coordinated the result of a new refund and credit certification
process with the other Treasury bureaus and Trust Fund entities:
We agree with the issues presented in the draft report. We have already
taken actions to address the recommendations. I would like to comment
on the four recommendations of your report.
Recommendation: We recommend that you direct IRS management to develop
and implement post-input review procedures to verify the accuracy of
excise tax credit information in the master file. In establishing these
procedures, IRS could consider establishing a dollar threshold, similar
to the threshold it established for its review of excise tax assessment
information on the Form 720 excise tax returns that would trigger post-
input verification of excise tax credit information.
Corrective Action: We are working with the Cincinnati Compliance campus
senior management to develop and implement post-input review procedures
to verify the accuracy of excise tax credit information posted to the
master file. We anticipate implementation by September 30, 2003.
Recommendation: We recommend that you direct IRS management to
investigate why certification errors continue to go undetected through
IRS's review procedures and develop and implement an action plan to
improve the certification review process.
Corrective Action: We have a new management team in place to review the
current excise tax certification process and to develop an action plan
for improving the certification reviews.
Recommendation: We recommend that you direct IRS management to
communicate in writing any potential changes in IRS's certification
process with other Treasury entities that use the certification
information, and to obtain concurrence from these entities prior to
implementing such changes.
Corrective Action: The IRS is a standing member of the Treasury Excise
Tax Working Group comprised of subject matter experts from Department
of the Treasury's Bureau of Public Debt (BPD), Financial Management
Service (FMS), Office of Cash & Debt Management (OCDM), and Office of
Tax Analysis (OTA). The working group, which meets at least quarterly,
was formed to address internal and external issues related to excise
tax revenue receipts, certification, and allocation of funds to Trust
Fund recipients.
We implemented in January 2002 the transcription of Form 720, Quarterly
Federal Excise Tax Return, Schedule C information. We discussed this
with the Excise Tax Trust Fund Working Group prior to implementation.
This change was to reduce the labor intensive and error prone manual
copying of data from Schedule C claims to pages one and two of the Form
720. This change provides IRS with total liability by type of tax and
not a netted total from the Form 720.
Based on the first year results and analysis of this transcription
change, we will:
provide documented recommendations to the Excise Tax Trust Fund Working
Group for potential changes to the certification process.
Recommendation: To enable IRS to accelerate its excise tax receipt
certification process, we recommend that you direct IRS management to
implement procedures to proactively ensure the timely receipt and
recording of the largest excise tax returns. Specifically, IRS
management should develop and implement procedures at the Cincinnati
Service Center Campus to:
* Annually identify excise taxpayers with the largest excise tax
liabilities affecting the Highway Trust Fund and the Airport and Airway
Trust Fund. In
identifying these taxpayers, IRS should consider the potential effect
on trust fund distributions if one or more of these taxpayers' returns
were omitted from its certification;
* track the status of tax return filings for the largest payers of
excise taxes and contact these taxpayers if the service center has not
received their tax return by 2 weeks after the due date; and:
* monitor the receipt and processing status of these large returns to
ensure that they are promptly recorded in IRS's master file prior to
certifying excise tax distributions.
Comments: We agree to conduct a pilot consisting of mock, non-
published, certifications for four quarters (June 2003 through March
2004) to determine the impact of an accelerated four-month
certification on all Trust Fund recipients while maintaining the
current six-month certification. We will provide documentation of our
analysis of the mock certification compared to the actual certification
to the Excise Tax Trust Fund Working Group and your staff to ascertain
the impact on smaller trust fund recipient investment activities.
We will identify and provide a list of the top 100 excise taxpayers to
the Cincinnati Submission Processing and Compliance Campuses for the
identification and expedited processing of these taxpayer's returns.
We are working with the Cincinnati Compliance Campus to implement
additional monitoring of the top 100 excise taxpayers to ensure timely
receipt of excise tax returns. We have procedures in place to verify
receipt of Form 720 "million-dollar" returns and correct posting of the
data on these returns to the master file. We will also conduct an
analysis of the top 100 excise taxpayers' receipt pattern to support
modifying the current timeline for contacting taxpayers for the
submission of their returns. This analysis will run concurrent with the
mock certification pilot.
I appreciate your input and will continue to take the necessary steps
to improve our excise tax certification process. With the continued
dedication and cooperation of both our staffs, we will further enhance
our excise tax certification procedures and internal controls. If you
have any questions, or would like to discuss this response in more
detail, please contact Greg Kane at (202) 435-5346.
Sincerely,
John M. Dalrymple:
Deputy Commissioner for Operations Support:
Signed by John M. Dalrymple:
[End of section]
Enclosure II:
:
Objectives, Scope, and Methodology:
The objective of the agreed-upon procedures work was to assist the
Inspector General of the Department of Transportation in ascertaining
whether the net excise tax collections and excise tax certifications
reported by IRS for the fiscal year ended September 30, 2002, were
supported by the underlying records. We did not perform work on excise
taxes collected by other Treasury bureaus, such as the Customs Service
and the Bureau of Alcohol, Tobacco, and Firearms.
In performing the agreed-upon procedures, we gained an understanding of
the internal controls over the excise tax collection and certification
process. The objectives of this report were to (1) discuss the
underlying internal control issues that allowed errors identified in
the agreed-upon procedures work to occur, (2) discuss timing issues
that have the potential to affect the accuracy of excise tax
distributions, and (3) provide recommendations for effectively
addressing these issues.
To accomplish our objectives, we examined, on a test basis, evidence
supporting the net excise tax collection amounts related to the Highway
Trust Fund and the Airport and Airway Trust Fund reported in the
Collection Certification System.
We used dollar unit sampling to select a sample of 94 prorated Highway
Trust Fund-related excise tax collections from the audit files[Footnote
25] for the first 6 months of fiscal year 2002, using a confidence
level of 80 percent, a test materiality of $315 million, and an
expected error amount of $94.5 million.
We selected a sample of 62 prorated Airport and Airway Trust Fund-
related excise tax collections from the audit files for the first 6
months of fiscal year 2002, using a confidence level of 80 percent, a
test materiality of $91 million, and an expected error amount of $27.3
million.
For each prorated excise tax collection sampled, we:
checked to see that the assessment amount on the tax return for the
sampled abstract agreed with the amount recorded in IRS's master file,
checked the mathematical accuracy of the taxpayers' calculations on the
tax returns for the related abstract, and:
recomputed the prorated collection amount based on information from the
master file and compared this amount to the sample items selected from
the Collection Certification System audit file.
We also performed detailed testing on the population of collections not
designated as related to the Highway Trust Fund or the Airport and
Airway Trust Fund to determine:
if they contained any Highway Trust Fund or Airport and Airway Trust
Fund excise tax collections.
Further, we performed the following procedures on IRS's certifications:
* We verified the mathematical accuracy of the totals on the
certification letters for the Highway Trust Fund and Airport and Airway
Trust Fund.
* We traced certified amounts for selected excise taxes from the
certification letters through summary schedules to the supporting
reports.
To determine the percentages of amounts certified to the Highway Trust
Fund and Airport and Airway Trust Fund that are accounted for by excise
tax returns with liabilities of $10 million or more and the amounts
from other excise tax returns received and recorded in IRS's master
file 2 months earlier than the certification cutoff, we analyzed IRS's
Collection Certification System and master file data. IRS made these
sources available to us for our fiscal years 2002 and 2001 agreed-upon
procedures reviews and fiscal years 2002 and 2001 IRS financial
statements audits. These included the audit support files from the
quarters ended June 30, 2001, September 30, 2001, December 31, 2001,
and March 31, 2002. Using these data, we:
identified excise tax returns by tax period and categorized excise
taxes for the tax returns identified that related to the Highway Trust
Fund and the Airport and Airway Trust Fund using data from IRS's audit
support file, and
summed the amounts related to the Highway Trust Fund and the Airport
and Airway Trust Fund for all tax returns with tax liabilities of $10
million or more and amounts related to tax returns with liabilities
below $10 million that had been recorded in IRS's master file 2 months
earlier than the certification date.
We conducted our work primarily from March 2002 through January 2003,
with some follow-up work through April 2003, in accordance with U.S.
generally accepted government auditing standards.
We requested comments on a draft of this report from the Commissioner
of IRS. We received written comments from the Deputy Commissioner for
Operations Support.
Enclosure III:
GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Charles E. Payton, (213) 830-1084:
Ted Hu, (213) 830-1108:
Acknowledgments:
Staff making key contributions to this report were David Elder, Gail
Luna, Esther Tepper, Julia Matta, and Sharon Byrd.
(196005):
:
FOOTNOTES
[1] U.S. General Accounting Office, Applying Agreed-Upon Procedures:
Highway Trust Fund Excise Taxes, GAO-03-360R (Washington D.C.: Jan. 23,
2003) and Applying Agreed-Upon Procedures: Airport and Airway Trust
Fund Excise Taxes, GAO-03-361R (Washington D.C.: Jan. 23, 2003).
[2] U.S. General Accounting Office, Financial Audit: IRS's Fiscal Years
2002 and 2001 Financial Statements, GAO-03-243 (Washington D.C.: Nov.
15, 2002).
[3] Because GAO is responsible for auditing IRS's financial statements,
we performed agreed-upon procedures to assist the Transportation IG in
assessing whether the net excise tax revenues distributed to the two
trust funds for fiscal year 2002 were supported by underlying records.
These agreed-upon procedures, in conjunction with additional testing by
the Transportation IG, provided Transportation's IG sufficient basis to
opine on the department's financial statements.
[4] In performing the agreed-upon procedures, we conducted our work in
accordance with attestation standards established by the American
Institute of Certified Public Accountants. These standards stipulate
that reporting on such engagements be in the form of procedures and
findings only.
[5] The Chief Financial Officers Act of 1990 (CFO Act), as expanded by
the Government Management Reform Act of 1994, requires the Department
of Transportation to annually submit audited financial statements to
the Office of Management and Budget (OMB). OMB requires agencies to
submit financial statements for fiscal year 2003 no later than February
1, 2004.
[6] Office of Management and Budget, Memorandum for Chief Financial
Officers and Inspectors General (Washington D.C.: Oct. 18, 2002).
[7] The Transportation Equity Act for the 21ST Century, Pub. L. No.
105-178, 112 Stat. 107 (1998), requires highway program funds to be
distributed to states on the basis of annual Highway Account receipts
information.
[8] The general fund accounts for receipts that are not earmarked by
law for specific purposes, the proceeds of general borrowing, and the
expenditure of these moneys for the general support of federal
government activities.
[9] Taxpayers file the quarterly excise tax return to report their
excise tax liability. Form 720 is generally due 30 days following the
end of the quarter.
[10] An assessment represents the taxes owed by a taxpayer for a given
period for a given tax. Typically, for excise taxes, this is the amount
reported by the taxpayer on the Form 720 excise tax return. Taxpayers
are allowed to claim excise tax credits for certain situations. For
example, due to IRS's method for taxing fuel, there are situations when
fuel could be taxed more than one time. Taxpayers are allowed to claim
a credit for the second time the fuel is taxed.
[11] The master file is a detailed database of taxpayer accounts.
[12] IRS certifies to trust funds the amount of excise taxes actually
collected. Because there are occasions on which taxpayers have not paid
their full tax liability at the time of IRS's certification, IRS must
allocate the amount of payments actually received among the different
excise taxes reported on the taxpayer's return. IRS's Collection
Certification System prorates a taxpayer's payments among all taxes
reported owed on the tax return. For example, if a Form 720 indicates
that the taxpayer owes $4 million for gasoline tax, $2 million for
diesel fuel tax, and $1 million for gasohol tax, but the taxpayer 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.
[13] This is the total amount of certified collections for each tax
(e.g., gasoline) prior to distribution between the general fund and
trust fund.
[14] The tax amounts for certain taxes, such as some motor fuel taxes,
are allocated among the general fund, the Highway Account of the
Highway Trust Fund, and the Mass Transit Account of the Highway Trust
Fund.
[15] This adjustment is determined by taking the IRS-certified amount
and subtracting from it the initial distribution amount derived from
the OTA estimate. If the resulting amount is positive, it is
transferred from the general fund to the trust fund. If the resulting
amount is negative, it is transferred out of the trust fund to the
general fund.
[16] Petroleum producers, who usually are assessed fuel excise taxes
and pay them to IRS, pass on these taxes to consumers in the form of
higher prices. Consumers who use the fuel for a tax-exempt purpose,
such as farming, can claim a credit for the excise taxes on their
personal or corporate income tax return.
[17] IRS has 10 submission processing campuses, which receive and
process tax returns.
[18] U.S. General Accounting Office, Standards for Internal Control in
the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November
1999).
[19] U.S. General Accounting Office, Excise Taxes: Internal Control
Weaknesses Affect Accuracy of Distributions to the Trust Funds, GAO/
AIMD-99-17 (Washington D.C.: Nov. 9, 1998).
[20] Taxpayers use the Form 8849 to claim certain fuel-related refunds,
such as nontaxable uses or tax paid on the resale of fuel previously
taxed.
[21] GAO/AIMD-99-17 and U.S. General Accounting Office, Internal
Revenue Service: Recommendations to Improve Financial and Operational
Management, GA0-01-42 (Washington D.C.: Nov. 17, 2000).
[22] GAO/AIMD-99-17.
[23] We reviewed data from IRS's Collection Certification System and
master file from the quarters ended June 30, 2001, September 30, 2001,
December 31, 2001, and March 31, 2002. IRS had made these data
available to us for our fiscal years 2002 and 2001 agreed-upon
procedures reviews and IRS financial statement audits.
[24] The Transportation Equity Act for the 21ST Century, Pub. L. No.
105-178, 112 Stat. 107 (1998) enhanced the link between the amount of
funds received by states and the amount of tax receipts credited to the
Highway Trust Fund by requiring that highway program funds be
distributed to states on the basis of annual highway account receipts.
[25] 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.