oversight

Applying Agreed-Upon Procedures: Highway Trust Fund Excise Taxes

Published by the Government Accountability Office on 2003-11-20.

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

United States General Accounting Office
Washington, DC 20548



          November 20, 2003


          The Honorable Kenneth M. Mead
          Inspector General
          Department of Transportation

          Subject:     Applying Agreed-Upon Procedures: Highway Trust Fund Excise Taxes

          Dear Mr. Mead:

          We have performed the procedures contained in the enclosure to this report, which
          we agreed to perform and with which you concurred, solely to assist your office in
          ascertaining whether the net excise tax revenue distributed to the Highway Trust
          Fund (HTF) for the fiscal year ended September 30, 2003, is supported by the
          underlying records. As agreed with your office, we evaluated fiscal year 2003 activity
          affecting distributions to the HTF.

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

          The adequacy of the procedures to meet your objectives is your responsibility, and
          we make no representation in that respect. The procedures we agreed to perform
          include (1) detailed tests of transactions that represent the underlying basis of
          amounts distributed to the HTF, (2) review of the Internal Revenue Service’s (IRS)
          quarterly HTF certifications, (3) review of the Department of the Treasury Financial
          Management Service (FMS) adjustments to the HTF for fiscal year 2003, (4) review of
                                 1
          IRS’s precertification of receipts for the third quarter of fiscal year 2003, (5) review
          of certain procedures of the Department of the Treasury Office of Tax Analysis’
          (OTA) process for estimating amounts to be distributed to the HTF for the fourth
          quarter of fiscal year 2003, and other procedures including (6) comparison of net
          excise tax distributions to the HTF during fiscal year 2003 and amounts reported in
          the draft financial statements prepared by the Bureau of the Public Debt (BPD) for

          1
           To accommodate the Department of Transportation’s accelerated reporting date for fiscal year 2003,
          IRS performed a precertification of excise tax collections for the quarter ended June 30, 2003. The
          data are for information purposes only and the precertification does not constitute an official
          certification.

                                                      GAO-04-213R Highway Trust Fund Excise Tax Procedures
the HTF and the HTF’s draft financial statements, (7) detailed tests of transactions
that represent total IRS tax revenue receipts and refunds, and (8) review of key
reconciliations of IRS records to Treasury records. The enclosure contains the
agreed-upon procedures and our findings from performing each of the procedures.

We were not engaged to perform, and did not perform, an audit, the objective of
which would have been the expression of an opinion on the amount of net excise
taxes distributed to the HTF. Accordingly, we do not express such an opinion. Had
we performed additional procedures, other matters might have come to our attention
that would have been reported to you.2 We completed the agreed-upon procedures
on November 7, 2003.

We provided a draft of this report to IRS and OTA officials for review and comment.
They agreed with the results and findings presented in this report. In response to our
findings concerning errors in its estimates, OTA stated that it has instituted additional
internal control procedures to promptly detect and correct any future errors.

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

Sincerely yours,



Steven J. Sebastian
Director
Financial Management and Assurance

Enclosure




2
 In our report on the results of our audit of IRS’s fiscal year 2003 financial statements, we noted a
material weakness in IRS’s financial reporting process (U.S. General Accounting Office, Financial
Audit: IRS’s Fiscal Years 2003 and 2002 Financial Statements, GAO-04-126, November 13, 2003). A
component of this process includes IRS’s ability to allocate excise tax collections to the appropriate
trust funds at the time deposits are made. This condition affects the adequacy of the distributions of
federal excise tax revenue to recipient trust funds and is a continuation of an issue that we have
reported on in prior years.

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                Highway Trust Fund Excise Tax Procedures and Results

I.   Detailed tests of transactions that represent the underlying basis of
     amounts distributed to the HTF in fiscal year 2003

     A. Nonrepresentative selection of tax returns from the quarter ended September 30,
             3
        2002

             1. For the quarter ending September 30, 2002, select the 30 largest excise tax
                returns containing excise taxes related primarily to the HTF and the
                                                                                         4
                Airport and Airway Trust Fund (AATF), on the basis of total tax liability
                amount, from IRS’s master file.5

                 Description of findings and results

                 We selected the 30 largest excise tax returns related primarily to the HTF
                 and the AATF from the quarter ended September 30, 2002, for testing. The
                 selection was based on the total tax liability amount and type of taxes
                 owed, for each return, from IRS’s master file.


                 The total tax liability amount related to these 30 returns was approximately
                 $8.6 billion, or 66 percent of the total excise tax liability amount−$13
                 billion−for all excise tax types for the quarter ended September 30, 2002.

                 Of these 30 returns, 22 contained primarily HTF-related taxes and 8
                 contained primarily AATF taxes.

             2. For each of the 22 returns related primarily to the HTF we performed the
                following procedures, which resulted in our testing approximately $6.4




3
 Since certifications are not completed until 6 months after the end of the quarter, the certification and
corresponding FMS adjustment for the quarter ended September 30, 2002, were completed in March 2003,
and thus affected fiscal year 2003 distributions to the HTF.
4
 Although the certifications are based on amounts collected, we used the tax liability amounts to identify
the taxpayers paying the largest amounts of excise taxes. Our review shows that these taxpayers generally
pay their excise taxes in full each quarter.
5
 The master file is a detailed database containing taxpayer information.

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                 billion in prorated collections6 affecting fiscal year 2003 distributions to
                 the HTF:


                 (a) Trace the liability amount for abstracts7 59, 60, and 62 from the tax
                     return to IRS's master file.

                      Description of findings and results

                      The liability amount for abstracts 59, 60, and 62 on the tax return
                      agreed with IRS’s master file for 22 of the 22 returns.

                 (b) Check the mathematical accuracy of the taxpayer’s calculations on the
                     tax return for the selected abstracts.

                      Description of findings and results

                      The taxpayer’s calculations on all 22 returns were mathematically
                      correct.

                 (c) Recompute the prorated collection amount for the selected abstracts
                     based on information from the master file and compare this amount to
                     the amount from the Collection Certification System audit file.8



6
 IRS certifies to trust funds the amount of excise taxes collected. Because there are occasions in which
taxpayers have not fully paid their tax liability, IRS must allocate the amount of payments actually received
among the different excise taxes reported on the taxpayer’s return. IRS’s Collection Certification System
prorates a taxpayer’s payments proportionately among all taxes reported as owed on the tax return. For
example, if a corporation reports that it owes $4 million for gasoline tax, $2 million for diesel fuel tax, and
$1 million for gasohol tax on its Form 720 Quarterly Federal Excise Tax Return, but has paid IRS only $3.5
million at the time IRS performs its certification, the program prorates the $3.5 million in the following
manner: $2 million to gasoline tax, $1 million to diesel fuel tax, and $500,000 to gasohol tax.
7
 The abstract numbers identify the tax type (e.g., gasoline and ticket tax) and are used as the basis for
determining the distribution of the excise taxes to the various trust funds. Abstract numbers are
preprinted on the Form 720 Quarterly Federal Excise Tax Return and are used by the taxpayer to report
excise tax assessments. If the return was related to the HTF, we selected (1) tax on 10 percent gasohol
(abstract 59), (2) diesel fuel tax (abstract 60), and (3) gasoline tax (abstract 62). If the return was related
to the AATF, we selected (1) tax on transportation of persons by air (abstract 26), (2) tax on use of
international air facilities (abstract 27), and (3) tax on transportation of property by air (abstract 28). The
tax amounts related to the selected abstracts for each trust fund are the largest tax amounts reported on
the taxpayer’s excise tax return and make up over 86 percent of the total amount certified to the HTF and
over 89 percent of the total amount certified to the AATF each quarter.
8
 The Collection Certification System produces what IRS refers to as "audit files." These audit files contain
the individual prorated collections, by abstract and taxpayer identification number, that make up the
certified total amounts for each abstract.

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                      Description of findings and results

                      The recomputed prorated collection amounts for the three selected
                      abstracts agreed with amounts in IRS’s Collection Certification System
                      audit file for all 22 of the returns.

         B. Dollar unit sample (DUS) of transactions from the quarters ended December
            31, 2002, and March 31, 2003

            1. Sampling

                 (a) Obtain excise tax assessments and collection data from IRS's master
                     file for the first 6 months of fiscal year 2003. Determine if excise tax
                     collections per the master file agree with IRS's general ledger.
                     Reconcile total excise tax collections from the master file to total
                     excise tax collections from the Collection Certification System audit
                                                            9
                     files to determine if they materially agree.

                      Description of findings and results

                      Excise tax collections for the first 6 months of fiscal year 2003 per the
                      master file materially agreed with IRS’s general ledger and with total
                      excise tax collections from the Collection Certification System.

                 (b) Select a random attribute sample of 78 excise tax assessments from
                                       10
                     IRS’s master file. Compare assessment and receipt information for
                     each sample item from the master file to the assessment and receipt
                     information in the Collection Certification System to determine if
                     assessments and receipts from the master file are contained in the
                     Collection Certification System.

                      Description of findings and results

                      For each sample item, assessments and receipts from the master file
                      were contained in the Collection Certification System.

                 (c) To determine if the Collection Certification System properly
                     summarized the prorated collections, total the prorated collections for



9
 For the purpose of this reconciliation, material is defined as 1 percent of the total Form 720-related excise
tax collections, related to the quarters ended December 31, 2002, and March 31, 2003. For fiscal year 2003,
the materiality amount was $203 million for the two quarters combined.
10
 For this sample, if one or no errors were found in testing the 78 items, we would be 90 percent confident
that the error rate in the population would not exceed 5 percent.

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                      selected abstracts11 from the audit files and compare these amounts to
                                                                        12
                      amounts in the Reports of Excise Tax Collection.

                      Description of findings and results

                      The Collection Certification System properly summarized the prorated
                      collections for all of the selected abstracts related to the HTF and the
                      AATF. Prorated collections for the above-mentioned trust funds from
                      the audit files agreed with the corresponding amounts in the Reports of
                      Excise Tax Collection.

                 (d) Separate the total population of prorated collections from the audit
                     files into the following distinct populations: (1) HTF, (2) AATF, and (3)
                     other excise tax abstracts. Use DUS to select a sample of prorated
                     excise tax collections from the HTF population.

                      Description of findings and results

                      Use of DUS with a confidence level of 80 percent, a test materiality of
                      $322 million, and an expected aggregate error amount of $96.6 million
                      resulted in a sample of 9613 prorated collections for HTF for the first 6
                      months of fiscal year 2003.

                 (e) Select samples of prorated excise tax collections from the two non-
                     HTF populations.

                      Description of findings and results

                      Use of DUS with a confidence level of 80 percent, a test materiality of
                      $89 million, and an expected aggregate error amount of $26.7 million

11
 The selected abstracts include the following: (1) tax on 10 percent gasohol (abstract 59),
(2) diesel fuel tax (abstract 60), (3) gasoline tax (abstract 62), (4) tax on transportation of persons by air
(abstract 26), (5) tax on use of international air facilities (abstract 27), (6) tax on transportation of
property by air (abstract 28), and (7) tax on aviation fuel for commercial use (abstract 77). The tax
amounts for the three HTF-related abstracts make up over 86 percent of the total amount certified to the
HTF and the tax amounts for the four AATF-related abstracts make up over 95 percent of the total
amounts certified to the AATF each quarter.
12
 The Report of Excise Tax Collection contains prorated collections, classified by abstracts that serve as
the basis for IRS’s quarterly trust fund certifications.

13
 The planned sample size using DUS was 143 items. DUS selects dollars versus specific transaction items
by dividing the population by dollar intervals. The dollar interval for the HTF was $118 million.
Accordingly, any item with a dollar value matching or exceeding the sampling interval would be selected,
whereas items less than the sampling interval might not be selected. For example, an item of $236 million
would cover two dollar-intervals, but represent one sample item. Due to large dollar items covering more
than one interval, the 96 unique sampled transactions selected represent 143 dollar-intervals.

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                      resulted in a sample of 6714 prorated collections for the first 6 months
                      of fiscal year 2003 for the AATF.

                      A random attribute sample of 45 items from the population of prorated
                      tax collections, related to all excise taxes other than the HTF and the
                                                        15
                      AATF, was selected for testing.

            2. Detailed tests of transactions

                (a) For each prorated excise tax collection sampled from the HTF
                    population:

                     •   Check to see that the assessment amount on the tax return, for the
                         sampled abstract, agrees with the amount recorded in IRS's master
                         file.

                         Description of findings and results

                         The assessment amounts on the tax returns agreed with the
                         amounts recorded in IRS’s master file for all of the sampled
                         abstracts.

                     •   Check the mathematical accuracy of the taxpayers' calculations on
                         the tax returns for the related abstract.

                         Description of findings and results

                         The taxpayers’ calculations on the tax returns for the related
                         abstracts were mathematically correct for all of the sampled
                         abstracts.

                     •   Recompute the prorated collection amount based on information
                         from the master file and compare this amount to the sample items
                                                                                      16
                         selected from the Collection Certification System audit file.


14
 The planned sample size using DUS was 132 items. As explained in footnote 13, DUS selects dollars
versus specific transaction items by dividing the population by dollar intervals. The dollar interval for the
AATF was $33 million. Due to large dollar items covering more than one interval, the 67 unique sampled
transactions selected represent 132 dollar-intervals.
15
 For this sample, if no errors are found in testing the 45 items, we would be 90 percent confident that the
error rate in the population would not exceed 5 percent.
16
 The purpose of this test is to determine whether the Collection Certification System prorates correctly.
This test is not intended to determine whether amounts provided to the system are correct.

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                        Description of findings and results

                        The recomputed prorated collection, based on information from the
                        master file, agreed with the amounts for all of the sampled items.

               (b) Perform detailed testing on the two samples of prorated collections
                   from the non-HTF populations to determine if they contain any HTF
                   excise tax collections.

                     Description of findings and results

                     The two samples of prorated collections from the non-HTF
                     populations did not contain any HTF excise tax collections.

                (c) Evaluate the results of conducting steps (a) and (b).

                     Description of findings and results

                     As noted in the results from steps (a) and (b), we found no errors.

II. Review of IRS’s quarterly HTF certifications

         A. Receipt certifications

         Perform the following steps on IRS’s HTF receipt certifications for the quarters
         ended September 30, 2002, December 31, 2002, and March 31, 2003:
                                                17
            1. Inspect the certification letters for authorizing signatures.

                Description of findings and results

                The HTF certification letters for all three quarters had authorizing
                signatures.

            2. Determine if evidence exists that the supervisor or another analyst
               checked the certification letters and supporting worksheets.

                Description of findings and results

                There was evidence that another analyst and a supervisor checked the
                certification letters and supporting worksheets for all three quarters.


17
 IRS prepares two certification letters for HTF each quarter: one for the Highway Account and the other
for the Mass Transit Account.

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            3. Recalculate the totals on the certification letters to determine if they are
               mathematically correct.

                Description of findings and results

                The totals on the certification letters for all three quarters were
                mathematically correct.

            4. Trace the certified amounts for diesel fuel tax (abstract 60), gasoline tax
                                                                          18
               (abstract 62), and tax on 10 percent gasohol (abstract 59) from the
               certification letters back to the Reports of Excise Tax Collection19 and
               Treasury 90 Report. 20

                Description of findings and results

                The certified amounts for diesel fuel tax (abstract 60), gasoline tax
                (abstract 62), and tax on 10 percent gasohol (abstract 59) per the
                certification letters agreed with the related Reports of Excise Tax
                Collection for all three quarters.

                However, on IRS’s receipt certification for the quarter ended December 31,
                2002, the IRS analyst used excise tax credit information from the Treasury
                90 Report for the quarter ended September 30, 2002, rather than the
                Treasury 90 Report for the quarter ended December 31, 2002. As a result,
                IRS understated certified receipts to the Highway Account by
                approximately $12.4 million and understated certified receipts to the Mass
                Transit Account by approximately $1.7 million. IRS discovered the error
                after it had sent the certification letter to the FMS, and FMS had already
                recorded the true-up adjustment for using the certification letters. IRS
                corrected this error on the receipt certification for the following quarter
                ended March 31, 2003. Therefore, this error had no net effect on fiscal year
                2003 distributions to the HTF.

18
 The certified amounts for diesel fuel tax (abstract 60), gasoline tax (abstract 62), and tax on 10 percent
gasohol (abstract 59), along with the heavy vehicle use tax (traced separately), make up over 89 percent of
the total amount certified to the HTF each quarter.
19
 IRS uses data from two of these reports, covering sequential processing intervals, for each quarterly
certification. Collections are classified by abstract on the report when the related Form 720 tax return has
been recorded in IRS’s master file during the processing interval covered by the report. The second of the
two reports used may contain collections related to previous quarters not classified by abstract until the
current quarter because the related return was not recorded on the master file until the current quarter.
20
  During fiscal year 2002, IRS changed its process of recording and summarizing excise tax credits related
to taxpayers’ Form 720 tax returns. As a result, IRS now obtains this excise tax credit information from
the applicable Treasury 90 Report. The Treasury 90 Report summarizes excise tax credit information and
is produced quarterly by IRS submission processing campus systems. IRS has 10 submission processing
campuses that receive and process tax returns and payments.

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               5. Review the distribution rates used by IRS to determine whether the
                  distribution rates for diesel fuel tax (abstract 60), gasoline tax (abstract
                  62), and tax on 10 percent gasohol (abstract 59) agree with the applicable
                  laws.21

                   Description of findings and results

                   The distribution rates used by IRS for diesel fuel tax (abstract 60), gasoline
                   tax (abstract 62), and tax on 10 percent gasohol (abstract 59) agreed with
                   the applicable laws in effect during all three quarters.

               6. Review the Reports of Excise Tax Collection used in the certification to
                  determine if they contain significant22 collections from prior quarters.

                   Description of findings and results

                   The Reports of Excise Tax Collection supporting IRS’s certification to HTF
                   for the quarter ended September 30, 2002, contained approximately $261
                   million in net HTF excise tax collections related to prior quarters. This
                   consisted of approximately $262 million from the quarter ended June 30,
                   2002 and ($1 million)23 from prior quarters. IRS attributed the delay in
                   classifying the June quarter amounts to two taxpayers who did not file
                   timely and five tax returns with processing delays due to taxpayer or IRS
                   errors.

                   The Reports of Excise Tax Collection supporting IRS’s certification to HTF
                   for the quarter ended December 31, 2002, contained approximately $330
                   million in net HTF excise tax collections related to prior quarters. Of this
                   amount, approximately $253 million was from the quarter ended
                   September 30, 2002. IRS attributed this delay to three taxpayers who did
                   not file timely and two tax returns with processing delays due to taxpayer
                   or IRS errors.

                   The Reports of Excise Tax Collections supporting IRS’s certification to the
                   HTF for the quarter ended March 31, 2003, did not contain significant prior
                   quarter collections.



21
 IRS calculates certified collections to the Highway Account and the Mass Transit Account using the total
prorated collection amount, tax rate, and distribution rates applicable to each account.
22
 For this test, “significant” is defined as $170 million. This represents approximately 2 percent of the
quarterly total certified to the HTF.
23
     Negative amounts occur due to taxpayer amendments or IRS corrections.

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             7. Heavy vehicle use taxes, which go to the HTF, are reported on Form 2290
                and are not included in the Collection Certification System. Trace the
                heavy vehicle use tax amounts from the Highway Account certification
                letters to the master file.

                 Description of findings and results

                 Heavy vehicle use tax per the Highway Account certification letters agreed
                 with the master file for all three quarters.

          B. Refund/credit reclassification24

          Perform the following steps on IRS’s HTF refund/credit certifications for the
          quarters ended December 31, 2002, March 31, 2003, June 30, 2003, and September
          30, 2003:25

             1. Inspect the certification letters for authorizing signatures.

                 Description of findings and results

                 The certification letters for all four quarters had authorizing signatures.

             2. Determine if evidence exists that a supervisor or another analyst checked
                                                                      26
                the certification letters and accompanying schedules.

                 Description of findings and results

                 There was evidence that another analyst and a supervisor checked the
                 certification letters and accompanying schedules for all four quarters.

             3. Recalculate the totals on the certification letters and accompanying
                schedules to determine if they are mathematically correct.



24
 IRS performs a quarterly reclassification of excise tax refunds and credits originally entered into its
master file as a personal or corporate refund/credit. IRS refers to these reclassifications as "refund/credit
certifications." These amounts do not represent the total excise tax refund/credit activity to the trust
funds. Other routine excise tax refunds and credits (e.g., overpayments), which are claimed on taxpayers’
Form 720 excise tax returns, are included in IRS’s excise tax receipt certification to trust funds.
25
  In order to meet certain reporting deadlines, IRS certified refunds and credits for the fourth quarter of
fiscal year 2003 as of September 5, 2003.
26
 IRS attaches a separate schedule to the HTF refund/credit certification letter that includes the detailed
excise tax amounts that support the total amount shown on the letter. IRS compiles the amounts on these
schedules from submission processing campus systems and its Interim Revenue Accounting Control
System. IRS has 10 submission processing campuses that process tax returns and taxpayer receipts.

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                Description of findings and results

                The totals on the certification letters and accompanying schedules were
                mathematically correct for all four quarters.

             4. Trace the refund and credit amounts for gasoline tax and diesel tax27 from
                the schedules accompanying the certification letters to other summary
                refund/credit schedules. These other refund/credit summary schedules
                summarize refund and credit data obtained from submission processing
                campuses’ records.

                Description of findings and results

                The refund and credit amounts for gasoline tax and diesel tax on the
                schedules accompanying the certification letters agreed with the amounts
                on the summary schedules for all four quarters.

III.      Review of FMS adjustments

          Perform the following steps on FMS adjustments to the HTF excise tax
          distributions for the quarters ended September 30, 2002, December 31, 2002, and
          March 31, 2003.

          A. Compare the FMS adjustments made to the HTF for fiscal year 2003 with
             original OTA estimates and IRS-certified amounts to see if they agree with the
                                   28
             supporting schedules.

             Description of findings and results

             For the FMS adjustments made to the HTF accounts (Highway and Mass
             Transit), the original OTA estimates and IRS-certified amounts agreed with the
             supporting schedules for all three quarters.

          B. Recompute the difference between the OTA estimates and final IRS-certified
             amounts to see if the amounts agree with the differences computed by FMS.


27
 The certified refund/credit amounts for gasoline and diesel make up at least 91 percent of the total
certified refund/credit amount for the HTF.
28
 An FMS accountant compiles this schedule, called “Subsidiary Quarterly Account of Estimates and Actual
Related Taxes Appropriated to the Highway Account.” The schedule computes the difference between IRS-
certified amounts and the OTA estimate for excise taxes, individually and in total, that relate to the
Highway Account. A similar schedule is prepared for the Mass Transit Account. The schedules, along with
OTA transfer forms and IRS certifications, support the FMS adjustment.

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             Description of findings and results

             The independently recalculated differences between the OTA estimates and
             the final IRS-certified amounts for the Highway Account agreed with the
             differences computed by FMS for all three quarters.
                                       29
             These amounts were

                 •   for the quarter ended September 30, 2002, $636,666,000;
                 •   for the quarter ended December 31, 2002, ($319,825,000); and
                 •   for the quarter ended March 31, 2003, $205,901,000.

             The independently recalculated differences between the OTA estimates and
             the final IRS-certified amounts for the Mass Transit Account agreed with the
             differences computed by FMS for all three quarters.

             These amounts were

                 •   for the quarter ended September 30, 2002, $16,750,000;
                 •   for the quarter ended December 31, 2002, ($17,123,000); and
                 •   for the quarter ended March 31, 2003, $48,083,000.
                                                                                                      30
IV.       Review of IRS precertification for the quarter ended June 30, 2003

          A. Determine if evidence exists that the supervisor or another analyst checked
             the results and supporting worksheets.

             Description of findings and results

             There was evidence that another analyst and a supervisor checked the results
             and supporting worksheets.

          B. Recalculate the totals on the precertification to determine if they are
             mathematically correct.




29
 A positive amount indicates that the FMS adjustment increased excise taxes distributed to the trust fund.
A negative amount, shown in parentheses, indicates that the FMS adjustment decreased excise taxes
distributed to the trust fund. Since the adjustment amount is the difference between OTA’s estimate and
IRS’s certified amount, it may be significantly affected by IRS’s ability to certify receipts in the appropriate
quarter.
30
 To accommodate the Department of Transportation’s accelerated reporting date for fiscal year 2003, IRS
performed a precertification of excise tax collections for the quarter ended June 30, 2003. The data are for
information purposes only and the precertification does not constitute an official certification.

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             Description of findings and results

             The totals on the precertification were mathematically correct.

          C. Trace the amounts for diesel fuel tax (abstract 60), gasoline tax (abstract 62),
                                                         31
             and tax on 10 percent gasohol (abstract 59) from the precertification back to
             the Reports of Excise Tax Collection and Treasury 90 Report.

             Description of findings and results

             The amounts for diesel fuel tax (abstract 60), gasoline tax (abstract 62), and
             tax on 10 percent gasohol (abstract 59) per the precertification agreed with the
             related Reports of Excise Tax Collection and Treasury 90 Report.

          D. Review the distribution rates used by IRS to determine whether the
             distribution rates for diesel fuel tax (abstract 60), gasoline tax (abstract 62),
             and tax on 10 percent gasohol (abstract 59) agree with the applicable laws.

             Description of findings and results

             The distribution rates used by IRS for diesel fuel tax (abstract 60), gasoline tax
             (abstract 62), and tax on 10 percent gasohol (abstract 59) agreed with the
             applicable laws in effect during the quarter ended June 30, 2003.

          E. Review the Reports of Excise Tax Collection used in the precertification to
                                                  32
             determine if they contain significant collections from prior quarters.

             Description of findings and results

             The Reports of Excise Tax Collection supporting IRS’s precertification for the
             quarter ended June 30, 2003, did not contain significant prior quarter
             collections.

          F. Review the Collection Certification System information to determine whether
                                                33
             IRS omitted any significant returns from the precertification. If so, report for
             the Highway Account and the Mass Transit Account: (1) the average amount of
31
 The amounts for diesel fuel tax (abstract 60), gasoline tax (abstract 62), and tax on 10 percent gasohol
(abstract 59), along with the heavy vehicle use tax (traced separately), make up over 89 percent of the
precertified total to the HTF.
32
 For this test, “significant” is defined as $170 million, which represents approximately 2 percent of the
precertified total to the HTF.
33
  For this test, “significant returns” are defined as those from taxpayers with a total quarterly excise tax
liability equal to or greater than $10 million during each of the prior four quarters. Tax returns related
specifically to HTF from taxpayers with liabilities equal to or greater than $10 million have, in the
aggregate, historically accounted for over 91 percent of distributions certified to HTF.

Page 14                                            GAO-04-213R Highway Trust Fund Excise Tax Procedures
Enclosure


             HTF-related excise taxes from these taxpayers’ returns that were included in
             IRS’s certification from the four previous quarters and (2) the amount of HTF-
             related excise taxes from these taxpayers’ returns that were included in IRS’s
             certification for the quarter ended June 30, 2002.

             Description of findings and results

             IRS did not omit any returns of historically significant excise tax taxpayers
             from its precertification to the HTF.

          G. Heavy vehicle use taxes, which go to the HTF, are reported on Form 2290 and
             are not included in the Collection Certification System. Trace these amounts
             from the Highway Account precertification letter to the master file.

             Description of findings and results

             Heavy vehicle use tax per the Highway Account precertification agreed with
             the master file.

V.        Procedures performed on excise tax distributions to the HTF for the
          quarter ended September 30, 2003

          A. Determine if OTA’s process for identifying and incorporating into its trust fund
                       34
             estimates the effect of new legislation on excise tax receipts was in place
             during fiscal year 2003.

             Description of findings and results

             OTA’s process for identifying and incorporating into its trust fund estimates
             the effect of new legislation on excise tax receipts was in place during fiscal
                                                         35
             year 2003. OTA prepares a tax rate table to capture information relating to
             legislation that affects tax rates, tax basis, accounts, and deposit rules in effect
             during the tax period.

          B. Determine if there is evidence of review of the transfer forms and supporting
             schedules.




34
 OTA makes semimonthly estimates of excise tax collections for transfer to trust funds. There are five
semimonthly estimates for the quarter ended September 30, 2003, which affect fiscal year 2003
distributions to the HTF.
35
 OTA communicates this information to interested parties at Treasury, the Federal Highway
Administration, the Federal Transit Administration, and the Department of Transportation. IRS uses the
tax and distribution rates from this table in its subsequent certification of collections to trust funds.

Page 15                                          GAO-04-213R Highway Trust Fund Excise Tax Procedures
Enclosure




             Description of findings and results

             There was evidence that another OTA economist reviewed the transfer forms
             and supporting schedules for the semimonthly transfers affecting distributions
             to the HTF for the quarter ended September 30, 2003.

          C. Recalculate the totals on the transfer forms to determine if they are
             mathematically correct.

             Description of findings and results

             The totals on the transfer forms affecting distributions to the HTF for the
             quarter ended September 30, 2003, were mathematically correct.

          D. Trace the transfer amounts for diesel fuel tax (abstract 60), gasoline tax
             (abstract 62), tax on 10 percent gasohol (abstract 59), and heavy vehicle use
             tax,36 from the transfer forms, through the supporting schedules and back to
             the related source documents.37

             Description of findings and results

             The transfer amounts for diesel fuel tax (abstract 60), gasoline tax (abstract
             62), tax on 10 percent gasohol (abstract 59), and heavy vehicle use tax from
             the transfer forms did not agree with the supporting schedules and source
             documents on the first two semimonthly estimates affecting distributions to
             the HTF for the quarter ended September 30, 2003. An error on one of OTA’s
             electronic spreadsheets resulted in the collection percentages for all tax types
             being miscalculated. After we brought this to its attention, OTA corrected the
             spreadsheet error so it did not affect the remaining estimates for the quarter.
             However, since the effect of this error on the total quarterly estimate would be
             only a fraction of a percent, OTA did not correct for the effects of this error on
             the two affected semimonthly estimates. Consequently, OTA understated its
             estimate for these four taxes to the HTF by approximately $4.2 million.

             In addition, there was another error affecting distributions to the HTF that was
             not directly related to the tax types selected for review. An error on OTA’s

36
 The transfer amounts for diesel fuel tax (abstract 60), gasoline tax (abstract 62), tax on 10 percent
gasohol (abstract 59), and heavy vehicle use tax make up over 92 percent of the total amount transferred
quarterly to the HTF.
37
 The source documents include the IRS report of excise taxes used to derive the percentages applied to
reported receipts, the Daily Treasury Statement, the Monthly Treasury Statement, and the excise tax rate
tables.

Page 16                                         GAO-04-213R Highway Trust Fund Excise Tax Procedures
Enclosure


                electronic spreadsheets resulted in the omission of the estimated amounts for
                retail tax on trucks (abstract 33) from its estimates to the Highway Account
                for the first four semimonthly periods of the quarter. As a result, OTA
                understated its estimates to the HTF by approximately $305 million. OTA
                corrected for the effects of this error through its final semimonthly estimate
                affecting fiscal year 2003 distributions to the HTF. Consequently, this error
                had no net effect on fiscal year 2003 distributions to the HTF.

VI.         Other procedures

            A. Compare total fiscal year 2003 excise taxes distributed to the HTF with drafts
               of (1) HTF’s fiscal year 2003 financial statements and (2) BPD’s fiscal year
               2003 financial statements for the HTF to determine if they agree.

                Description of findings and results

                The $34.1 billion of fiscal year 2003 excise taxes distributed to the HTF agreed
                with the amount reported on the draft HTF financial statements but did not
                agree with the amount reported on the draft BPD fiscal year 2003 financial
                statements for the HTF. The BPD fiscal year 2003 financial statements for the
                HTF reported excise tax distributions to the HTF of $33.7 billion. The
                difference is due to FMS’s $388.6 million downward adjustment for the quarter
                ended June 30, 2002—a $378.9 million adjustment to the Highway Account and
                a $9.7 million adjustment to the Mass Transit Account—which FMS recorded
                in December 2002. The trust fund’s administrator included this transaction as
                part of the fiscal year 2002 distributions to the HTF because the HTF had time
                to record the adjustment on its fiscal year 2002 financial statements, which
                were issued in January 2003. However, BPD included this transaction as part
                of the fiscal year 2003 distributions because it was recorded after the
                November 1, 2002, issuance date of BPD’s fiscal year 2002 financial statements
                for the HTF.

            B. Procedures performed as part of the fiscal year 2003 IRS financial statement
               audit:

                1. From IRS’s master files for the first 8 months of fiscal year 2003, use DUS
                   to select statistical samples of (1) total tax revenue receipts and (2)
                   refunds. For each sample item, test that the collection or refund amount,
                   tax period, and tax class38 from source documentation agree with those
                   recorded in IRS’s master files.




38
     IRS assigns a tax class number to specific types of taxes. Excise taxes are tax class 4.

Page 17                                               GAO-04-213R Highway Trust Fund Excise Tax Procedures
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 IRS’s master files.

            2. Review selected IRS submission processing campuses’ monthly Treasury
               SF-224 reconciliations to determine if IRS-reported revenue receipts were
               properly classified and reconciled to Treasury FMS records. For refunds,
               review selected IRS submission processing campuses’ monthly Treasury
               SF-224 reconciliations to determine if IRS-reported total refunds (all tax
               classes) materially39 reconciled to Treasury FMS records.
                                                                          40




                Description of findings and results

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

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

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

                Description of findings and results

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



39
 For the purpose of this procedure and procedure VI.B.3, we define material as $20 billion. This
represents approximately 1 percent of the total tax revenue receipts collected by IRS in fiscal year 2003.
40
 IRS maintains records of refund balances by tax class in its master file and reports this information
monthly to Treasury on the SF-224. Treasury provides IRS with a Statement of Differences (TFS-6652),
which reports differences between total refunds reported by IRS on the SF-224 and the total refunds per
Treasury records.

Page 18                                           GAO-04-213R Highway Trust Fund Excise Tax Procedures
Enclosure


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




(196003)

Page 19                               GAO-04-213R Highway Trust Fund Excise Tax Procedures
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