Applying Agreed-Upon Procedures
Federal Unemployment Taxes Gao ID: GAO-05-27R November 5, 2004We assisted the Department of Labor in ascertaining whether the net federal unemployment tax (FUTA) revenue distributed to the Unemployment Trust Fund (UTF) for the fiscal year ended September 30, 2004, is supported by the underlying records. We evaluated fiscal year 2004 activity affecting distributions to the UTF. In performing the agreed-upon procedures, we conducted our work in accordance with U.S. generally accepted government auditing standards, which incorporate financial audit and attestation standards established by the American Institute of Certified Public Accountants. These standards also provide guidance for performing and reporting the results of agreed-upon procedures. The procedures we agreed to perform 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 records to the Department of the Treasury records.
GAO-05-27R, Applying Agreed-Upon Procedures: Federal Unemployment Taxes
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November 5, 2004:
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, 2004, is supported
by the underlying records. As agreed with your office, we evaluated
fiscal year 2004 activity affecting distributions to the UTF.
In performing the agreed-upon procedures, we conducted our work in
accordance with U.S. generally accepted government auditing standards,
which incorporate financial audit and attestation standards established
by the American Institute of Certified Public Accountants. These
standards also provide guidance for performing and reporting the
results of agreed-upon procedures.
The adequacy of the procedures to meet your objectives is your
responsibility, and we make no representation in that respect. The
procedures we agreed to perform 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 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 27, 2004.
We provided a draft of this report to IRS officials 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 Labor and should not be used by those who
have not agreed to the procedures and have not taken responsibility for
the sufficiency of the procedures for their purposes. However, this
report is a matter of public record, and its distribution is not
limited. Copies are available to others upon request. This report is
also available at no charge on GAO's Web site at http://www.gao.gov. If
you have any questions, please call me at (202) 512-3406.
Sincerely yours,
Signed by:
Steven J. Sebastian:
Director:
Financial Management and Assurance:
Enclosure:
Unemployment Trust Fund Procedures and Results:
I. Detailed tests of transactions:
A. Obtain from the Internal Revenue Service (IRS) total Federal
Unemployment Tax (FUTA) collections and refunds reflecting the first 8
months of fiscal year 2004 posted to the master file.[Footnote 1]
Determine whether 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 2004 per IRS's master file materially reconciled to IRS's general
ledger.
B. Use dollar unit sampling (DUS) to select a sample of combined FUTA
collection and refund transactions from the master file for the first 8
months of fiscal year 2004, using a confidence level of 80 percent, a
test materiality of $374 million, and an expected aggregate error
amount of $112 million.
Description of findings and results:
Use of DUS with a confidence level of 80 percent, a test materiality
of $374 million, and an expected aggregate error amount of $112 million
resulted in a sample of 40 transactions for the first 8 months of
fiscal year 2004. All of the 40 transactions represented collection
sample items.
C. For each sampled FUTA tax collection transaction:
1. Determine whether 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 40 sampled FUTA collection transactions.
2. Determine whether 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 40 sampled FUTA collection transactions.
3. 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 39 of the 40 sampled
transactions. One sampled transaction, which was classified as a FUTA
receipt, should have been classified as a corporate tax payment (tax
class 3). IRS discovered the error and made the correction after our
sample cutoff date but before the end of the fiscal year.
Based on our testing results, the net most likely error for the first 8
months of fiscal year 2004 is $141 million. The net upper error limit
is $414 million.
4. Confirm FUTA transactions paid via the Electronic Federal Tax
Payment System (EFTPS)[Footnote 4] to determine whether the recorded
transactions are valid and reflect the proper amounts, are applied to
the proper tax period, and are properly classified as FUTA receipts.
Description of findings and results:
Of the 40 sampled FUTA collection transactions, 33 were paid via EFTPS.
The bank confirmations showed that all 33 transactions were valid and
had been recorded to the proper tax period and tax class and for the
proper amounts.
II. Analytical procedures:
A. Perform analytical procedures on FUTA revenue collection and refund
data for the period not subject to detailed tests of transactions to
determine whether reported fiscal year 2004 revenue collections and
refunds appear reasonable.
Description of findings and results:
We performed a predictive test on the final 4 months of fiscal year
2004 FUTA revenue collection and refund data. The predicted FUTA
revenue collection and refund data amounts for the final 4 months of
fiscal year 2004 did not materially vary from the actual amount of
revenue collections and refunds per IRS's records for this period.
III. Other FUTA procedures:
A.For each of the 12 months in fiscal year 2004, obtain and review
supporting documentation for monthly revenue reclassification
adjustments transmitted by IRS to the Department of the Treasury's
Financial Management Service (FMS). Check to see whether the supporting
documentation agrees with the reclassification adjustment transmitted
to FMS.
Description of findings and results:
Documentation supported the monthly FUTA reclassification adjustment
amount transmitted to FMS for all 12 months of fiscal year 2004.
B. For each of the 12 months in fiscal year 2004, obtain and review
supporting documentation for the monthly entry of FUTA refund data into
the Government Online Accounting Link System (GOALS) to charge back the
Unemployment Trust Fund (UTF) account for FUTA tax refunds issued.
Check to see whether the supporting documentation agrees with the
monthly entries reported on GOALS.
Description of findings and results:
Documentation supported the monthly FUTA refund amount entered into
GOALS to charge the UTF for FUTA tax refunds issued for all 12 months
of fiscal year 2004.
C. Compare fiscal year 2004 net FUTA collections per 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.
Description of findings and results:
There were no significant variances between net FUTA collections per
IRS's draft statement of custodial activity and BPD's accounting
records for UTF. Similarly, there were no significant variances between
IRS's draft statement of custodial activity and related footnote
disclosures and drafts of DOL's fiscal year 2004 consolidated financial
statements.
IV.Other procedures performed as part of the fiscal year 2004 IRS
financial statement audit:
A. From IRS's master files for the first 8 months of fiscal year 2004,
use DUS to select statistical samples of (1) total tax revenue receipts
and (2) refunds. For each sample item, test whether the collection or
refund amount, tax period, and tax class from source documentation
agree with those recorded in IRS's master files.
Description of findings and results:
Detailed testing of 135 revenue receipts and 48 refund sample
transactions showed that the collection or refund amount, tax period,
and tax class from source documentation agreed with those recorded in
IRS's master files.
B. Review selected IRS service center campuses' monthly Treasury SF-224
reconciliations to determine whether 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 whether IRS-reported total refunds
(all tax classes) materially[Footnote 5] reconciled to Treasury FMS
records.[Footnote 6]
Description of findings and results:
Tax revenue receipts reported by selected IRS service center campuses
through the monthly Treasury SF-224 reconciliation process were
properly classified and materially reconciled to Treasury FMS records.
Total refunds reported by selected IRS service center campuses through
the monthly Treasury SF-224 reconciliation process materially
reconciled to Treasury FMS records.
C. Perform procedures to determine whether tax revenue receipt balances
by tax class, including FUTA, recorded in 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 files, 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 Treasury
records.
Refund balances per IRS's general ledger materially agreed with the
master files and with Treasury records.
(196008):
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 $374 million. This represents 1 percent of net
Unemployment Trust Fund collections for fiscal year 2003.
[3] IRS assigns a tax class number to specific types of taxes. FUTA
taxes are tax class 8.
[4] EFTPS is a Financial Management Service system maintained by two
financial agents for the government. EFTPS is used for initiating tax
payments electronically. Employers who make federal tax deposits
exceeding $200,000 must use EFTPS to pay their FUTA taxes. The $200,000
threshold includes all federal tax deposits, such as deposits for
employment tax, excise tax, and corporate income tax. Taxpayers who are
not required to make electronic deposits may voluntarily participate in
EFTPS.
[5] For the purpose of this procedure and procedure IV.C, we define
"material" as $20 billion. This represents 1 percent of the estimated
total tax revenue receipts collected by IRS in fiscal year 2004.
[6] IRS maintains records of refund balances by tax class in its master
file and reports this information monthly to Treasury on the SF-224.
Treasury provides IRS with a Statement of Differences (TFS-6652), which
reports differences between total refunds reported by IRS on the SF-224
and the total refunds in Treasury records.
