oversight

Agreed-Upon Procedures: Airport and Airway Trust Fund Excise Taxes

Published by the Government Accountability Office on 1999-02-25.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

GAO
      United States
      General Accounting Office
      Washington, D.C. 20548

      Accounting and Information
      Management Division

      B-281570


      February 25, 1999

      The Honorable Kenneth M. Mead
      Inspector General
      Department of Transportation

      Subject:   Agreed-Unon Procedures: Airport and Airwav Trust Fund Excise
                 Taxes

      Dear Mr. Mead:

      We have performed the procedures contained in enclosure I to this letter, which
      we agreed to perform solely to assist your office in ascertaining whether the net
      excise tax revenue distributed to the Airport and Airway Trust Fund (AATF) for
      the fiscal year ended September 30, 1998, is supported by the underlying
      records. As agreed upon with your office, we evaluated fiscal year 1998 AATF
      activity.

      This engagement to apply agreed-upon procedures was performed in accordance
      with standards established by the American Institute of Certified Public
      Accountants (AICPA). Accordingly, the adequacy of the procedures to meet
      your objectives is your responsibility and we make no representations in that
      respect. The procedures we agreed to perform included (1) detailed tests of
      transactions that represent the underlying basis of amounts distributed to AATF,
      (2) review of the Internal Revenue Service’s (IRS) quarterly AATF certifications,
      (3) review of the Department of the Treasury Financial Management Service
      adjustments to AATF for fiscal year 1998, (4) review of the Office of Tax
      Analysis process for estimating amounts to be distributed to AATF for the
      fourth quarter of fiscal year 1998, (5) comparison of net excise tax distributions
      to AATF during fiscal year 1998 and amounts reported in the financial
      statements prepared by the Bureau of Public Debt for AATF and the Federal
      Aviation Administration’s consolidated financial statements, and (6) review of
      key reconciliations of IRS records to Treasury records. Enclosure I contains
      the agreed-upon procedures and our results and findings from performing each
      of the procedures.

      We were not engaged to, and did not, perform an audit, the objective of which
      would be the expression of an opinion on the net excise taxes distributed to

                          GAO/AIMD-99-72R Airport and Airway Excise Tax Procedures
B-281570

AATF. Accordingly, we do not express such an opinion. Had we performed
additional procedures, other matters r-night have come to our attention that
would have been reported to you.

We provided a draft of this letter to IRS and Treasury officials, along with its
enclosure, for review and comment. They agreed with the contents of this
letter and its enclosure.

We completed the agreed-upon procedures on February 12, 1999. In performing
the agreed-upon procedures, we conducted our work in accordance with
generally accepted government auditing standards, which incorporate financial
audit and attestation standards established by the AICPA. These standards also
provide guidance when performing and reporting the results of agreed-upon
procedures.

This report is intended for the use of the Office of Inspector General of the
Department of Transportation. However, this report is a matter of public
record and its distribution is not limited. Consequently, copies are available to
others upon request. If you have any questions, please call me at 512-3406.

Sincer@y yours,




Associzte Director, Governmentwide Accounting
 and Financial Management Issues

Enclosure




 2                  GAOIAIMD-99-72R Airport and Airway Excise Tax Procedures
ENCLOSURE I                                                                   ENCLOSURE I

    Agreed-uuon nrocedures                   Descrintion of findings and results
    (A) PROCEDURES PERFORMED
    FOR FISCAL YEAR 1998 EXCISE
    TAX DISTRIBUTIONS   RELATED
    TO QUARTERS ENDED JUNE 30,
    1997, AND SEPTEMBER   30,1997”
    (1) Nonrepresentative selection of tax
    returns
    (a)   For the quarters ending June       (a)   A total of 67 excise tax returns from
          30, 1997, and September 30,              the quarters ended June 30, 1997, and
          1997, select the 30 largest              September 30, 1997, were selected for
          excise tax returns, on the basis         review. The selection was based on
          of the assessment amount for             total assessment amount and the
          each quarter. Select a                   inclusion of additional tax returns
          minimum of 6 AATF returns                related to M’I’F. The selection
          for each quarter.                        exceeded 30 returns per quarter to
                                                   obtain a minimumof6AATFtax
                                                   returns in each quarter.
                                                   The total assessment amount related to
                                                   these 67 returns is approximately
                                                   $14.5 billion, or 64 percent of total
                                                   excise tax assessment amounts
                                                   ($22.7 billion) for the two quarters
                                                   combined. Of the 67 returns, 48
                                                   contained primarily Highway Trust
                                                   Fund (HTF) related taxes, 16 contained
                                                   primarily AATF related taxes, and 3
                                                   contained other excise taxes related to
                                                   the general fund.



“Although the law requires that certifkations be based on tax collections, IRS based
certifications on tax assessments until June 1998. Since certifications usually are not
completed until 6 months after the end of the quarter, the certifications for the quarters
ended June 30 and September 30, 1997, were actually performed in fiscal year 1998, based
on tax assessments. In June, for collections in the first quarter of fiscal year 1998, IRS
began using a new certification method that brings IRS into compliance with the
requirements of the law.
3                             GAO/AIMD-99-72R Airport and Airway Excise Tax Procedures
ENCLOSURE I                                                                  ENCLOSURE I

    Agreed-upon nrocedures                  Descrintion of findings and results
    (b)   For each of the selected          (b)   For each of the 16 returns related
          returns:                                primarily to AATF, tax amounts for
               trace the assessment               ticket tax (abstract 26), facilities use
               amount for selected                tax (abstract 27), and air freight tax
               abstractsb from the tax            (abstract 28), were selected for tracing
               return to IRS’master file          to IRS’master file and AQETL system.
              -and to the Automated               This resulted in our testing
               Quarterly Excise Tax               approximately $2.6 billion in net excise
               Listing system (AQETL)’ to         tax assessments related to AATF.
               determine if the amounts
               were properly input into            The assessment amount for the 3
               the master file and                 selected abstracts on the tax returns
               properly transferred to             agreed with the amount in IRS’master
               AQETL.                              file and AQETL system for all 16 cases.
               check the mathematical              For one case related primarily to HTF,
               accuracy of the taxpayer’s          a data input error resulted in an
               calculations for selected           understatement of $826,000to abstract
               abstracts.                          26. In this case, IRS inadvertently
                                                   applied a credit related to a HTF’
                                                   abstract to an AATF abstract.

                                                   Overall, for these 16 AATF and the 1
                                                   HTF case tested, less than 1 percent of
                                                   total assessments of about $2.6 billion
                                                   were in error.




bThe abstract numbers identify the tax type (e.g., ticket tax) and are used as the basis to
deterrnine the distribution of the excise taxes to the various trust funds. Abstract
numbers are preprinted on the Form 720 and are used by taxpayers to report excise tax
assessments.
“AQETL contains excise tax data extracted from the master tie. This system is used by
IRS to monitor excise tax assessments reported on Forms 720 and to generate gross
certified tax amounts for each tax type.

4                             GAO/AIMD-99-72R Airport and Airway Excise Tax Procedures
ENCLOSURE I                                                                     ENCLOSURE I

    Agreed-unon nrocedures                     Description of findings and results
    (2) Receipt certifications
     (a)   Inspect the certification letters   (a)   The certification letters for the
           for authorizing signatures.               certifications related to the quarters
                                                     ended June 30, 1997, and September
                                                     30, 1997, had authorizing signatures.
     (b)   Determine if evidence exists        (b)   There was no evidence that data on the
           that the certification letters            AATF’certification letters, distribution
           and accompanying AATF’                    schedules, or supporting documents for
           distribution schedulesd were              the certifications related to the
           checked by the supervisor or              quarters ended June 30, 1997, and
           another analyst.                          September 30, 1997, were checked by
                                                     either the supervisor or another
                                                     analyst.
     (c)   Recalculate the totals on the       (c)   The totals on the certification letters
           certification letter and AATF             and the AATF distribution schedules
           distribution schedule to                  for the certifications related to the
           determine if they are                     quarters ended June 30, 1997, and
           mathematically correct.                   September 30, 1997, were
                                                     mathematically correct.
     (d)   !IYace the gross certified          (d)   The gross certified amounts for ticket
           amounts for ticket tax                    tax (abstract 26), facilities use tax
           (abstract 26), facilities use tax         (abstract 27), and air freight tax
           (abstract 27), and air freight            (abstract 28) per the AATF distribution
           tax (abstract 28) from the                schedules for the certifications related
           AATF distribution schedule to             to the quarters ended June 30, 1997,
           the AQETL system. (The gross              and September 30, 1997, were the same
           tax assessment amounts for                as the amounts for these abstracts on
           these three abstracts generally           the AQETL system.
           make up over 85 percent of
           total excise tax assessments
           related to AATF’.)


?I’he AATF’distribution schedule, which is attached to the AATF’certification letter,
shows the distribution of gross certified tax amounts for each abstract to the general
fund, AATF, and the Leaking Underground Storage Tank (LUST) Trust Fund. The IRS
analyst uses this electronic schedule, which contains tax rates provided by Office of Tax
Analysis (OTA), to distribute the gross tax amounts.
5                                GAO/AIMD-99-72R Airport and Airway Excise Tax Procedures
ENCLOSURE I                                                                     ENCLOSURE I

    !&reed-unon Drocedures                     Descrintion of findings-and results
                                                     However, IRS omitted gross
                                                     assessment amounts for aviation gas
                                                     (abstract 95) and aviation O/T gas
                                                     (abstract 96) from its certification for
                                                     the quarter ended June 30, 1997. As a
                                                     result, IRS understated the cetied
                                                     amount to AATF by $506,000 on its
                                                     certification for the quarter ended
                                                     December 31, 1997. IRS subsequently
                                                     adjusted its certification for the quarter
                                                     ended June 30, 1998, which was
                                                     completed in December 1998, to
                                                     correct the error.

    (e)    Compare totals f?om the             (e)    Supporting reports of master file data
           supporting reports of master               agreed with the AQETL certification
           file data to the AQETL                     results.
           certification results to
           determine if they agree.
    (f)    For one abstract, total the         0      For the tire tax (abstract 66), the
           individual assessments per this            AQETL system included aU of the
           abstract from the master file              assessments when computing the total
           and compare the amount to the              gross certified amount.
           AQETL computed total to
           determine if AQETL included
           all the assessments when
           computing the total gross
           certified amount.
     (g)   Review the AATF distribution        69     We saw no evidence that the
           schedules to determine if the              distribution rates for ticket tax
           distribution rates for ticket tax          (abstract 26), facilities use tax
           (abstract 26), facilities use tax          (abstract 27), and air freight tax
           (abstract 27), and air freight             (abstract 28) on both the June 30, 1997
           tax (abstract 28) agree with the           and September 30, 1997, AXIF
           applicable law.                            distribution schedules did not agree
                                                      with the applicable laws.



6                              GAO/AIMD-99-72R Airport and Airway Excise Tax Procedures
ENCLOSURE I                                                                    ENCLOSURE I

    &reed-won    nrocedures                   Descrintion of findings and results
    (3) FMS adjustments
     (a)   Compare the Financial              (a)   For the FMS adjustments made to
           Management Service (FMS)                 AATF, the original OTA estimates and
           adjustments made to AATF for             IRS certified amounts agreed with the
           fisc’d year 1998 with originaI           supporting schedule.” The
           OTA estimates and IRS                    independently recalculated differences
           cerWied amounts to see if they           between the OTA estimates and the
           agree with the supporting                final IRS cerWed amounts for &YI’l?
           schedules. Recompute the                 for the quarters ended June 30, 1997-
           difference between the OTA               ($100,447,666)f-and September 30,
           estimate and final IRS certified         1997-($106,612,350)-agree with the
           amount to see if the amount              difference computed by F’MS.
           agrees with the difference
           computed by FMS.




?Ihis schedule, called the “Subsidiary Quarterly Account of Estimates and Actual Related
Excise Taxes Appropriated to the AATF,” is compiled by an accountant at FMS and it
computes the difference between IRS certified amounts and the OTA estimate for excise
taxes, individua.Uy and in total, that relate to AATF. The schedule, along with OTA
transfer forms and IRS cetications, supports the F’MS adjustment.
fA positive amount indicates that the FMS adjustment increased the excise taxes
distributed to the trust fund. A negative amount indicates a decrease in the excise taxes
distributed to the trust funds.
7                             GAO/AIMD-99-72R Airport and Airway Excise Tax Procedures
ENCLOSURE I                                                                ENCLOSURE I

    Agreed-unon nrocedures                Descriution of findinns and results
    (B) PROCEDURES PERFORMED
    FOR FISCAL YEAR 1998 EXCISE
    TAX DISTRIBUTIONS  RELATED
    TO QUARTERS ENDED
    DECEMBER 31,1997, AND
    MARCH 31,199s
     (1) sampling
     (a)   Obtain excise tax assessments (a)     Excise tax collections for the first 6
           and coIlections data from IRS’        months of fiscal year 1998 per the
           master file for the first 6           master file materially agreed with IRS’
           months of fiscal year 1998.           general ledger and with total excise tax
           Determine if excise tax               collections from the Collection
           collections per the master file       Certification System.
           agree with IRS’general ledger.
           Reconcile total excise tax
           collections from the master file
           to total excise tax collections
           from the Collection
           Certification System audit filesg
           to determine if they materiah~
           agree.




gIRS’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 certii5ed total amounts for each abstract.

hFor purposes of this reconciliation, we are defining materiality as $200 million. This
represents 1 percent of total Form 720-related excise tax collections, related to the
quarters ended December 31, 1997, and March 31, 1998.

8                            GAO/AIMD-99-72R Airport and Airway Excise Tax Procedures
ENCLOSURE I                                                                   ENCLOSURE I

    Agreed-won nrocedures                     Descriution of jimhngs and results
     (b)   Select an attribute sample of      @)    For each sample item, assessments
           78 excise tax assessments.               from the master file are contained in
           Compare assessment                       the Collection Certification System.
           information for each sample
           item from the master file to the
           assessment information in the
           Collection Cert35cation System
           to determine if assessments
           from the master tie are
           contained in the Collection
           CertiEcation System.
     (c)   To determine if the Collection     (c)   The Collection Certification System
           Certification System properly            properly summarized the prorated
           summarized the prorated                  collections for abstracts related to
           collections, total the prorated          AATF, BTF, and the Black Lung
           collections for selected                 Disability Trust Fund. Prorated
           abstracts from the audit files           collections for the above mentioned
           and compare these amounts to             trust funds from the audit files agreed
           amounts indicated on the                 with the corresponding amounts on the
           “Report of Excise Tax                    “Report of Excise Tax Collection.”
           Collection.“’




‘The “Report of Excise Tax Collection” is produced by the Collection Certification System.
The IRS analyst uses information from these reports as the basis for calculating the gross
certified amount for each abstract.

9                             GAO/AI&ID-99-72R Airport and Airway Excise Tax Procedures
ENCLOSURE I                                                                    ENCLOSURE I

 Agreed-uDon Drocedures                      Descrktion of findin~ts -and results
     (d)   Separate the total population     (d)    Use of DUS with a confidence level of
           of prorated collections from             80 percent, a test materiality of $90
           the audit files into the                 million, and an expected aggregate
           following distinct sampling              error amount of $27 million resulted in
           populations 1) AATF, 2) HTF,             a sample of 57 prorated collections for
           and 3) remaining other excise            the first 6 months of fiscal year 1998.
           taxtis. Use Dollar Unit
           Sampling @US) to extract a
           sample of prorated excise tax
           collections from the AATF
           population.
     (e)   Extract samples of prorated       (e)    Use of DUS with a confidence level of
           excise tax collections from the          80 percent, a test materiali@ of $230
           two non-MTF populations.                 million, and an expected aggregate
                                                    error amount of $69 million resulted in
                                                    a sample of 125kprorated collections
                                                    for the 16rst6 months of fiscal year
                                                    1998 for HTF.

                                                    Forty-five random items from the
                                                    population of prorated tax collections
                                                    related to all excise taxes other than
                                                    AATF’ and HTF were selected for
                                                    testing.’




jThe actual sample size using DUS was 108 items. However, because DUS selects dollars
versus specific transaction items as the sampling unit, 51 items were selected twice.
 Consequently, 57 unique sample transactions were selected for testing.
kThe actual sample size using DUS was 182 items. However, because DUS selects dollars
versus specik transaction items as the sampling unit, 57 items were selected twice.
Consequently, 125 unique sample transactions were selected for testing.

‘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.
10                             GAO/AIMD-99-72R Airport and Airway Excise Tax Procedures
ENCLOSURE I                                                                    ENCLOSURE I

 Agreed-upon Drocedures                       Descrintion of findings and results
     (2) Detailed test of transactions
     (a)    For each prorated excise tax       -    The assessment amounts on the tax
            collection sampled from the             return agreed with the amount
            AATF population:                        recorded in IRS’ master file for all 57
            - ‘check to see that the                sample items.
                assessment on the tax
                 return, for the sampled
                 abstract, agrees with the
                 amount recorded in IRS’
                 master file.
            -   test the mathematical               The taxpayer’s calculations on the tax
                accuracy of the taxpayer’s          return for the related abstracts were
                calculations on the tax             mathematically correct.
                return for the related
                abstract.
            -   recompute the prorated         -    The recomputed prorated collection
                collection amount per the           amount per the master file agreed with
                master file and compare             the amounts for all items sampled Tom
                this amount to the sample           the Collection Certification System
                items pulled from the               audit file.
                Collection Certification
                System audit file.
      (b)   Perform detailed testing on the   (b)   The two samples of prorated
            two samples of prorated                 collections from the non-AATF
            collections from the non-AATF           populations did not contain any AATF
            populations to determine if             excise tax collections.
            they contain any AATF excise
            tax collections.
      (c)   Project the results of            (c)   There were no errors for the sample
            conducting steps (a) and (b)            items selected from the AATF
            for the samples of prorated             population, and no AATF excise tax
            excise tax collections to the           collections in the two samples of
            population of AATF prorated             prorated collections fi-om the non-
            collections.                            AATF populations.




11                              GAO/AIMD-99-72R Airport and Airway Excise Tax Procedures
ENCLOSURE I                                                                     ENCLOSURE I

  &reed-uuon nrocedures                        Descrintion of flndinPs and results
  [3) Receipt certifications
     (a)   Inspect the certification letters   (a)   The certification letters for the
           for authorizing signatures.               certifications related to the quarters
                                                     ended December 31, 1997 and March
                                                     31, 1998, had authorizing signatures.
     (b)   Determine if evidence exists        (b)   There was evidence that data on the
           that the certification letters            certification letters, AATF distribution
           and accompanying AATF                     schedules, and documents supporting
           distribution schedule were                the certification results for the
           checked by the supervisor or              certifications related to the quarters
           another analyst.                          ended December 31, 1997, and March
                                                     31, 1998, were checked by another
                                                     analyst.
  (c)      Recalculate the totals on the       (c)    The totals on the certification letters
           certi6cation letter and                    and the AATF distribution schedule for
           accompanying AATF                          the certifications related to the
           distribution schedule to                   quarters ended December 31, 1997, and
           determine if they are                      March 31, 1998, were mathematically
           mathematically correct.                    correct.




12                               GAO/AIMD-99-72R Airport and Airway Excise Tax Procedures
ENCLOSURE I                                                                     ENCLOSURE I

  Agreed-unon nrocedures                       Descrintion of findings and results
     (d)   Trace the gross certilXed           (d)   The gross certified amounts for ticket
           amounts for ticket tax                    tax (abstract 26), facilities use tax
           (abstract 26), facilities use tax         (abstract 27), and tax on commercial
           (abstract 27), and tax on                 use aviation fuel (abstract 77) per the
           commercial use aviation fuel              AATF distribution schedule for the -
           (abstract 77)” from the AATF              quarter ended December 31, 1997, did
           distribution schedule back to             not agree with the “Report of Excise
           the “Report of Excise Tax                 Tax Collections.” This occurred
           Collections.”                             because IRS incorrectly reversed some
                                                     prorated collections related to previous
                                                     quarters from its December 31, 1997,
                                                     certification.

                                                     IRS also bmitted prorated Collections
                                                     for aviation gas (abstract 95) and
                                                     aviation O/T gas (abstract 96) from its
                                                     certification for the quarter ended
                                                     December 31, 1997.

                                                     As a result of these two errors, IRS
                                                     understated gross prorated collections
                                                     related to AATF by approximately
                                                     $57.3 million on its certification for the
                                                     quarter ended December 31, 1997. IRS
                                                     subsequently made adjustments on its
                                                     certification for the quarter ended June
                                                     30, 1998, which was completed in
                                                     December 1998, to correct the error.




“Air freight tax (abstract 28) was replaced with tax on commercial use aviation fuel
(abstract 77) beginning with the certification for the quarter ended December 31, 1997,
because a change in the law during fiscal year 1998 caused this tax to be more significant
to AATF.
13                              GAOMMD-99-72R Airport and Airway Excise Tax Procedures
ENCLOSURE I                                                                  ENCLOSURE I

 Agreed-unon nrocedures                     Descrintion of findings and results
                                                  Additionally, IRS did not reverse the
                                                  total amount of “e&rnateP included
                                                  in the previous quarter’s certification.
                                                  Since the “estimates” are not supported
                                                  by underlying tax returns or
                                                  collections, the amounts IRS certified
                                                  to AATF in Cscal year 1998 were
                                                  overstated by approximately $76
                                                  million. IRS did not correct this error
                                                  for &scal year 1998.

                                                   The gross certified amounts for ticket
                                                   tax (abstract 26), facilities use tax
                                                   (abstract 27), and tax on commercial
                                                   use aviation fuel (abstract 77) per the’
                                                   AATF distribution schedule for the
                                                   quarter ended March 31, 1997, traced
                                                   back to the “Report of Excise Tax
                                                   Collections.”
  (e)   Review the AATF distribution        (e)    We saw no evidence that the
        schedule to determine if the               distribution rates for ticket tax
        distribution rates for ticket tax          (abstract 26), facilities use tax
        (abstract 26), facilities use tax          (abstract 27), and tax on commercial
        (abstract 27), and tax on                  use aviation fuel (abstract 77) on both
        commercial use aviation fuel               the December 31, 1997, and March 31,
        (abstract 77) agree with the               1998, AATF distribution schedules did
        applicable law.                            not agree with the applicable laws.


“Under IRS’previous certification process, which was used for the June 30, 1997, and
September 30, 1997, certification, the AQETL system added estimated tax amounts to the
gross certified tax if a taxpayer’s return was not posted to the master file when the
certification was performed. IRS believed the accuracy of the specific quarter’s
certification would be improved by including these estimates. The AQETL system would
subsequently reverse the estimated amounts from the following quarter’s certification,
which would include the actual amounts per the tax returns. When IRS began its new
certification process that started with the December 31, 1997, certification, it reversed
actual prorated collections related to previous quarters rather than the amount that had
been originally estimated. These amounts differed by approximately $76 million.
14                           GAO/AIMD-99-72R Airport and Airway Excise Tax Procedures
ENCLOSURE I                                                                      ENCLOSURE I

     Agreed-upon procedures                     Descrintion of findings and results
     (4) Refunds/credit reclassification”

      (a)   Inspect the certification letters   (a)    The certification letters for the
            for .authorizing signatures.               certifications related to the quarters
                                                       ended December 31, 1997, and March
                                                       31, 1998, had authorizing signatures.
      (b)   Determine if evidence exists        (b)   There was no evidence that data on the
            that the certification letters            certification letters and accompanying
            and accompanying schedulesP               schedules for the certifications related
            were checked by the                       to the quarters ended December 31,
            supervisor or another analyst.            1997, and March 31, 1998, were
                                                      checked by either the supervisor or
                                                      another analyst.
      (c)   Recalculate the totals on the       (c)    The totals on the certification letters
            certification letters and                  and accompanying schedules for the
            accompanying schedule to                   certifications related to the quarters
            determine if they are                      ended December 31, 1997, and March
            mathematically correct.                    31, 1998, were mathematically correct.




“IRS performs a quarterly reclassification of excise tax refunds and*credits originahy
entered into its master file as personal or corporate refunds/credits. IRS refers to these
reclassifications as “refunds/credits 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 reported on the Form 720 excise tax returns,
are netted against the excise tax receipt certification to trust funds.

pIRS attaches a supporting schedule to the AATF refund/credit certification letter that
includes the detailed excise tax amounts that support the total amount shown on the
letter. IRS compiles the amounts on these schedules from service center systems and its
Interim Revenue Accounting Control System (IRACS).
15                               GAO/AIMD-99-72R Airport and Airway Excise Tax Procedures
ENCLOSURE I                                                                   ENCLOSURE I

  Weed-won       nrocedures                  Descriution of findings and results
     (d)   For selected excise taxes,q       (d)   The refund and credit amounts for the
           trace the refund and credit             selected excise taxes, aviation gas, and
           amounts from the schedule               aviation O/T gas, on the schedule
           accompanying the cetication             accompanying the certification letter
           letter to other summary                 agreed with the amounts on the
           refund/credit schedules.                summary schedules.
           (These other refund/credit
           summary schedules summarize
           refund and credit data obtained
           from service center’ records.)
  (5) FMS adjustments
     (a)   Compare the FMS adjustment        (a)    For the F‘MS adjustments made to
           made to the AATF for fiscal              AATF, the original OTA estimates and
           year 1998 with original OTA              IRS certified amounts agreed with the
           estimates and IRS certified              supporting schedme. The
           amounts to see if these agree            independently recalculated differences
           with the supporting schedules.           between the OTA estimates and the
           Recompute the difference                 final IRS certified amounts for AATF
           between the OTA estimate and             for the quarters ended December 31,
           final IRS certified amount to             1997-($55,749,000)-and March 31,
           see if the amount agrees with             1998-($275,854,000)-agree with the
           the difference computed by               difference computed by EMS.
           FMS.




qThe information used by IRS to capture excise tax refunds and credits from corporate
and personal returns comes from service center systems and IRACS. These systems do
not capture excise tax data at the abstract level. For this reason, reference is made to
excise taxes rather than abstracts.
QXS has 10 service centers that process tax returns and tax receipts.

16                            GAO/AIMD-99-72R Airport and Airway Excise Tax Procedures
ENCLOSURE I                                                                    ENCLOSURE I

 Agreed-unon nrocedures                       Descrintion of landings and results
 (C) PROCEDURES PERFORMED
 FOR FISCAL YEAR 1998 EXCISE
 TAX DISTRIBUTIONS  RELATED
 TO TEIE QUARTER ENDED JUNE
 30,199s
 (1) Receipt certifications
     (a)   Inspect the certification letter   (a)   The certification letter for the
           for authorizing signature.               certification related to the quarter
                                                    ended June 30, 1998, had an
                                                    authorizing signature.
     (b)   Determine if evidence exists       (b)   There was evidence that data on the
           that the certXication letter and         certification letter, AATF distribution
           accompanying AATF                        schedule, and documents supporting
           distribution schedule were               the certification results for the
           checked bythe supervisor or              certification related to the quarter
           another analyst.                         ended June 30, 1998 were checked by
                                                    another analyst.
     (c)   Recalculate the totals on the      (c)   The totals on the certi&ation letter
           certification letter and                 and the AATF’distribution schedule for
           accompanying AATF                        the certification related to the quarter
           distribution schedule to                 ended June 30, 1998, were
           determine if they are                    mathematically correct.
           mathematically correct.




17                              GAO/MMD-99-72R Airport and Airway Excise Tax Procedures
ENCLOSURE I                                                                     ENCLOSURE I

  &reed-unon -Procedures                       Descrintion of findings and results
     (d)   Trace the gross certified           (d)   The gross certified amounts for ticket
           amounts for ticket tax                    tax (abstract 26), facilities use tax
           (abstract 26), facilities use tax         (abstract 27), and tax on commercial
           (abstract 27), and tax on                 use aviation fuel (abstract 77) per the
           commercial use aviation fuel              AATF’distribution schedule agreed
           (abstract 77) from the AATF               with the related “Report of Excise Tax
           distribution schedule to the              Collections.” The total gross prorated
           “Report of Excise Tax                     collections certified to AATF’for the
           Collections.”                             quarter ended June 30, 1998, included
                                                     approximately $457 million related to
                                                     the quarter ended March 31,1998. This
                                                     resulted in the amount certified to
                                                     AATF being $457 million higher for the
                                                     June quarter and $457 million lower for
                                                     the March quarter.
     (e)   Review the AATF distribution        (e)    We saw no evidence that the
           schedule to determine if the               distribution rates for ticket tax
           distribution rates for ticket tax          (abstract 26), facilities use tax
           (abstract 26), facilities use tax          (abstract 27), and tax on commercial
           (abstract 27), and tax on                  use aviation fuel (abstract 77) on the
           commercial use aviation fuel               &YI’F’ distribution schedule for the
           (abstract 77) agree with the               certification related to the quarter
           applicable laws.                           ended June 30,1998, did not agree with
                                                      the applicable laws.
  (2) Refunds/credit reclassification

     (a)   Inspect the certification letter    (a)    The certification letter for the
           for authorizing signature.                 certification related to the quarter
                                                      ended June 30, 1998, had an
                                                      authorizing signature.
     (b)   Determine if evidence exists        @)     There was no evidence that data on the
           that the certihcation letter and           certification letter and accompanying
           accompanying schedule were                 schedule for the certification related to
           checked by the supervisor or               the quarter ended June 30, 1998, were
           another analyst.                           checked by either the supervisor or
                                                      another analyst.



18                               GAO/AIMD-99-72R Airport and Airway Excise Tax Procedures
ENCLOSURE I                                                                     ENCLOSURE I

     Agreed-unon nrocedures                    Descrintion of findings and results
      (c)   Recalculate the totals on the      (c)   The totals on the cert@cation letters
            certification letter and                 and accompanying schedules for the
            accompanying schedule to                 certification related to the quarter
            determine if they are                    ended June 30, 1998, were
            mathematically correct.                  mathematically correct.
      (d)   For selected excise taxes, trace   (d)   The refund and credit amounts for the
            the refund and credit amounts            selected excise taxes, aviation gas and
            from the schedule                        aviation O/T gas, on the schedule
            accompanying the certification           accompanying the certification letter
            letter to other summary                  agreed with the amounts on the
            refund/credit schedules.                 summary schedules.
     (3) FMS adjustments
      (a)   Compare the FMS adjustment         (a)   For the FMS adjustments made to
            made to AATF for fiscal year             AATF, the original OTA estimates and
            1998 with original OTA                   IRS certified amounts agreed with the
            estimates and IRS certified              supporting schedule. The independently
            amounts to see if these agree            recalculated differences between the
            with the supporting schedules.           OTA estimates and the final IRS
            Recompute the difference                 certified amounts for AATF for the
            between the OTA estimate and             quarter ended June 30, 1998-
            final IRS certified amount to            $598,063,000-agree with the difference
            see if the amount agrees with            computed by FMS.
            the difference computed by
            FMS.




19                             GAO/AIMD-99-72R Airport and Airway Excise Tax Procedures
ENCLOSURE I                                                                     ENCLOSURE I

  Agreed-unon Drocedures                      Descriution of findings -and results
  (D) PROCEDURES PERFORMED
  FOR FISCAL YEAR 1998 EXCISE
  TAX DISTRIBUTIONS RELATED
  TO THE QUARTER ENDED
  SEPTEMBER 30,199s
  (1) OTA estimation process
     (a)   Determine if OTA has a             (a)    OTA has a process for identi&ing and
           process to determine whether              including new laws and regulations
           new legislation affecting excise          affecting excise tax receipts into its
           tax receipts is identified and            receipt estimates. This process includes
           included in the receipt                   consultations with Treasury’s Tax
           estimates.                                Legislative Counsel, IRS’ Chief Counsel,
                                                     Office of Management and Budget, and
                                                     the Joint Committee on Taxation.
                                                     These communications are not
                                                     routinely documented.

                                                     An OTA tax rate table is used to
                                                     capture information relating to
                                                     legislation that affects tax rates, tax
                                                     basis, accounts, and deposit rules in
                                                     effect during the tax period and to
                                                     communicate this information to
                                                     interested parties at Treasury, Federal
                                                     Aviation Administration (FAA), and
                                                     Department of Transportation (DOT).
                                                     OTA does not obtain documentation
                                                     indicating review and concurrence kith
                                                     the information in this table by
                                                      relevant Treasury offices, FAA or DOT.
                                                     OTA does not routinely compile a
                                                     comprehensive listing of laws and
                                                     regulations that affect the receipt
                                                     estimates.




20                             GAO/A&ID-99-72R Airport and Airway Excise Tax Procedures
ENCLOSURE I                                                                 ENCLOSURE I

     Agreed-upon nrocedures                Description of findings and results
     (b)   Determine if OTA has a          (b)   OTA has a process that considers the
           process that considers the            views of FAA and DOT prior to its
           views of DOT and FM prior to          finalizing the receipt estimates. During
           its finalizing the receipt            the development of the receipts
           estimates.                            estimates, OTA staff economists
                                                 communicate with analysts at FAA and
                                                 DOT about the development of the
                                                 estimates. These communications are
                                                 not documented. Prior to finalizing the
                                                 full year estimates, which are the basis
                                                 for the monthly tax distributions, OTA
                                                 transmits the full year estimates to
                                                 FAA and DOT for their review. The
                                                 documentation maintained does not
                                                 indicate the nature of review
                                                 comments and whether the FAA and
                                                 DOT concurred with the tinal
                                                 estimates.

     (c)   Determine if OTA has a review   (c)   OTA has a review process to ensure
           process to ensure that new            that new information received between
           information received between          the budget preparation cycles is
           the budget preparation cycles         reflected in the receipt estimates. At
           is reflected in the receipt           least two reviews are conducted by
           estimates.                            OTA’s Director of the Revenue
                                                 Estimation Division (RED) for the
                                                 impact of various technical, economic,
                                                 and legislative factors on the receipt
                                                 estimates. The Director of RED reviews
                                                 the changes to the earlier forecasts,
                                                 provides input to each staff economist,
                                                 and approves the changes to the
                                                 forecasts. Documentation of review
                                                 comments is not maintained and
                                                 Director approval of the final changes
                                                 is not documented by signature.




21                            GAO/AIMD-99-72R Airport and Airway Excise Tax Procedures
ENCLOSURE I                                                              ENCLOSURE I

  Agreed-upon nrocedures                 Descrintion of tidings and results
                                               The Director of RED reviews the
                                               monthly receipt forecasts prepared by
                                               OTA staff economists, which are based
                                               on the fiscal year forecasts described
                                               above, and indicates his concurrence
                                               by his signature on the monthly
                                               transfer documents transmitted to
                                               FMS.
                                               The Director of RED reviews the
                                               adjustments prepared by OTA staff
                                               economists for the impact of new
                                               legislation enacted in the period
                                               between the budget cycles and
                                               indicates his concurrence by his
                                               signature on the adjustment and
                                               transmittal memo to FMS.
  (d)   Determine if OTA has a           (d)    OTA has a process to consider the
        process to consider the impact          impact of variances between actual and
        of variances between actual             previously forecasted excise tax
        and previously forecasted               receipts and incorporate these into its
        excise tax receipts and                 receipts estimation process. OTA
        incorporate these into its              compares prior estimates of excise tax
        receipt estimates.                      receipts to actual excise tax
                                                collections, as reported by Treasury’s
                                                F&IS, to adjust its excise tax receipts
                                                estimation models: In addition, OTA
                                                staff economists review the differences
                                                between prior quarterly estimates and
                                                IRS certified amounts at the trust fund
                                                level. This information is considered
                                                 along with other factors to determine if
                                                 adjustments to the excise tax receipts
                                                 estimation models are warranted.




“OTA uses economic models to develop estimates for the amounts of excise tax receipts
to be transferred to AATF.
22                         GAO/AIMD-99-72R Airport and Airway Excise Tax Procedures
ENCLOSURE I                                                                      ENCLOSURE I

     Agreed-upon procedures                     Description of findings and results
     (2) Refunds/credit reclassification
      (a)   Inspect the certification letter    (a)   The certification letter for the
            for authorizing signature.                certification related to the quarter
                                                      ended September 30, 1998, had an
                                                      authorizing signature.
      (b)   Determine if evidence exists        (b)   There was no evidence that data on the
            that the certification letter and         certification letter and accompanying
            accompanying schedule were                schedule for the certification related to
            checked by the supervisor or              the quarter ended September 30, 1998,
            another analyst.                          were checked by either the supervisor
                                                      or another analyst.
      (c)   Recalculate the totals on the       (c)   The totals on the certification letter
            certification letter and                  and accompanying schedule-for the
            accompanying schedule to                  certification related to the quarter
            determine if they are                     ended September 30, 1998, Were
            mathematically correct.                   mathematically correct.
      (d)   For selected excise taxes, trace    (d)   The refund and credit amounts for the
            the refund and credit amounts             selected excise taxes, aviation gas and
            from the schedule                         aviation O/T gas, on the schedule
            accompanying the certification            accompanying the certification letter
            letter to other summary                   agreed with the amounts on the
            refund/credit schedules.                  summary schedules.
     (E) OTHER PROCEDURES
     RELATED TO TOTAL FISCAL
     YEAR 1998 EXCISE TAX
     DISTRIBUTIONS
     (1)    Compare total fiscal year 1998      (1)    Fiscal year 1998 excise tax
            excise taxes distributed to                distributions for AATF materially
            AATF with drafts of the 1)                 agreed with drafts of the 1) BPD
            Bureau of Public Debts’ (BPD)              financial statements for AATF and 2)
            financial statements for AATF,             FAA consolidated financial statements.
            and 2) FAA consolidated
            financial statements to
            determine if they agree.




23                               GAO/AIMD-99-72R Airport and Airway Excise Tax Procedures
ENCLOSURE I                                                                     ENCLOSURE I

  &reed-upon nrocedures                        Description of findings and results
  :F) OTHER PROCEDURES

  :1>      Performed as part-of fiscal
           year 1998 IRS financial
           statement audit
     (a)   Use DUS to extract statistical      (a)    Detailed testing of a total of 413
           samples of 1) total revenue                revenue collection and 109 refund
           receipts and 2) refunds fkom               sample transactions did not reveal any
           IRS master files for the first 9           instances of misclassifications related
           months of fiscal year 1998.                to excise taxes.
           For each item in the samples
           of revenue receipts and
           refunds, test that the collection
           or refund amount and tax class
           from source documentation
           agrees with amounts recorded
           in IRS’master files.
     @)    Review selected service             09     -   Tax revenue collections reported
           centers’monthly Treasury 224                   by the selected IRS service centers
           reconciliations by tax classt to               via the monthly Treasury 224
           determine if IRS-reported                      reconciliation process were
           revenue receipts and refunds,                  properly classified and materially”
           including excise taxes, are                    agreed with Treasury F’MS records.
           properly classified and
           reconciled to Treasury FMS                 -   Total refunds reported by the
           records.                                       selected IRS service centers via the
                                                          monthly Treasury 224
                                                          reconciliation process materially
                                                          agreed with Treasury FMS records.




!IRS assigns a tax class number to specific types of taxes. Excise taxes are Tax Class 4.

“For the purposes of this section, we defined materiality as $17 billion.
24                             GAO/AI&ID-99-72R Airport and Airway Excise Tax Procedures
ENCLOSURE I                                                                     ENCLOSURE I

     Agreed-unon nrocedures                    Descrintion of findings and results
      (c)   Perform a proof of cash for        (‘3   -   F’iscal year-end tax collection
            fiscal year 1998 to determine if             balances for all tax classes,
            revenue receipt balances by                  including excise taxes, per IRS’
            tax class, including excise tax,             general ledger materially agreed
            and refund balances per IRS’                 with IRS’master mes and with
            general ledger materially agree              Treasury records.
            with IRS master files and
            Treasury records.                            F’iscal year-end refund balances per
                                                         IRS’general ledger materially
                                                         agreed with the master file and
                                                         with Treasury records.




(919325)

25                             GAO/AIMD-99-72R Airport and Airway Excise Tax Procedures
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