oversight

Applying Agreed-Upon Procedures: Airport and Airway 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: Airport and Airway 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 Airport and Airway
          Trust Fund (AATF) 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 AATF.

          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 AATF, (2) review of the Internal Revenue Service’s (IRS)
          quarterly AATF certifications, (3) review of the Department of the Treasury Financial
          Management Service (FMS) adjustments to the AATF for fiscal year 2003, (4) review
                                    1
          of 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) estimation procedures affecting excise tax distributions to the AATF for the
          fourth quarter of fiscal year 2003, and other procedures including (6) the comparison
          of net excise tax distributions to the AATF during fiscal year 2003 and amounts
          reported in the draft financial statements prepared by the Bureau of the Public Debt

          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-04-214R Airport and Airway Trust Fund Excise Tax Procedures
(BPD) for the AATF and the Federal Aviation Administration’s (FAA) draft
consolidated 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 AATF. 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 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 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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             Airport and Airway Trust Fund Excise Tax Procedures and Results

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

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

                1. For the quarter ending September 30, 2002, select the 30 largest excise tax
                   returns containing excise taxes related primarily to the AATF and the
                                                                                4
                   Highway Trust Fund (HTF), 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 AATF
                   and the HTF 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, 8 contained primarily AATF-related taxes and 22
                   contained primarily HTF taxes.

                2. For each of the 8 returns related primarily to the AATF, we performed the
                   following procedures, which resulted in our testing approximately $1.5




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 AATF.
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
                 AATF:


                 (a) Trace the liability amount for abstracts7 26, 27, and 28 from the tax
                     return to IRS’s master file.

                      Description of findings and results

                      The liability amount for abstracts 26, 27, and 28 on the tax return
                      agreed with IRS’s master file for 8 of the 8 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 8 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 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). 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). The
tax amounts related to the selected abstracts for each trust fund are generally the largest tax amounts
reported on the taxpayer’s excise tax return and make up over 89 percent of the total amount certified to
the AATF and over 86 percent of the total amount certified to the HTF 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 8 of the returns.

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

                1.      Sampling

                     (a) Obtain excise tax assessments and collection data from IRS’s master
                         file for the first 6 months of fiscal year 2003. Determine if excise tax
                         collections per the master file agree with IRS’s general ledger.
                         Reconcile total excise tax collections from the master file to total
                         excise tax collections from the Collection Certification System audit
                         files to determine if they materially9 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 AATF and the
                      HTF. 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) AATF, (2) HTF, and (3)
                     other excise tax abstracts. Use DUS to select a sample of prorated
                     excise tax collections from the AATF population.

                      Description of findings and results

                      Use of DUS with a confidence level of 80 percent, a test materiality of
                      $89 million, and an expected aggregate error amount of $26.7 million
                      resulted in a sample of 6713 prorated collections for AATF for the first 6
                      months of fiscal year 2003.

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

                      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

11
 The selected abstracts include the following: (1) tax on transportation of persons by air (abstract 26), (2)
tax on use of international air facilities (abstract 27), (3) tax on transportation of property by air (abstract
28), (4) tax on aviation fuel for commercial use (abstract 77), (5) tax on 10 percent gasohol (abstract 59),
(6) diesel fuel tax (abstract 60), and (7) gasoline tax (abstract 62). The tax amounts for the four AATF-
related abstracts make up over 95 percent of the total amount certified to the AATF and the tax amounts
for the three HTF-related abstracts make up over 86 percent of the total amounts certified to the HTF each
quarter.
12
 The Report of Excise Tax Collection contains prorated collections, classified by abstracts, which serve as
the basis for IRS’s quarterly trust fund certifications.
13
 The planned sample size using DUS was 132 items. DUS selects dollars versus specific transaction items
by dividing the population by dollar intervals. The dollar interval for the AATF was $33 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 $66 million
would cover two dollar-intervals, but represent one sample item. Due to large dollar items covering more
than one interval, the 67 unique sampled transactions selected represent 132 dollar-intervals.

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                      resulted in a sample of 9614 prorated collections for the first 6 months
                      of fiscal year 2003 for the HTF.

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

            2.    Detailed tests of transactions

                 (a) For each prorated excise tax collection sampled from the AATF
                     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 66 of the 67 sampled
                           abstracts. For one sampled abstract, the IRS disallowed a credit
                           but made a data entry error and entered the credit into the master
                           file. As a result, IRS overstated prorated collections to the AATF
                           by approximately $48,000.

                      •    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


14
 The planned sample size using DUS was 143 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
HTF was $118 million. Due to large dollar items covering more than one interval, the 96 unique sampled
transactions selected represent 143 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.


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                           selected from the Collection Certification System audit file.16

                           Description of findings and results

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

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

                      Description of findings and results

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

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

                      Description of findings and results

                      For the first 6 months of fiscal year 2003, the net most likely error is
                      $282,000 with an upper error limit of $53 million at the 80 percent
                      confidence level. Collections go through additional calculations to
                      produce certification amounts for distribution. Consequently, the
                      magnitude of the error cannot be quantified with respect to the impact
                      on recorded distributions to the AATF.

     II.   Review of IRS’s quarterly AATF certifications

           A. Receipt certifications

           Perform the following steps on IRS’s AATF receipt certifications for the quarters
           ended September 30, 2002; December 31, 2002; and March 31, 2003:

              1. Inspect the certification letters for authorizing signatures.

                 Description of findings and results

                 The 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.

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

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

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

                 Description of findings and results

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

             4. Trace the certified amounts for tax on transportation of persons by air
                (abstract 26), tax on use of international air facilities (abstract 27), tax on
                transportation of property by air (abstract 28), and tax on aviation fuel for
                commercial use (abstract 77)17 from the certification letters back to the
                Reports of Excise Tax Collection18and Treasury 90 Report.19

                 Description of findings and results

                 The certified amounts for tax on transportation of persons by air (abstract
                 26), tax on use of international air facilities (abstract 27), tax on
                 transportation of property by air (abstract 28), and tax on aviation fuel for
                 commercial use (abstract 77) 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,
17
 The certified amounts for tax on transportation of persons by air (abstract 26), tax on use of international
air facilities (abstract 27), tax on transportation of property by air (abstract 28), and tax on aviation fuel for
commercial use (abstract 77) make up over 95 percent of the total amount certified to the AATF each
quarter.
18
 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.
19
 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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                IRS overstated certified receipts to the AATF by approximately $6.4
                million. IRS discovered the error after it had sent the certification letter to
                the FMS, and FMS had already recorded the true-up adjustment using the
                certification letter. 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 AATF.

            5. Review the distribution rates used by IRS to determine whether the
               distribution rates for tax on transportation of persons by air (abstract 26),
               tax on use of international air facilities (abstract 27), tax on transportation
               of property by air (abstract 28), and tax on aviation fuel for commercial use
               (abstract 77) agree with the applicable laws.

                Description of findings and results

                The distribution rates used by IRS for tax on transportation of persons by
                air (abstract 26), tax on use of international air facilities (abstract 27), tax
                on transportation of property by air (abstract 28), and tax on aviation fuel
                for commercial use (abstract 77) 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 significant20 collections from prior quarters.

                Description of findings and results

                The Reports of Excise Tax Collection supporting IRS’s certification to
                AATF for the quarter ended September 30, 2002, contained approximately
                $43 million in AATF excise tax collections related to prior quarters. Of this
                amount, approximately $21 million was from the quarter ended June 30,
                2002. IRS attributed this delay to one taxpayer who did not file timely and
                four tax returns with processing delays due to taxpayer or IRS errors.

                The Reports of Excise Tax Collection supporting IRS’s certification to
                AATF for the quarter ended December 31, 2002, contained approximately
                $66 million in AATF excise tax collections related to prior quarters. Of this
                amount, approximately $62 million was from the quarter ended September
                30, 2002. IRS attributed this delay to two taxpayers who did not file timely
                and two tax returns with processing delays due to taxpayer or IRS errors.

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

20
 For this test, “significant” is defined as $40 million, which represents approximately 2 percent of the
quarterly total certified to the AATF.

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                                                    21
            B. Refund/credit reclassification

            Perform the following steps on IRS’s AATF refund/credit certifications for the
            quarters ended December 31, 2002; March 31, 2003; June 30, 2003; and September
            30, 2003:22

                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 reviewed
                                                                         23
                   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.

                    Description of findings and results

                    The totals on the certification letters and accompanying schedules were
                    mathematically correct for all four quarters.
                                                                                                              24
                4. Trace the refund and credit amount for aviation gas and aviation O/T gas
                   from the schedules accompanying the certification letters to other

21
 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.
22
  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.
23
 IRS attaches a separate 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 submission processing campus systems and its Interim Revenue Accounting Control
System. IRS has 10 submission processing campuses that process tax returns and taxpayer receipts.
24
     Aviation gas and aviation O/T gas are the only two excise taxes on the AATF refund/credit certification.

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                 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 aviation gas and aviation O/T gas 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 AATF 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 AATF for fiscal year 2003 with
           original OTA estimates and IRS-certified amounts to see if they agree with the
                                 25
           supporting schedules.

             Description of findings and results

             For the FMS adjustments made to the AATF, the original OTA estimates and
             IRS-certified amounts agreed with the supporting schedule for all three
             quarters.

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

             Description of findings and results

             The independently recalculated differences between the OTA estimates and
             the final IRS-certified amounts for the AATF agreed with the differences
             computed by FMS for all three quarters.
                                       26
             These amounts were

25
 An FMS accountant compiles this schedule, called “Subsidiary Quarterly Account of Estimates and Actual
Related Taxes Appropriated to AATF.” The schedule computes the difference between IRS-certified
amounts and the OTA estimate for excise taxes, individually and in total, that relate to the AATF. The
schedule, along with OTA transfer forms and IRS certifications, supports the FMS adjustment.
26
 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.

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                 •   for the quarter ended September 30, 2002, ($44,195,000);
                 •   for the quarter ended December 31, 2002, ($27,813,000); and
                 •   for the quarter ended March 31, 2003, $(9,845,000).

IV.     Review of IRS precertification for the quarter ended June 30, 200327

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

             Description of findings and results

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

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

             Description of findings and results

             The totals on the precertification were mathematically correct.

        C. Trace the amounts for tax on transportation of persons by air (abstract 26),
           tax on use of international air facilities (abstract 27), tax on transportation of
           property by air (abstract 28), and tax on aviation fuel for commercial use
                        28
           (abstract 77) from the precertification back to the Reports of Excise Tax
           Collection and Treasury 90 Report.

             Description of findings and results

             The amounts for tax on transportation of persons by air (abstract 26), tax on
             use of international air facilities (abstract 27), tax on transportation of
             property by air (abstract 28), and tax on aviation fuel for commercial use
             (abstract 77) 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 tax on transportation of persons by air (abstract 26), tax
           on use of international air facilities (abstract 27), tax on transportation of
27
 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.
28
 The certified amounts for tax on transportation of persons by air (abstract 26), tax on use of international
air facilities (abstract 27), tax on transportation of property by air (abstract 28), and tax on aviation fuel for
commercial use (abstract 77) make up over 95 percent of the precertified total to the AATF.

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            property by air (abstract 28), and tax on aviation fuel for commercial use
            (abstract 77) agree with applicable laws.

            Description of findings and results

            The distribution rates used by IRS for tax on transportation of persons by air
            (abstract 26), tax on use of international air facilities (abstract 27), tax on
            transportation of property by air (abstract 28), and tax on aviation fuel for
            commercial use (abstract 77) agreed with the applicable laws in effect during
            the quarter ended June 30, 2003.

        E. Review the Reports of Excise Tax Collection used in the precertification to
           determine if they contain significant29 collections from prior quarters.

            Description of findings and results

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

        F. Review the Collection Certification System information to determine whether
           IRS omitted any significant returns30 from the precertification. If so, report: (1)
           the average amount of AATF-related excise taxes from these taxpayers’
           returns that were included in IRS’s certification from the four previous
           quarters and (2) the amount of AATF-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 AATF.

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

        A. Determine if OTA’s process for identifying and incorporating into its trust fund



29
 For this test, “significant” is defined as $40 million. This represents approximately 2 percent of the
precertified total to the AATF.
30
  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 AATF from taxpayers with liabilities equal to or greater than $10 million have, in the
aggregate, historically accounted for over 85 percent of distributions certified to the AATF.

 Page 14                                GAO-04-214R Airport and Airway Trust Fund Excise Tax Procedures
Enclosure


            estimates31 the effect of new legislation on excise tax receipts was in place
            during fiscal year 2003.

            Description of findings and results

            OTA’s process for identifying and incorporating into its trust fund estimates
            the effect of new legislation on excise tax receipts was in place during fiscal
            year 2003. OTA prepares a tax rate table32 to capture information relating to
            legislation that affects tax rates, tax basis, accounts, and deposit rules in effect
            during the tax period.

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

            Description of findings and results

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

        D. Trace the transfer amounts for tax on transportation of persons by air
           (abstract 26), tax on use of international air facilities (abstract 27), tax on
           transportation of property by air (abstract 28), and tax on aviation fuel for
                                           33
           commercial use (abstract 77), from the transfer forms, through the




31
 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 AATF.
32
 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.
33
 The transfer amounts for tax on transportation of persons by air (abstract 26), tax on use of international
air facilities (abstract 27), tax on transportation of property by air (abstract 28), and tax aviation fuel for
commercial use (abstract 77) make up over 96 percent of the total amount transferred to the AATF during
the fourth quarter of fiscal year 2003.

 Page 15                                GAO-04-214R Airport and Airway Trust Fund Excise Tax Procedures
Enclosure


            supporting schedules, and back to the related source documents.34

            Description of findings and results

            The transfer amounts for tax on transportation of persons by air (abstract 26),
            tax on use of international air facilities (abstract 27), tax on transportation of
            property by air (abstract 28), and tax on aviation fuel for commercial use
            (abstract 77) from the transfer forms did not agree with the supporting
            schedules and source documents on the first two semimonthly estimates
            affecting distributions to the AATF 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 period. 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 AATF
            by approximately $1.1 million.

VI.     Other procedures

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

            Description of findings and results

            The $8.8 billion of fiscal year 2003 excise taxes distributed to the AATF agreed
            with the amount reported on the draft FAA consolidated financial statements
            but did not agree with the amount on the BPD fiscal year 2003 financial
            statements for the AATF. The BPD fiscal year 2003 financial statements for
            the AATF reported excise tax distributions to the AATF of $8.7 billion. The
            difference is due to FMS’s $105 million downward adjustment for the quarter
            ended June 30, 2002, which FMS recorded in December 2002. FAA’s
            administrators included this transaction as part of the fiscal year 2002
            distributions to the AATF because it 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 AATF.



34
 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-04-214R Airport and Airway Trust Fund Excise Tax Procedures
Enclosure


            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,
                                             35
                   tax period, and tax class from source documentation agree with those
                   recorded in IRS’s master files.

                    Description of findings and results

                    Detailed testing of 169 revenue receipts and 50 refund sample transactions
                    showed that the collection or refund amount, tax period, and tax class
                    from source documents agreed with those recorded in IRS’s master files.

                2. Review selected 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) were materially36 reconciled to Treasury FMS records.37

                    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 tax, per IRS’s general ledger, materially agree
                   with IRS master files and Treasury records. For refunds, perform a
                   comparison of total refund balances between the master file, the general
                   ledger, and Treasury records.

35
     IRS assigns a tax class number to specific types of taxes. Excise taxes are tax class 4.
36
 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.
37
 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 17                                   GAO-04-214R Airport and Airway Trust Fund Excise Tax Procedures
Enclosure



            Description of findings and results

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

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




(196004)
Page 18                       GAO-04-214R Airport and Airway Trust Fund Excise Tax Procedures
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