oversight

Applying Agreed-Upon Procedures: Federal Unemployment Taxes

Published by the Government Accountability Office on 2003-01-23.

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

United States General Accounting Office
Washington, DC 20548




          January 23, 2003

          The Honorable Gordon S. Heddell
          Inspector General
          Department of Labor

          Subject: Applying Agreed-Upon Procedures: Federal Unemployment Taxes

          Dear Mr. Heddell:

          We have performed the procedures contained in the enclosure to this report, which
          we agreed to perform and with which you concurred, solely to assist your office in
          ascertaining whether the net federal unemployment tax (FUTA) revenue distributed
          to the Unemployment Trust Fund (UTF) for the fiscal year ended September 30, 2002,
          is supported by the underlying records. As agreed with your office, we evaluated
          fiscal year 2002 activity affecting distributions to the UTF.

          In performing the agreed-upon procedures, we conducted our work in accordance
          with generally accepted government auditing standards, which incorporate financial
          audit and attestation standards established by the American Institute of Certified
          Public Accountants. These standards also provide guidance for performing and
          reporting the results of agreed-upon procedures.

          The adequacy of the procedures to meet your objectives is your responsibility and we
          make no representation in that respect. The procedures we agreed to perform
          include (1) detailed tests of transactions that represent the underlying basis of
          amounts distributed to the UTF and (2) review of key reconciliations of the Internal
          Revenue Service (IRS) records to the Department of the Treasury records. The
          enclosure contains the agreed-upon procedures and our findings from performing
          each of the procedures.

          We were not engaged to perform, and did not perform, an audit, the objective of
          which would have been the expression of an opinion on the net amount of FUTA
          taxes distributed to the UTF. Accordingly, we do not express such an opinion. Had
          we performed additional procedures, other matters might have come to our attention
          that would have been reported to you. We completed the agreed-upon procedures on
          January 10, 2003.

          We provided a draft of this report to IRS officials, along with its enclosure, for review
          and comment. They agreed with the results and findings presented in this report.



                                            GAO-03-362R Unemployment Trust Fund Procedures
This report is intended solely for the use of the Office of Inspector General of the
Department of Labor and should not be used by those who have not agreed to the
procedures and have not taken responsibility for the sufficiency of the procedures for
their purposes. However, this report is a matter of public record and its distribution
is not limited. Copies are available to others upon request. This report is also
available at no charge on GAO’s home page at http://www.gao.gov. If you have any
questions, please call me at (202) 512-3406.

Sincerely yours,




Steven J. Sebastian
Director
Financial Management and Assurance

Enclosure




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Enclosure


                      Unemployment Trust Fund Procedures and Results

I. Detailed tests of transactions

           A. Obtain from IRS total FUTA collections and refunds reflecting the first 8
                                                                   1
              months of fiscal year 2002 posted to the master file. Determine if FUTA
              collections and refund data per the master file materially reconcile to the
                              2
              general ledger.

               Description of findings and results

               Total FUTA collections and refunds for the first 8 months of fiscal year 2002
               per IRS’s master file materially reconciled to IRS’s general ledger.

           B. Use dollar unit sampling (DUS) to select a sample of combined FUTA
              collection and refund transactions from the master file for the first 8 months
              of fiscal year 2002, using a confidence level of 80 percent, a test materiality of
              $341 million, and an expected aggregate error amount of $102.3 million.

               Description of findings and results

               Use of DUS with a confidence level of 80 percent, a test materiality of
               $341 million, and an expected aggregate error amount of $102.3 million
               resulted in a sample of 44 transactions for the first 8 months of fiscal year
               2002. Of this total, 43 transactions represented collections and 1 transaction
               represented refunds.

           C. For each sampled FUTA tax collection transaction:

               1. Determine if collection amounts are accurately recorded by tracing
                  collection transaction amounts from IRS's master files to deposit
                  confirmation documents (e.g., federal tax deposit coupons).

                   Description of findings and results

                   Based on supporting documentation, collection amounts were accurately
                   recorded for all 43 sampled FUTA collection transactions.

               2. Determine if amounts were recorded to the appropriate period by
                  reviewing the date on source documents.



1
    The master file is a detailed database containing taxpayer information.
2
 Except where noted for certain procedures, significant or material is defined as $341 million. This
represents 1 percent of the UTF collections made by federal and state government agencies for fiscal
year 2001.


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Enclosure


                   Description of findings and results

                   Based on supporting documentation, collection amounts were recorded to
                   the appropriate period for all 43 sampled FUTA collection transactions.

               3. Determine whether the transactions were properly classified as FUTA
                  receipts by reviewing source documentation maintained in IRS's files (e.g.,
                  tax returns).

                   Description of findings and results

                   Based on supporting documentation, collection amounts were recorded
                   in the correct tax class3 for all 43 sampled FUTA collection transactions.

               4. Confirm FUTA transactions paid via the Electronic Federal Tax Payment
                  System (EFTPS)4 to determine whether the recorded transactions are
                  valid and reflect the proper amounts, are applied to the proper tax period,
                  and are properly classified as FUTA receipts.

                    Description of findings and results

                    Thirty-six of the 43 sampled FUTA receipt transactions were paid via
                    EFTPS. The bank confirmation showed that all 36 transactions were valid
                    and had been recorded to the proper tax period and tax class and for the
                    proper amounts.

               5. Recalculate each tax return to check mathematical accuracy.

                   Description of findings and results

                   The two applicable FUTA tax returns5 were mathematically correct.

           D. For each sampled FUTA tax refund transaction:

               1. Confirm sampled FUTA refund transactions with Treasury’s Financial
                  Management Service (FMS) by checking that the amount of the refund is
                  correct, and that it was recorded to the appropriate period and tax class.


3
    IRS assigns a tax class number to specific types of taxes. FUTA taxes are tax class 8.
4
 EFTPS is a system for initiating tax payments electronically. Employers who make federal tax deposits
exceeding $200,000 must use EFTPS to pay their FUTA taxes. The $200,000 threshold includes all federal
tax deposits, such as deposits for employment tax, excise tax, and corporate income tax. Taxpayers who
are not required to make electronic deposits may voluntarily participate in EFTPS.
5
 Of the 43 sampled FUTA receipt transactions, only 2 included remittances with tax returns. The
remaining 41 transactions were paid via EFTPS or federal tax deposits.



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Enclosure


               Description of findings and results

               For the one sampled FUTA refund transaction, confirmation with
               Treasury’s FMS showed that the amount of the refund was correct and
               that it was recorded to the appropriate period and tax class.

            2. Recalculate each tax return to verify mathematical accuracy.

                Description of findings and results

                The tax return for the sampled FUTA refund transaction was
                mathematically correct.

            3. For FUTA tax returns, determine whether the taxpayer provided a written
               explanation for exempt payments, and whether the explanation meets
               IRS's criteria for FUTA exempt wage payments.

               Description of findings and results

               For the one sampled FUTA refund transaction, the taxpayer claimed an
               exempt wage payment and provided a written explanation that met IRS
               criteria.
                                    6
             4. For manual refunds, check to see that the appropriate supporting
                documentation is attached and that individuals who approved the manual
                refunds were authorized to do so.

                Description of findings and results

                The one sampled FUTA refund transaction was not a manual refund.

II. Analytical procedures

         A. Perform analytical procedures on FUTA revenue collection and refund
            data for the period not subject to detailed tests of transactions to determine
            if reported fiscal year 2002 revenue collections and refunds appear
            reasonable.

            Description of findings and results

            We performed a predictive test on the final 4 months of fiscal year 2002
            FUTA revenue collection and refund data. The predicted FUTA revenue
            collection and refund data amounts for the final 4 months of fiscal year 2002


6
 A manual refund is a refund manually processed by an IRS employee rather than through IRS’s normal
automated process.


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Enclosure


            did not materially vary from the actual amount of revenue collections and
            refunds per IRS’s records for this period.

III. Other FUTA procedures

         A. For each of the 12 months in fiscal year 2002, obtain and review supporting
            documentation for monthly revenue reclassification adjustments transmitted
            by IRS to Treasury's FMS. Check to see that the supporting documentation
            agrees with the reclassification adjustment transmitted to FMS.

            Description of findings and results

            Documentation supported the monthly FUTA reclassification adjustment
            amount transmitted to Treasury’s FMS for all 12 months of fiscal year 2002.

         B. For each of the 12 months in fiscal year 2002, obtain and review supporting
            documentation for the monthly entry of FUTA refund data into the
            Government Online Accounting Link System (GOALS) to charge back the
            UTF account for FUTA tax refunds issued. Check to see that the supporting
            documentation agrees with the monthly entries reported in GOALS.

            Description of findings and results

            Documentation supported the monthly FUTA refund amount entered in
            GOALS to charge the UTF for FUTA tax refunds issued for all 12 months of
            fiscal year 2002.

         C. Compare fiscal year 2002 net FUTA collections per IRS’s statement of
            custodial activity and related footnote disclosures to (1) the Treasury’s
            Bureau of Public Debt (BPD) accounting records for the UTF and (2) drafts
            of the Department of Labor's (DOL) fiscal year 2002 consolidated financial
            statements. Obtain explanations/support for material variances.

            Description of findings and results

            There were no significant variances between net FUTA collections per IRS’s
            statement of custodial activity and BPD’s accounting records for the UTF.
            Similarly, there were no significant variances between IRS’s statement of
            custodial activity and related footnote disclosures and drafts of DOL’s fiscal
            year 2002 consolidated financial statements.




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Enclosure


IV. Other procedures performed as part of the fiscal year 2002 IRS
    financial statement audit

         A. From IRS’s master files for the first 8 months of fiscal year 2002, 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 from source documentation agree with the information
            recorded in the IRS’s master files.

            Description of findings and results

            Detailed testing of 153 revenue receipts and 50 refund sample transactions
            showed that the collection or refund amount, tax period, and tax class from
            source documents agreed with the information recorded in the IRS master
            files.

         B. Review selected IRS campuses’ monthly Treasury SF-224 reconciliations to
            determine if IRS-reported revenue receipts were properly classified and
            reconciled to Treasury FMS records. For refunds, review selected IRS
            service centers' monthly Treasury SF-224 reconciliations to determine if IRS-
            reported total refunds (all tax classes) materially7 reconciled to Treasury
                          8
            FMS records.

            Description of findings and results

            Tax revenue receipts reported by selected IRS service center campuses
            through the monthly Treasury SF-224 reconciliation process were properly
            classified and materially agreed with Treasury FMS records.

            Total refunds reported by the selected IRS service center campuses through
            the monthly Treasury SF-224 reconciliation process materially agreed with
            Treasury FMS records.

         C. Perform procedures to determine whether revenue receipt balances by tax
            class per the general ledger materially agree with IRS's master files and
            Treasury records. For refunds, perform a comparison of total refund
            balances between the master file, the general ledger, and Treasury records.
            Also, compare FUTA refunds per the master file to the general ledger.



7
 For the purpose of this procedure and procedure IV.C, we define material as $20 billion. This represents
1 percent of the total tax revenue receipts collected by IRS in fiscal year 2002.
8
IRS maintains records of refund balances by tax class in its master file, and reports this information
monthly to Treasury via the SF-224. Treasury provides 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.


Page 7                                   GAO-03-362R Unemployment Trust Fund Procedures
Enclosure


            Description of findings and results

            Tax receipt balances for all tax classes, including FUTA, per IRS’s general
            ledger, materially agreed with IRS’s master files and with Treasury records.

            Refund balances per IRS’s general ledger materially agreed with the master
            file and with Treasury records.




(191028)


Page 8                              GAO-03-362R Unemployment Trust Fund Procedures