Applying Agreed-Upon Procedures
Highway Trust Fund Excise Taxes
Gao ID: GAO-04-213R November 20, 2003
The Inspector General (IG) of the Department of Transportation requested that GAO perform procedures to assist the IG's office in ascertaining whether the net excise tax revenue distributed to the Highway Trust Fund (HTF) for the fiscal year ended September 30, 2003, is supported by the underlying records. GAO evaluated fiscal year 2003 activity affecting distributions to the HTF.
GAO noted that the adequacy of the procedures to meet IG's objectives is the IG's responsibility, and GAO makes no representation in that respect. The procedures GAO agreed to perform include (1) detailed tests of transactions that represent the underlying basis of amounts distributed to the HTF, (2) review of the Internal Revenue Service's (IRS) quarterly HTF certifications, (3) review of the Department of the Treasury Financial Management Service (FMS) adjustments to the HTF for fiscal year 2003, (4) review of IRS's precertification1 of receipts for the third quarter of fiscal year 2003, (5) review of certain procedures of the Department of the Treasury Office of Tax Analysis' (OTA) process for estimating amounts to be distributed to the HTF for the fourth quarter of fiscal year 2003, and other procedures including (6) comparison of net excise tax distributions to the HTF during fiscal year 2003 and amounts reported in the draft financial statements prepared by the Bureau of the Public Debt (BPD) for the HTF and the HTF's draft financial statements, (7) detailed tests of transactions that represent total IRS tax revenue receipts and refunds, and (8) review of key reconciliations of IRS records to Treasury records. GAO was not engaged to perform, and did not perform, an audit, the objective of which would have been the expression of an opinion on the amount of net excise taxes distributed to the HTF.
GAO-04-213R, Applying Agreed-Upon Procedures: Highway Trust Fund Excise Taxes
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November 20, 2003:
The Honorable Kenneth M. Mead:
Inspector General:
Department of Transportation:
Subject: Applying Agreed-Upon Procedures: Highway Trust Fund Excise
Taxes:
Dear Mr. Mead:
We have performed the procedures contained in the enclosure to this
report, which we agreed to perform and with which you concurred, solely
to assist your office in ascertaining whether the net excise tax
revenue distributed to the Highway Trust Fund (HTF) for the fiscal year
ended September 30, 2003, is supported by the underlying records. As
agreed with your office, we evaluated fiscal year 2003 activity
affecting distributions to the HTF.
In performing the agreed-upon procedures, we conducted our work in
accordance with U.S. generally accepted government auditing standards,
which incorporate financial audit and attestation standards established
by the American Institute of Certified Public Accountants. These
standards also provide guidance for performing and reporting the
results of agreed-upon procedures.
The adequacy of the procedures to meet your objectives is your
responsibility, and we make no representation in that respect. The
procedures we agreed to perform include (1) detailed tests of
transactions that represent the underlying basis of amounts distributed
to the HTF, (2) review of the Internal Revenue Service's (IRS)
quarterly HTF certifications, (3) review of the Department of the
Treasury Financial Management Service (FMS) adjustments to the HTF for
fiscal year 2003, (4) review of IRS's precertification[Footnote 1] of
receipts for the third quarter of fiscal year 2003, (5) review of
certain procedures of the Department of the Treasury Office of Tax
Analysis' (OTA) process for estimating amounts to be distributed to the
HTF for the fourth quarter of fiscal year 2003, and other procedures
including (6) comparison of net excise tax distributions to the HTF
during fiscal year 2003 and amounts reported in the draft financial
statements prepared by the Bureau of the Public Debt (BPD) for the HTF
and the HTF's draft financial statements, (7) detailed tests of
transactions that represent total IRS tax revenue receipts and refunds,
and (8) review of key reconciliations of IRS records to Treasury
records. The enclosure contains the agreed-upon procedures and our
findings from performing each of the procedures.
We were not engaged to perform, and did not perform, an audit, the
objective of
which would have been the expression of an opinion on the amount of net
excise taxes distributed to the HTF. Accordingly, we do not express
such an opinion. Had we performed additional procedures, other matters
might have come to our attention that would have been reported to
you.[Footnote 2] We completed the agreed-upon procedures on November 7,
2003.
We provided a draft of this report to IRS and OTA officials for review
and comment. They agreed with the results and findings presented in
this report. In response to our findings concerning errors in its
estimates, OTA 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 Transportation and should not be used by
those who have not agreed to the procedures and have not taken
responsibility for the sufficiency of the procedures for their purpose.
However, this report is a matter of public record and its distribution
is not limited. Copies are available to others upon request. This
report is also available at no charge on GAO's Internet Web site 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:
[End of section]
Enclosure:
Highway Trust Fund Excise Tax Procedures and Results:
I. Detailed tests of transactions that represent the underlying basis
of amounts distributed to the HTF in fiscal year 2003:
A. Nonrepresentative selection of tax returns from the quarter ended
September 30, 2002[Footnote 3]:
1. For the quarter ending September 30, 2002, select the 30 largest
excise tax returns containing excise taxes related primarily to the
HTF and the Airport and Airway Trust Fund (AATF), on the basis of
total tax liability[Footnote 4] amount, from IRS's master file.
[Footnote 5]
Description of findings and results:
We selected the 30 largest excise tax returns related primarily to the
HTF and the AATF from the quarter ended September 30, 2002, for
testing. The selection was based on the total tax liability amount and
type of taxes owed, for each return, from IRS's master file.
The total tax liability amount related to these 30 returns was
approximately $8.6 billion, or 66 percent of the total excise tax
liability amount-$13 billion-for all excise tax types for the quarter
ended September 30, 2002.
Of these 30 returns, 22 contained primarily HTF-related taxes and 8
contained primarily AATF taxes.
2. For each of the 22 returns related primarily to the HTF we
performed the following procedures, which resulted in our testing
approximately $6.4 billion in prorated collections[Footnote 6]
affecting fiscal year 2003 distributions to the HTF:
a. Trace the liability amount for abstracts[Footnote 7] 59, 60, and 62
from the tax return to IRS's master file.
Description of findings and results:
The liability amount for abstracts 59, 60, and 62 on the tax return
agreed with IRS's master file for 22 of the 22 returns.
b. Check the mathematical accuracy of the taxpayer's calculations on
the tax return for the selected abstracts.
Description of findings and results:
The taxpayer's calculations on all 22 returns were mathematically
correct.
c. Recompute the prorated collection amount for the selected abstracts
based on information from the master file and compare this amount to
the amount from the Collection Certification System audit
file.[Footnote 8]
Description of findings and results:
The recomputed prorated collection amounts for the three selected
abstracts agreed with amounts in IRS's Collection Certification System
audit file for all 22 of the returns.
B. Dollar unit sample (DUS) of transactions from the quarters ended
December 31, 2002, and March 31, 2003:
1. Sampling:
(a) Obtain excise tax assessments and collection data from IRS's master
file for the first 6 months of fiscal year 2003. Determine if excise
tax collections per the master file agree with IRS's general ledger.
Reconcile total excise tax collections from the master file to total
excise tax collections from the Collection Certification System audit
files to determine if they materially[Footnote 9] agree.
Description of findings and results:
Excise tax collections for the first 6 months of fiscal year 2003 per
the master file materially agreed with IRS's general ledger and with
total excise tax collections from the Collection Certification System.
(b) Select a random attribute sample of 78 excise tax assessments from
IRS's master file.[Footnote 10] Compare assessment and receipt
information for each sample item from the master file to the assessment
and receipt information in the Collection Certification System to
determine if assessments and receipts from the master file are
contained in the Collection Certification System.
Description of findings and results:
For each sample item, assessments and receipts from the master file
were contained in the Collection Certification System.
(c) To determine if the Collection Certification System properly
summarized the prorated collections, total the prorated collections
for selected abstracts[Footnote 11] from the audit files and compare
these amounts to amounts in the Reports of Excise Tax Collection.
[Footnote 12]
Description of findings and results:
The Collection Certification System properly summarized the prorated
collections for all of the selected abstracts related to the HTF and
the AATF. Prorated collections for the above-mentioned trust funds from
the audit files agreed with the corresponding amounts in the Reports of
Excise Tax Collection.
(d) Separate the total population of prorated collections from the
audit files into the following distinct populations: (1) HTF, (2)
AATF, and (3) other excise tax abstracts. Use DUS to select a sample
of prorated excise tax collections from the HTF population.
Description of findings and results:
Use of DUS with a confidence level of 80 percent, a test materiality of
$322 million, and an expected aggregate error amount of $96.6 million
resulted in a sample of 96[Footnote 13] prorated collections for HTF
for the first 6 months of fiscal year 2003.
(e) Select samples of prorated excise tax collections from the two non-
HTF populations.
Description of findings and results:
Use of DUS with a confidence level of 80 percent, a test materiality of
$89 million, and an expected aggregate error amount of $26.7 million
resulted in a sample of 67[Footnote 14] prorated collections for the
first 6 months of fiscal year 2003 for the AATF.
A random attribute sample of 45 items from the population of prorated
tax collections, related to all excise taxes other than the HTF and the
AATF, was selected for testing.[Footnote 15]
2. Detailed tests of transactions:
(a) For each prorated excise tax collection sampled from the HTF
population:
* Check to see that the assessment amount on the tax return, for the
sampled abstract, agrees with the amount recorded in IRS's master file.
Description of findings and results:
The assessment amounts on the tax returns agreed with the amounts
recorded in IRS's master file for all of the sampled abstracts.
* Check the mathematical accuracy of the taxpayers' calculations on the
tax returns for the related abstract.
Description of findings and results:
The taxpayers' calculations on the tax returns for the related
abstracts were mathematically correct for all of the sampled abstracts.
* Recompute the prorated collection amount based on information from
the master file and compare this amount to the sample items selected
from the Collection Certification System audit file.[Footnote 16]
Description of findings and results:
The recomputed prorated collection, based on information from the
master file, agreed with the amounts for all of the sampled items.
(b) Perform detailed testing on the two samples of prorated collections
from the non-HTF populations to determine if they contain any HTF
excise tax collections.
Description of findings and results:
The two samples of prorated collections from the non-HTF populations
did not contain any HTF excise tax collections.
(c) Evaluate the results of conducting steps (a) and (b).
Description of findings and results:
As noted in the results from steps (a) and (b), we found no errors.
II. Review of IRS's quarterly HTF certifications:
A. Receipt certifications:
Perform the following steps on IRS's HTF receipt certifications for the
quarters ended September 30, 2002, December 31, 2002, and March 31,
2003:
1. Inspect the certification letters[Footnote 17] for authorizing
signatures.
Description of findings and results:
The HTF certification letters for all three quarters had authorizing
signatures.
2. Determine if evidence exists that the supervisor or another analyst
checked the certification letters and supporting worksheets.
Description of findings and results:
There was evidence that another analyst and a supervisor checked the
certification letters and supporting worksheets for all three quarters.
3. Recalculate the totals on the certification letters to determine if
they are mathematically correct.
Description of findings and results:
The totals on the certification letters for all three quarters were
mathematically correct.
4. Trace the certified amounts for diesel fuel tax (abstract 60),
gasoline tax (abstract 62), and tax on 10 percent gasohol (abstract
59)[Footnote 18] from the certification letters back to the Reports of
Excise Tax Collection[Footnote 19] and Treasury 90 Report.[Footnote 20]
Description of findings and results:
The certified amounts for diesel fuel tax (abstract 60), gasoline tax
(abstract 62), and tax on 10 percent gasohol (abstract 59) per the
certification letters agreed with the related Reports of Excise Tax
Collection for all three quarters.
However, on IRS's receipt certification for the quarter ended December
31, 2002, the IRS analyst used excise tax credit information from the
Treasury 90 Report for the quarter ended September 30, 2002, rather
than the Treasury 90 Report for the quarter ended December 31, 2002. As
a result, IRS understated certified receipts to the Highway Account by
approximately $12.4 million and understated certified receipts to the
Mass Transit Account by approximately $1.7 million. IRS discovered the
error after it had sent the certification letter to the FMS, and FMS
had already recorded the true-up adjustment for using the certification
letters. IRS corrected this error on the receipt certification for the
following quarter ended March 31, 2003. Therefore, this error had no
net effect on fiscal year 2003 distributions to the HTF.
5. Review the distribution rates used by IRS to determine whether the
distribution rates for diesel fuel tax (abstract 60), gasoline tax
(abstract 62), and tax on 10 percent gasohol (abstract 59) agree with
the applicable laws.[Footnote 19]
Description of findings and results:
The distribution rates used by IRS for diesel fuel tax (abstract 60),
gasoline tax (abstract 62), and tax on 10 percent gasohol (abstract 59)
agreed with the applicable laws in effect during all three quarters.
6. Review the Reports of Excise Tax Collection used in the
certification to determine if they contain significant[Footnote 22]
collections from prior quarters.
Description of findings and results:
The Reports of Excise Tax Collection supporting IRS's certification to
HTF for the quarter ended September 30, 2002, contained approximately
$261 million in net HTF excise tax collections related to prior
quarters. This consisted of approximately $262 million from the quarter
ended June 30, 2002 and ($1 million)[Footnote 23] from prior quarters.
IRS attributed the delay in classifying the June quarter amounts to two
taxpayers who did not file timely and five tax returns with processing
delays due to taxpayer or IRS errors.
The Reports of Excise Tax Collection supporting IRS's certification to
HTF for the quarter ended December 31, 2002, contained approximately
$330 million in net HTF excise tax collections related to prior
quarters. Of this amount, approximately $253 million was from the
quarter ended September 30, 2002. IRS attributed this delay to three
taxpayers who did not file timely and two tax returns with processing
delays due to taxpayer or IRS errors.
The Reports of Excise Tax Collections supporting IRS's certification to
the HTF for the quarter ended March 31, 2003, did not contain
significant prior quarter collections.
7. Heavy vehicle use taxes, which go to the HTF, are reported on Form
2290 and are not included in the Collection Certification System.
Trace the heavy vehicle use tax amounts from the Highway Account
certification letters to the master file.
Description of findings and results:
Heavy vehicle use tax per the Highway Account certification letters
agreed with the master file for all three quarters.
B. Refund/credit reclassification[Footnote 24]
Perform the following steps on IRS's HTF refund/credit certifications
for the quarters ended December 31, 2002, March 31, 2003, June 30,
2003, and September 30, 2003:[Footnote 25]
1. Inspect the certification letters for authorizing signatures.
Description of findings and results:
The certification letters for all four quarters had authorizing
signatures.
2. Determine if evidence exists that a supervisor or another analyst
checked the certification letters and accompanying schedules.[Footnote
26]
Description of findings and results:
There was evidence that another analyst and a supervisor checked the
certification letters and accompanying schedules for all four quarters.
3. Recalculate the totals on the certification letters and
accompanying schedules to determine if they are mathematically
correct.
Description of findings and results:
The totals on the certification letters and accompanying schedules were
mathematically correct for all four quarters.
4. Trace the refund and credit amounts for gasoline tax and diesel
tax[Footnote 27] from the schedules accompanying the certification
letters to other summary refund/credit schedules. These other refund/
credit summary schedules summarize refund and credit data obtained from
submission processing campuses' records.
Description of findings and results:
The refund and credit amounts for gasoline tax and diesel tax on the
schedules accompanying the certification letters agreed with the
amounts on the summary schedules for all four quarters.
III. Review of FMS adjustments:
Perform the following steps on FMS adjustments to the HTF excise tax
distributions for the quarters ended September 30, 2002, December 31,
2002, and March 31, 2003.
A. Compare the FMS adjustments made to the HTF for fiscal year 2003
with original OTA estimates and IRS-certified amounts to see if they
agree with the supporting schedules.[Footnote 28]
Description of findings and results:
For the FMS adjustments made to the HTF accounts (Highway and Mass
Transit), the original OTA estimates and IRS-certified amounts agreed
with the supporting schedules for all three quarters.
B. Recompute the difference between the OTA estimates and final IRS-
certified amounts to see if the amounts agree with the differences
computed by FMS.
Description of findings and results:
The independently recalculated differences between the OTA estimates
and the final IRS-certified amounts for the Highway Account agreed with
the differences computed by FMS for all three quarters.
These amounts were[Footnote 29]
* for the quarter ended September 30, 2002, $636,666,000;
* for the quarter ended December 31, 2002, ($319,825,000); and:
* for the quarter ended March 31, 2003, $205,901,000.
The independently recalculated differences between the OTA estimates
and the final IRS-certified amounts for the Mass Transit Account agreed
with the differences computed by FMS for all three quarters.
These amounts were:
* for the quarter ended September 30, 2002, $16,750,000;
* for the quarter ended December 31, 2002, ($17,123,000); and:
* for the quarter ended March 31, 2003, $48,083,000.
IV. Review of IRS precertification for the quarter ended June 30,
2003[Footnote 30]
A. Determine if evidence exists that the supervisor or another analyst
checked the results and supporting worksheets.
Description of findings and results:
There was evidence that another analyst and a supervisor checked the
results and supporting worksheets.
B. Recalculate the totals on the precertification to determine if they
are mathematically correct.
Description of findings and results:
The totals on the precertification were mathematically correct.
C. Trace the amounts for diesel fuel tax (abstract 60), gasoline tax
(abstract 62), and tax on 10 percent gasohol (abstract 59)[Footnote 31]
from the precertification back to the Reports of Excise Tax Collection
and Treasury 90 Report.
Description of findings and results:
The amounts for diesel fuel tax (abstract 60), gasoline tax (abstract
62), and tax on 10 percent gasohol (abstract 59) per the
precertification agreed with the related Reports of Excise Tax
Collection and Treasury 90 Report.
D. Review the distribution rates used by IRS to determine whether the
distribution rates for diesel fuel tax (abstract 60), gasoline tax
(abstract 62), and tax on 10 percent gasohol (abstract 59) agree with
the applicable laws.
Description of findings and results:
The distribution rates used by IRS for diesel fuel tax (abstract 60),
gasoline tax (abstract 62), and tax on 10 percent gasohol (abstract 59)
agreed with the applicable laws in effect during the quarter ended June
30, 2003.
E. Review the Reports of Excise Tax Collection used in the
precertification to determine if they contain significant[Footnote 32]
collections from prior quarters.
Description of findings and results:
The Reports of Excise Tax Collection supporting IRS's precertification
for the quarter ended June 30, 2003, did not contain significant prior
quarter collections.
F. Review the Collection Certification System information to determine
whether IRS omitted any significant returns[Footnote 33] from the
precertification. If so, report for the Highway Account and the Mass
Transit Account: (1) the average amount of HTF-related excise taxes
from these taxpayers' returns that were included in IRS's certification
from the four previous quarters and (2) the amount of HTF-related
excise taxes from these taxpayers' returns that were included in IRS's
certification for the quarter ended June 30, 2002.
Description of findings and results:
IRS did not omit any returns of historically significant excise tax
taxpayers from its precertification to the HTF.
G. Heavy vehicle use taxes, which go to the HTF, are reported on Form
2290 and are not included in the Collection Certification System. Trace
these amounts from the Highway Account precertification letter to the
master file.
Description of findings and results:
Heavy vehicle use tax per the Highway Account precertification agreed
with the master file.
V. Procedures performed on excise tax distributions to the HTF for the
quarter ended September 30, 2003:
A. Determine if OTA's process for identifying and incorporating into
its trust fund estimates[Footnote 34] the effect of new legislation on
excise tax receipts was in place during fiscal year 2003.
Description of findings and results:
OTA's process for identifying and incorporating into its trust fund
estimates the effect of new legislation on excise tax receipts was in
place during fiscal year 2003. OTA prepares a tax rate table[Footnote
35] to capture information relating to legislation that affects tax
rates, tax basis, accounts, and deposit rules in effect during the tax
period.
B. Determine if there is evidence of review of the transfer forms and
supporting schedules.
Description of findings and results:
There was evidence that another OTA economist reviewed the transfer
forms and supporting schedules for the semimonthly transfers affecting
distributions to the HTF for the quarter ended September 30, 2003.
C. Recalculate the totals on the transfer forms to determine if they
are mathematically correct.
Description of findings and results:
The totals on the transfer forms affecting distributions to the HTF for
the quarter ended September 30, 2003, were mathematically correct.
D. Trace the transfer amounts for diesel fuel tax (abstract 60),
gasoline tax (abstract 62), tax on 10 percent gasohol (abstract 59),
and heavy vehicle use tax,[Footnote 36] from the transfer forms,
through the supporting schedules and back to the related source
documents.[Footnote 37]
Description of findings and results:
The transfer amounts for diesel fuel tax (abstract 60), gasoline tax
(abstract 62), tax on 10 percent gasohol (abstract 59), and heavy
vehicle use tax from the transfer forms did not agree with the
supporting schedules and source documents on the first two semimonthly
estimates affecting distributions to the HTF for the quarter ended
September 30, 2003. An error on one of OTA's electronic spreadsheets
resulted in the collection percentages for all tax types being
miscalculated. After we brought this to its attention, OTA corrected
the spreadsheet error so it did not affect the remaining estimates for
the quarter. However, since the effect of this error on the total
quarterly estimate would be only a fraction of a percent, OTA did not
correct for the effects of this error on the two affected semimonthly
estimates. Consequently, OTA understated its estimate for these four
taxes to the HTF by approximately $4.2 million.
In addition, there was another error affecting distributions to the HTF
that was not directly related to the tax types selected for review. An
error on OTA's electronic spreadsheets resulted in the omission of the
estimated amounts for retail tax on trucks (abstract 33) from its
estimates to the Highway Account for the first four semimonthly periods
of the quarter. As a result, OTA understated its estimates to the HTF
by approximately $305 million. OTA corrected for the effects of this
error through its final semimonthly estimate affecting fiscal year 2003
distributions to the HTF. Consequently, this error had no net effect on
fiscal year 2003 distributions to the HTF.
VI. Other procedures:
A. Compare total fiscal year 2003 excise taxes distributed to the HTF
with drafts of (1) HTF's fiscal year 2003 financial statements and (2)
BPD's fiscal year 2003 financial statements for the HTF to determine
if they agree.
Description of findings and results:
The $34.1 billion of fiscal year 2003 excise taxes distributed to the
HTF agreed with the amount reported on the draft HTF financial
statements but did not agree with the amount reported on the draft BPD
fiscal year 2003 financial statements for the HTF. The BPD fiscal year
2003 financial statements for the HTF reported excise tax distributions
to the HTF of $33.7 billion. The difference is due to FMS's $388.6
million downward adjustment for the quarter ended June 30, 2002--a
$378.9 million adjustment to the Highway Account and a $9.7 million
adjustment to the Mass Transit Account--which FMS recorded in December
2002. The trust fund's administrator included this transaction as part
of the fiscal year 2002 distributions to the HTF because the HTF had
time to record the adjustment on its fiscal year 2002 financial
statements, which were issued in January 2003. However, BPD included
this transaction as part of the fiscal year 2003 distributions because
it was recorded after the November 1, 2002, issuance date of BPD's
fiscal year 2002 financial statements for the HTF.
B. Procedures performed as part of the fiscal year 2003 IRS financial
statement audit:
1. From IRS's master files for the first 8 months of fiscal year 2003,
use DUS to select statistical samples of (1) total tax revenue
receipts and (2) refunds. For each sample item, test that the
collection or refund amount, tax period, and tax class[Footnote 38]
from source documentation agree with those 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 IRS's
master files.
2. Review selected IRS submission processing 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 submission processing campuses' monthly
Treasury SF-224 reconciliations to determine if IRS-reported total
refunds (all tax classes) materially[Footnote 39] reconciled to
Treasury FMS records.[Footnote 40]
Description of findings and results:
Tax revenue receipts reported by selected IRS submission processing
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 submission processing
campuses through the monthly Treasury SF-224 reconciliation process
materially agreed with Treasury FMS records.
3. Perform procedures to determine whether tax revenue receipt
balances by tax class, including excise taxes, per IRS's general
ledger, materially agree with IRS's master files and Treasury records.
For refunds, perform a comparison of total refund balances between the
master file, the general ledger, and Treasury records.
Description of findings and results:
Tax receipt balances for all tax classes, including excise taxes, per
IRS's general ledger, materially agreed with IRS's master files and
with Treasury records.
Refund balances per IRS's general ledger materially agreed with the
master file and with Treasury records.
(196003):
FOOTNOTES
[1] To accommodate the Department of Transportation's accelerated
reporting date for fiscal year 2003, IRS performed a precertification
of excise tax collections for the quarter ended June 30, 2003. The data
are for information purposes only and the precertification does not
constitute an official certification.
[2] In our report on the results of our audit of IRS's fiscal year 2003
financial statements, we noted a material weakness in IRS's financial
reporting process (U.S. General Accounting Office, Financial Audit:
IRS's Fiscal Years 2003 and 2002 Financial Statements, GAO-04-126,
November 13, 2003). A component of this process includes IRS's ability
to allocate excise tax collections to the appropriate trust funds at
the time deposits are made. This condition affects the adequacy of the
distributions of federal excise tax revenue to recipient trust funds
and is a continuation of an issue that we have reported on in prior
years.
[3] Since certifications are not completed until 6 months after the end
of the quarter, the certification and corresponding FMS adjustment for
the quarter ended September 30, 2002, were completed in March 2003, and
thus affected fiscal year 2003 distributions to the HTF.
[4] Although the certifications are based on amounts collected, we used
the tax liability amounts to identify the taxpayers paying the largest
amounts of excise taxes. Our review shows that these taxpayers
generally pay their excise taxes in full each quarter.
[5] The master file is a detailed database containing taxpayer
information.
[6] IRS certifies to trust funds the amount of excise taxes collected.
Because there are occasions in which taxpayers have not fully paid
their tax liability, 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 proportionately among all taxes reported as owed on the tax
return. For example, if a corporation reports that it owes $4 million
for gasoline tax, $2 million for diesel fuel tax, and $1 million for
gasohol tax on its Form 720 Quarterly Federal Excise Tax Return, but
has paid IRS only $3.5 million at the time IRS performs its
certification, the program prorates the $3.5 million in the following
manner: $2 million to gasoline tax, $1 million to diesel fuel tax, and
$500,000 to gasohol tax.
[7] The abstract numbers identify the tax type (e.g., gasoline and
ticket tax) and are used as the basis for determining the distribution
of the excise taxes to the various trust funds. Abstract numbers are
preprinted on the Form 720 Quarterly Federal Excise Tax Return and are
used by the taxpayer to report excise tax assessments. If the return
was related to the HTF, we selected (1) tax on 10 percent gasohol
(abstract 59), (2) diesel fuel tax (abstract 60), and (3) gasoline tax
(abstract 62). If the return was related to the AATF, we selected (1)
tax on transportation of persons by air (abstract 26), (2) tax on use
of international air facilities (abstract 27), and (3) tax on
transportation of property by air (abstract 28). The tax amounts
related to the selected abstracts for each trust fund are the largest
tax amounts reported on the taxpayer's excise tax return and make up
over 86 percent of the total amount certified to the HTF and over 89
percent of the total amount certified to the AATF each quarter.
[8] 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.
[9] For the purpose of this reconciliation, material is defined as 1
percent of the total Form 720-related excise tax collections, related
to the quarters ended December 31, 2002, and March 31, 2003. For fiscal
year 2003, the materiality amount was $203 million for the two quarters
combined.
[10] For this sample, if one or no errors were found in testing the 78
items, we would be 90 percent confident that the error rate in the
population would not exceed 5 percent.
[11] The selected abstracts include the following: (1) tax on 10
percent gasohol (abstract 59), (2) diesel fuel tax (abstract 60), (3)
gasoline tax (abstract 62), (4) tax on transportation of persons by air
(abstract 26), (5) tax on use of international air facilities (abstract
27), (6) tax on transportation of property by air (abstract 28), and
(7) tax on aviation fuel for commercial use (abstract 77). The tax
amounts for the three HTF-related abstracts make up over 86 percent of
the total amount certified to the HTF and the tax amounts for the four
AATF-related abstracts make up over 95 percent of the total amounts
certified to the AATF each quarter.
[12] The Report of Excise Tax Collection contains prorated collections,
classified by abstracts that serve as the basis for IRS's quarterly
trust fund certifications.
[13] The planned sample size using DUS was 143 items. DUS selects
dollars versus specific transaction items by dividing the population by
dollar intervals. The dollar interval for the HTF was $118 million.
Accordingly, any item with a dollar value matching or exceeding the
sampling interval would be selected, whereas items less than the
sampling interval might not be selected. For example, an item of $236
million would cover two dollar-intervals, but represent one sample
item. Due to large dollar items covering more than one interval, the 96
unique sampled transactions selected represent 143 dollar-intervals.
[14] The planned sample size using DUS was 132 items. As explained in
footnote 13, DUS selects dollars versus specific transaction items by
dividing the population by dollar intervals. The dollar interval for
the AATF was $33 million. Due to large dollar items covering more than
one interval, the 67 unique sampled transactions selected represent 132
dollar-intervals.
[15] For this sample, if no errors are found in testing the 45 items,
we would be 90 percent confident that the error rate in the population
would not exceed 5 percent.
[16] The purpose of this test is to determine whether the Collection
Certification System prorates correctly. This test is not intended to
determine whether amounts provided to the system are correct.
[17] IRS prepares two certification letters for HTF each quarter: one
for the Highway Account and the other for the Mass Transit Account.
[18] The certified amounts for diesel fuel tax (abstract 60), gasoline
tax (abstract 62), and tax on 10 percent gasohol (abstract 59), along
with the heavy vehicle use tax (traced separately), make up over 89
percent of the total amount certified to the HTF each quarter.
[19] IRS uses data from two of these reports, covering sequential
processing intervals, for each quarterly certification. Collections are
classified by abstract on the report when the related Form 720 tax
return has been recorded in IRS's master file during the processing
interval covered by the report. The second of the two reports used may
contain collections related to previous quarters not classified by
abstract until the current quarter because the related return was not
recorded on the master file until the current quarter.
[20] During fiscal year 2002, IRS changed its process of recording and
summarizing excise tax credits related to taxpayers' Form 720 tax
returns. As a result, IRS now obtains this excise tax credit
information from the applicable Treasury 90 Report. The Treasury 90
Report summarizes excise tax credit information and is produced
quarterly by IRS submission processing campus systems. IRS has 10
submission processing campuses that receive and process tax returns and
payments.
[21] IRS calculates certified collections to the Highway Account and
the Mass Transit Account using the total prorated collection amount,
tax rate, and distribution rates applicable to each account.
[22] For this test, "significant" is defined as $170 million. This
represents approximately 2 percent of the quarterly total certified to
the HTF.
[23] Negative amounts occur due to taxpayer amendments or IRS
corrections.
[24] IRS performs a quarterly reclassification of excise tax refunds
and credits originally entered into its master file as a personal or
corporate refund/credit. IRS refers to these reclassifications as
"refund/credit certifications." These amounts do not represent the
total excise tax refund/credit activity to the trust funds. Other
routine excise tax refunds and credits (e.g., overpayments), which are
claimed on taxpayers' Form 720 excise tax returns, are included in
IRS's excise tax receipt certification to trust funds.
[25] In order to meet certain reporting deadlines, IRS-certified
refunds and credits for the fourth quarter of fiscal year 2003 as of
September 5, 2003.
[26] IRS attaches a separate schedule to the HTF refund/credit
certification letter that includes the detailed excise tax amounts that
support the total amount shown on the letter. IRS compiles the amounts
on these schedules from submission processing campus systems and its
Interim Revenue Accounting Control System. IRS has 10 submission
processing campuses that process tax returns and taxpayer receipts.
[27] The certified refund/credit amounts for gasoline and diesel make
up at least 91 percent of the total certified refund/credit amount for
the HTF.
[28] An FMS accountant compiles this schedule, called "Subsidiary
Quarterly Account of Estimates and Actual Related Taxes Appropriated to
the Highway Account." The schedule computes the difference between IRS
certified amounts and the OTA estimate for excise taxes, individually
and in total, that relate to the Highway Account. A similar schedule is
prepared for the Mass Transit Account. The schedules, along with OTA
transfer forms and IRS certifications, support the FMS adjustment.
[29] A positive amount indicates that the FMS adjustment increased
excise taxes distributed to the trust fund. A negative amount, shown in
parentheses, indicates that the FMS adjustment decreased excise taxes
distributed to the trust fund. Since the adjustment amount is the
difference between OTA's estimate and IRS's certified amount, it may be
significantly affected by IRS's ability to certify receipts in the
appropriate quarter.
[30] To accommodate the Department of Transportation's accelerated
reporting date for fiscal year 2003, IRS performed a precertification
of excise tax collections for the quarter ended June 30, 2003. The data
are for information purposes only and the precertification does not
constitute an official certification.
[31] The amounts for diesel fuel tax (abstract 60), gasoline tax
(abstract 62), and tax on 10 percent gasohol (abstract 59), along with
the heavy vehicle use tax (traced separately), make up over 89 percent
of the precertified total to the HTF.
[32] For this test, "significant" is defined as $170 million, which
represents approximately 2 percent of the precertified total to the
HTF.
[33] For this test, "significant returns" are defined as those from
taxpayers with a total quarterly excise tax liability equal to or
greater than $10 million during each of the prior four quarters. Tax
returns related specifically to HTF from taxpayers with liabilities
equal to or greater than $10 million have, in the aggregate,
historically accounted for over 91 percent of distributions certified
to HTF.
[34] OTA makes semimonthly estimates of excise tax collections for
transfer to trust funds. There are five semimonthly estimates for the
quarter ended September 30, 2003, which affect fiscal year 2003
distributions to the HTF.
[35] OTA communicates this information to interested parties at
Treasury, the Federal Highway Administration, the Federal Transit
Administration, and the Department of Transportation. IRS uses the tax
and distribution rates from this table in its subsequent certification
of collections to trust funds.
[36] The transfer amounts for diesel fuel tax (abstract 60), gasoline
tax (abstract 62), tax on 10 percent gasohol (abstract 59), and heavy
vehicle use tax make up over 92 percent of the total amount transferred
quarterly to the HTF.
[37] The source documents include the IRS report of excise taxes used
to derive the percentages applied to reported receipts, the Daily
Treasury Statement, the Monthly Treasury Statement, and the excise tax
rate tables.
[38] IRS assigns a tax class number to specific types of taxes. Excise
taxes are tax class 4.
[39] For the purpose of this procedure and procedure VI.B.3, we define
material as $20 billion. This represents approximately 1 percent of the
total tax revenue receipts collected by IRS in fiscal year 2003.
[40] IRS maintains records of refund balances by tax class in its
master file and reports this information monthly to Treasury on the
SF-224. Treasury provides IRS with a Statement of Differences
(TFS-6652), which reports differences between total refunds reported
by IRS on the SF-224 and the total refunds per Treasury records.