oversight

Applying Agreed-Upon Procedures: Federal Unemployment Taxes

Published by the Government Accountability Office on 2003-11-14.

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

United States General Accounting Office
Washington, DC 20548



          November 14, 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, 2003,
          is supported by the underlying records. As agreed with your office, we evaluated
          fiscal year 2003 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 when 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
          October 31, 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. In
          response to our finding concerning an error on monthly FUTA refund data entered
          into the Government Online Accounting Link System (GOALS), IRS stated that it has


                                                     GAO-04-212R Unemployment Trust Fund Procedures
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 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 activity posted to the
          master file for the first 8 months of fiscal year 2003.1 Determine if FUTA
          collections and refund data per the master file materially reconcile to the
          general ledger.2

          Description of findings and results

          Total FUTA collections and refunds for the first 8 months of fiscal year 2003
          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 2003, using a confidence level of 80 percent, a test
          materiality of $333 million, and an expected aggregate error amount of
          $99.9 million.

          Description of findings and results

          Use of DUS with a confidence level of 80 percent, a test materiality of
          $333 million, and an expected aggregate error amount of $99.9 million resulted
          in a sample of 45 transactions for the first 8 months of fiscal year 2003. Of this
          total, 44 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 supporting
               documents (e.g., federal tax deposit coupons).

               Description of findings and results

               Based on supporting documentation, collection amounts were accurately
               recorded for all 44 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 $333 million. This
   represents 1 percent of the UTF collections made by federal and state government agencies for fiscal
   year 2002.


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Enclosure


                  Description of findings and results

                  Based on supporting documentation, collection amounts were recorded to
                  the appropriate period for all 44 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 44 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-eight of the 44 sampled FUTA receipt transactions were paid via the
                  EFTPS. The bank confirmation showed that all 44 transactions were valid
                  and had been recorded to the proper tax period and tax class and for the
                  proper amounts.

          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.

                  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.



   3
       IRS assigns a tax class number to specific types of taxes. FUTA taxes are tax class 8.
   4
    The EFTPS is a system for initiating tax payments electronically. Employers who make federal tax
   deposits exceeding $200,000 must use the 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 the EFTPS.


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 Enclosure

                2. 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 did not claim
                   an exempt wage payment.

                3. For manual refunds,5 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 2003 revenue collections and refunds
              appear reasonable.

              Description of findings and results

              We performed a predictive test on the final 4 months of fiscal year 2003
              FUTA revenue collection and refund data. The predicted FUTA revenue
              collection and refund data amounts for the final 4 months of fiscal year
              2003 did not materially vary from the actual amount of revenue
              collections and refunds per the IRS’s records for this period.

III.       Other FUTA Procedures

           A. For each of the 12 months in fiscal year 2003, 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 the FMS.




       5
       A manual refund is a refund manually processed by an IRS employee rather than through the IRS’s
       manual automated process.


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 Enclosure

           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 2003.


       B. For each of the 12 months in fiscal year 2003, obtain and review
          supporting documentation for the monthly entry of FUTA refund data
          onto the GOALS to charge back the Unemployment Trust Fund account
          for FUTA tax refunds issued. Check to see that the supporting
          documentation agrees with the monthly entries reported in the 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 11 of the 12
           months of fiscal year 2003. For the month of May 2003, IRS incorrectly
           charged the cumulative refund amount for the year through May 2003 of
           $73 million to the UTF instead of the amount for May 2003 of $11 million.

           We brought this to the attention of the IRS and they made an adjustment
           for May 2003. The adjustment was made during September 2003.
           Therefore, there was no impact on FUTA reported amounts on the
           financial statements.

       C. Compare fiscal year 2003 net FUTA collections per the IRS’s draft
          statement of custodial activity and related footnote disclosures to (a) the
          Treasury’s Bureau of the Public Debt (BPD) accounting records for the
          UTF and (b) drafts of the Department of Labor’s (DOL) consolidated
          financial statements. Obtain explanations/support for material variances.

           Description of findings and results

           There were no significant variances between net FUTA collections per the IRS’s
           draft statement of custodial activity and the BPD’s accounting records for the
           UTF. Similarly, there were no significant variances between IRS’s draft
           statement of custodial activity and related footnote disclosures and drafts of the
           DOL’s fiscal year 2003 consolidated financial statements.


IV.    Other procedures performed as part of the fiscal year 2003 IRS
       financial statement audit

       A. From the IRS’s master files for the first 8 months of fiscal year 2003, use DUS to
          select statistical samples of (a) total tax revenue receipts and (b) refunds. For
          each item in the samples of tax revenue receipts and refunds, test that the
          collection or refund amount and tax class from source documentation agrees
          with amounts recorded in IRS’s master files.


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Enclosure


          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 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) materially6 reconciled to Treasury FMS records.7

          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.

          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.




          (196006)

   6
    For the purpose of this procedure and procedure IV.C, we define material as $20 billion. This
   represents approximately 1 percent of the total tax revenue receipts collected by the IRS in fiscal year
   2003.
   7
    The 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 the IRS with a Statement of
   Differences (TFS-6652), which reports differences between total refunds reported by the IRS on the
   SF-224 and the total refunds per Treasury records.


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