oversight

Fiscal Year 2012 Agreed-Upon Procedures: Excise Tax Distributions to the Airport and Airway Trust Fund and the Highway Trust Fund

Published by the Government Accountability Office on 2012-11-07.

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

United States Government Accountability Office
Washington, DC 20548


          November 7, 2012

          The Honorable Calvin L. Scovel III
          Inspector General
          U.S. Department of Transportation

          Subject: Fiscal Year 2012 Agreed-Upon Procedures: Excise Tax Distributions to
                   the Airport and Airway Trust Fund and the Highway Trust Fund

          Dear Mr. Scovel:

          We have performed the procedures described in the enclosures to this letter, 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) and the Highway Trust Fund (HTF) for the fiscal year ended
          September 30, 2012, is supported by the underlying records.

          We conducted the engagement in accordance with U.S. generally accepted
          government auditing standards, which incorporate certain financial audit and
          attestation standards established by the American Institute of Certified Public
          Accountants.

          You are solely responsible for the sufficiency of these agreed-upon procedures to
          meet your objectives, and we make no representation in that respect. The
          procedures we agreed to perform were related to (1) transactions that represent the
          underlying basis of amounts distributed from the general fund to the AATF and the
          HTF during fiscal year 2012, (2) the Internal Revenue Service’s (IRS) quarterly
          AATF and HTF excise tax receipt certifications prepared during fiscal year 2012, (3)
          the U.S. Department of the Treasury’s Office of Tax Analysis’s (OTA) estimates of
          excise tax amounts to be distributed to the AATF and the HTF for the fourth quarter
          of fiscal year 2012, and (4) the amount of net excise taxes to be distributed to the
          AATF and the HTF during fiscal year 2012. Enclosure I provides the details on the
          agreed-upon procedures and our results with respect to the AATF. Enclosure II
          provides the details on the agreed-upon procedures and our results with respect to
          the HTF.

          We were not engaged to perform, and did not perform, an examination, the objective
          of which would have been to express an opinion on the amount of net excise taxes
          distributed to the AATF and the HTF during fiscal year 2012. Accordingly, we do not
          express such an opinion. Had we performed additional procedures, other matters
          might have come to our attention that we would have reported to you. We completed
          the agreed-upon procedures on October 25, 2012.


                                                                 GAO-13-73R Excise Tax Procedures
We provided a draft of this letter, along with the report, to IRS and OTA officials for
review and comment. IRS and OTA agreed with the results and findings related to
the procedures performed concerning excise tax distributions to AATF and HTF
during fiscal year 2012.

This report is intended solely for the use of the Office of Inspector General of the
U.S. Department of Transportation and should not be used by those who have not
agreed to the procedures or have not taken responsibility for the sufficiency of the
procedures for their purposes. However, the report is a matter of public record, and
its distribution is not limited. The report is available at no charge on the GAO website
at http://www.gao.gov.

If you have any questions concerning this report, please contact me at (202) 512-
9377 or clarkce@gao.gov. Contact points for our Offices of Congressional Relations
and Public Affairs may be found on the last page of this report. Ted Hu, Assistant
Director; Stephanie Chen; and Melanie Darnell made key contributions to this report.

Sincerely yours,




Cheryl E. Clark
Director
Financial Management and Assurance

Enclosures - 2




Page 2                                                  GAO-13-73R Excise Tax Procedures
Enclosure I


                  Airport and Airway Trust Fund Excise Tax Procedures

I.       Procedures on Transactions That Represent the Underlying Basis of
         Amounts Distributed to the Airport and Airway Trust Fund (AATF) in Fiscal
         Year 2012

         A. Statistical selection of attribute and monetary unit samples (MUS) from the
            quarters ended September 30, 2011; December 31, 2011; and March 31,
            2012 1

            1. Procedures on population of transactions and sample selection:

                (a) Compare the total excise tax collections from the Internal Revenue
                    Service’s (IRS) master file with excise tax collections from IRS’s
                    Collection Certification System audit files for all three quarters to
                    determine whether there is any variance that exceeds 1 percent of total
                    excise tax collections per the master file. 2,3

                    Description of Findings and Results

                    Excise tax collections for all three quarters from IRS’s master file
                    agreed with excise tax collections from IRS’s Collection Certification
                    System audit files with less than a 1 percent variance.

                (b) Select a random attribute sample of 45 excise tax assessments from
                    IRS’s master file, which are based on Form 720 excise tax returns IRS
                    received and recorded during these three quarters. Compare
                    assessment and receipt information for each return from IRS’s master
                    file to IRS’s Collection Certification System for agreement. 4

                     Description of Findings and Results

                     For all 45 excise tax assessments, assessment and receipt
                     information from IRS’s master file agreed with the information in IRS’s
                     Collection Certification System.
1
 The Internal Revenue Service certification of excise tax distributions and corresponding U.S. Department
of the Treasury Financial Management Service adjustment for the quarter ended September 30, 2011,
were completed in February 2012, and thus affected distributions to the AATF during fiscal year 2012.
2
 IRS’s master file contains the detailed records of taxpayer accounts.
3
 The Collection Certification System produces what IRS refers to as audit files. These audit files contain
the individual prorated collections by tax type and taxpayer identification number. IRS calculates the
amount it certifies to the trust funds by first subtracting credits claimed by taxpayers from the prorated
collections, and then multiplying the result by the applicable trust fund distribution rates.
4
 For this sample, if no errors were found in our comparison of 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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Enclosure I


                 (c) For each quarter, sum the prorated collections for selected abstracts
                     from IRS’s Collection Certification System audit files and compare
                     these amounts to amounts in the Report of Excise Tax Collection to
                     determine if the Collection Certification System properly summarized
                     the prorated collections. 5,6,7

                      Description of Findings and Results

                      For each of the three quarters, the independently calculated sum of
                      prorated collections from the audit files for the selected abstracts
                      agreed with the corresponding amounts in the Report of Excise Tax
                      Collection.

                 (d) Combine the total population of prorated collections from IRS’s
                     Collection Certification System audit files for all three quarters, and
                     then separate the combined population into the following distinct
                     subpopulations: (1) AATF, (2) Highway Trust Fund (HTF), and (3) all
                     other abstracts. Use MUS to select a sample of prorated excise tax
                     collections from the AATF population using a confidence level of 63
                     percent, a tolerable misstatement of $161 million, and an expected
                     aggregate error amount of $28 million. 8




5
 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. The selected abstracts are tax on transportation of persons by air (abstract 26), tax on the
use of international air travel facilities (abstract 27), tax on transportation of property by air (abstract 28),
and tax on kerosene for use in commercial aviation (abstract 77) for AATF, and diesel fuel tax (abstract
60) and gasoline tax (abstract 62) for Highway Trust Fund (HTF). The tax amounts for the four AATF-
related abstracts made up over 97 percent of the total amount of excise tax receipts certified by IRS to
the AATF in fiscal year 2012. The tax amounts for the two HTF-related abstracts made up over 84
percent of the total amount of excise tax receipts certified by IRS to the HTF in fiscal year 2012.
6
 The Report of Excise Tax Collection contains prorated collections, classified by abstracts, which serve as
the basis for IRS’s quarterly trust fund certifications.
7
 IRS certifies to trust funds the amount of excise taxes collected. Because taxpayers have sometimes not
fully paid their tax liability, IRS must allocate the amount of payments actually received among the
different excise taxes reported on the taxpayers’ returns. 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 kerosene 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 kerosene tax.
8
 The $161 million tolerable misstatement represents 1.4 percent of the net excise tax revenue distributed
to the AATF in fiscal year 2011. The expected aggregate error amount of $28 million represents
approximately 17 percent of the tolerable misstatement amount.



Page 4                                                                   GAO-13-73R Excise Tax Procedures
Enclosure I


                     Description of Findings and Results

                     Use of MUS with a confidence level of 63 percent, a tolerable
                     misstatement of $161 million, and an expected aggregate error amount
                     of $28 million resulted in a sample of 49 prorated excise tax collections
                     for the AATF. 9

                 (e) Select samples of prorated excise tax collections from the two non-
                     AATF populations. Use MUS to select a sample of prorated excise tax
                     collections from the HTF population using a confidence level of 63
                     percent, a tolerable misstatement of $727 million, and an expected
                     aggregate error amount of $124 million. 10 Select a random attribute
                     sample of 45 items from the population of prorated tax collections
                     related to all abstracts other than the AATF and the HTF. 11

                     Description of Findings and Results

                     Use of MUS with a confidence level of 63 percent, a tolerable
                     misstatement of $727 million, and an expected aggregate error amount
                     of $124 million resulted in a sample of 47 prorated excise tax
                     collections for the HTF. 12

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




9
  The planned sample size using MUS was 68 items. MUS selects dollars versus specific transaction
items by dividing the population of prorated excise tax collections by dollar intervals. The dollar interval for
AATF was $128 million. Accordingly, any item with a dollar value equal to or exceeding the interval would
be selected. Items with a dollar value less than the interval might not be selected, but may also be
selected more than once. The 49 unique sampled transactions selected represented 68 dollar intervals.
10
  The $727 million tolerable misstatement represents 1.97 percent of the net excise tax revenue
distributed to the HTF in fiscal year 2011. The expected aggregate error amount of $124 million
represents approximately 17 percent of the tolerable misstatement amount.
11
 For this sample, if no errors are found in performing procedures on the 45 items, we would be 90
percent confident that the error rate in the population would not exceed 5 percent.
12
  The planned sample size using MUS was 50 items. As explained in footnote 9, MUS selects dollars
instead of specific transaction items by dividing the population of prorated excise tax collections by dollar
intervals. The dollar interval for the HTF was $591 million. Accordingly, any item with a dollar value equal
to or exceeding the interval would be selected. Items with a dollar value less than the interval might not
be selected but may also be selected more than once. The 47 unique sampled transactions represented
50 dollar intervals.



Page 5                                                                  GAO-13-73R Excise Tax Procedures
Enclosure I


            2. Procedures on transactions:

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

                     •   Compare the assessment or adjustment amount from the
                         supporting document to IRS’s master file for agreement. 13

                         Description of Findings and Results

                         The assessment or adjustment amount on the supporting
                         documentation agreed with the assessment or adjustment amount
                         recorded in IRS’s master file for 48 of the 49 sampled items. On the
                         remaining sample item, IRS erroneously recorded an abatement of
                         ticket tax as a refundable credit. This error resulted in IRS certifying
                         about $612,000 in ticket tax collections to the AATF that it had not
                         collected. 14 While IRS intends to correct this error, it did not do so
                         before completing its certification to the AATF for the quarter ended
                         June 30, 2012. Consequently, the effect of this error is included in
                         IRS’s certified distributions to the AATF for fiscal year 2012.

                     •   Calculate the assessment or adjustment amount on the supporting
                         documentation to determine whether it is mathematically correct.

                         Description of Findings and Results

                         The assessment or adjustment amount on the supporting
                         documentation was mathematically correct for each of the 49
                         sampled items.

                     •   Calculate the prorated collection amount for the sampled item
                         based on information from IRS’s master file and compare this
                         amount to the amount in IRS’s Collection Certification System audit
                         files for agreement.




13
  Supporting documentation includes Form 720 excise tax returns and other forms submitted by the
taxpayer or prepared by IRS.
14
  The Collection Certification System treats a refundable credit as a collection when computing the pro-
rated collection amount for each tax type reported by a taxpayer. Because the transaction was not
actually a refundable credit and IRS certifies 100 percent of ticket tax collections to the AATF, this error
resulted in IRS certifying amounts to the AATF that it had not actually collected.



Page 6                                                                  GAO-13-73R Excise Tax Procedures
Enclosure I


                       Description of Findings and Results

                       The independently calculated prorated collection amount agreed
                       with the amount in IRS’s Collection Certification System audit files
                       for each of the 49 sampled items.

                (b) Inspect the supporting documentation and master file information for
                    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 supporting documentation and master file information for the two
                    samples of 92 prorated collections from the non-AATF populations did
                    not contain any AATF excise tax collections.

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

                   Description of Findings and Results

                   The net most likely error related to AATF was $127 million with an
                   upper error limit of $266 million at the 63 percent confidence level.
                   The upper error limit exceeded the $161 million tolerable misstatement
                   designed for this procedure.

II.      Procedures on IRS’s Quarterly AATF Receipt Certifications

         Perform the following procedures on IRS’s AATF receipt certifications for the
         quarters ended September 30, 2011; December 31, 2011; March 31, 2012; and
         June 30, 2012:

         A. Inspect the certification letters for authorizing signatures.

             Description of Findings and Results

             The certification letters for all four quarters had authorizing signatures.

         B. Inspect the certification letters and supporting worksheets to determine if
            evidence exists that they were reviewed by the supervisor or another
            analyst.

             Description of Findings and Results

             There was evidence that the supervisor or another analyst reviewed the
             certification letters and supporting worksheets for all four quarters.




Page 7                                                        GAO-13-73R Excise Tax Procedures
Enclosure I


         C. Calculate 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 the quarters ended September 30,
              2011; December 31, 2011; and March 31, 2012, were mathematically
              correct.

              On its certification letter to the AATF for the quarter ended June 30, 2012,
              IRS omitted $3 million in collections for liquid fuel used in a fractional aircraft
              ownership program. As a result, total excise taxes certified to the AATF was
              $3 million less than it should have been. IRS corrected its error after we
              brought this to IRS’s attention.

         D. Trace the certified amounts for tax on transportation of persons by air
            (abstract 26), tax on the use of international air travel facilities (abstract 27),
            tax on transportation of property by air (abstract 28), and tax on kerosene for
            use in commercial aviation (abstract 77) from the certification letters back to
            the Report of Excise Tax Collection and the Treasury 90 Report for
            agreement. 15,16,17

              Description of Findings and Results

              The certified amounts for transportation of persons by air (abstract 26), tax
              on the use of international air travel facilities (abstract 27), tax on
              transportation of property by air (abstract 28), and tax on kerosene for use in
              commercial aviation (abstract 77) from the certification letters agreed with
              the related Report of Excise Tax Collection and the Treasury 90 Report for
              the quarters ended September 30, 2011; December 31, 2011; and March 31,
              2012.




15
  The certified amounts for tax on transportation of persons by air (abstract 26), tax on the use of
international air travel facilities (abstract 27), tax on transportation of property by air (abstract 28), and tax
on kerosene for use in commercial aviation (abstract 77) made up over 97 percent of the total amount of
excise tax receipts certified by IRS to the AATF for each quarter of fiscal year 2012.
16
   The Report of Excise Tax Collection is produced by the Collection Certification System. Collections are
classified by abstract on the report when the related Form 720 tax return has been posted to IRS’s master
file during the processing interval covered by the report.
17
 The Treasury 90 Report summarizes excise tax credit information and is produced quarterly by IRS
service center campuses. IRS has six service center campuses that receive and process tax returns and
payments.



Page 8                                                                    GAO-13-73R Excise Tax Procedures
Enclosure I


             For the quarter ended June 30, 2012, IRS used the wrong version of the
             Report of Excise Tax Collection. 18 As a result, the amount IRS certified to the
             AATF was almost $270 million less than it should have been. IRS detected
             this error when researching another issue, and after it had sent out its
             original certification letter for the AATF. Once IRS detected its error, IRS
             made corrections and issued a revised certification letter for the AATF 6
             days after issuing its original certification letter. The certified amounts for
             transportation of persons by air (abstract 26), tax on the use of international
             air travel facilities (abstract 27), tax on transportation of property by air
             (abstract 28), and tax on kerosene for use in commercial aviation (abstract
             77) from the revised certification letter agreed with the correct Report of
             Excise Tax Collection and the Treasury 90 Report.

         E. Compare the distribution rates used by IRS for tax on transportation of
            persons by air (abstract 26), tax on the use of international air travel facilities
            (abstract 27), tax on transportation of property by air (abstract 28), and tax
            on kerosene for use in commercial aviation (abstract 77) for agreement 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 the use of international air travel facilities (abstract 27),
            tax on transportation of property by air (abstract 28), and tax on kerosene for
            use in commercial aviation (abstract 77) agreed with the applicable laws in
            effect during all four quarters.

         F. Inspect the Report of Excise Tax Collection used in the certification to
            determine if it contains more than $55 million in AATF collections from prior
            quarters. 19,20

            Description of Findings and Results

            None of these reports used in the AATF certification for any of the four
            quarters contained more than $55 million in collections from prior quarters.



18
  IRS used the Report of Excise Tax Collection that was produced by the Collection Certification System
5 weeks earlier than its actual cut-off for performing the certification.
19
  The $55 million represents approximately 2 percent of the total amount of excise tax receipts certified by
IRS to the AATF for each quarter of fiscal year 2012.
20
  The Report of Excise Tax Collection may contain collections related to prior quarters that IRS certifies
as part of the current quarter’s collections because IRS did not post the related tax return to its master file
until the current processing period. This may result from IRS processing delays or from delay by the
taxpayer in filing the tax return.



Page 9                                                                  GAO-13-73R Excise Tax Procedures
Enclosure I

        G. Inspect the Report of Excise Tax Collection used in the certification to
           determine if it contains more than $55 million in collections from future
           quarters. 21

             Description of Findings and Results

             None of these reports used in the AATF certification for any of the four
             quarters contained more than $55 million in collections from future quarters.

        H. For the quarter ended June 30, 2012, only, inquire with IRS whether any
           excise tax returns from its list of the largest excise taxpayers were omitted
           from the certification. 22 For any such returns that were omitted but were
           subsequently received by IRS, report the total amount of AATF-related tax
           collections from these tax returns. For any such returns that were omitted
           and where IRS has not yet received these, report the average quarterly
           amount of AATF-related tax collections from the taxpayer(s) based on the
           previous four quarters

            Description of Findings and Results

            According to IRS, no tax returns from its list of the largest excise taxpayers
            were omitted from its certification for the quarter ended June 30, 2012.

III.    Procedures on Excise Tax Distributions to the AATF for the Quarter Ended
        September 30, 2012

        A. Determine if the Department of the Treasury’s Office of Tax Analysis (OTA)
           prepares a tax rate table to capture information concerning tax rates, tax
           basis, accounts, and deposit rules in effect during the quarter ended
           September 30, 2012, and whether OTA uses this rate table in its trust fund
           estimates for the quarter. 23


21
 The Report of Excise Tax Collection may contain collections related to future quarters that IRS certifies
as part of the current quarter’s collections because the taxpayer filed the tax return before the due date
and paid the taxes owed, and IRS posted the tax return to its master file during the current processing
period.
22
 IRS maintains a listing of approximately 150 taxpayers that are its largest excise taxpayers. To help
ensure that tax return data for the largest excise taxpayers are included in each quarterly excise tax
certification, IRS tracks the receipt of these returns and contacts these taxpayers when necessary.
23
  OTA makes semimonthly estimates of excise tax collections for transfer to trust funds. To better match
excise tax collections with the corresponding quarter, OTA’s estimates for each quarter cover the period
starting on the 16th day of the first month in the quarter and go through the 15th day of the first month of
the next quarter. For example, OTA’s estimates for the fourth quarter of fiscal year 2012 cover July 16,
2012, through October 15, 2012. While there are six semimonthly estimates related to the quarter, only
five of these affect fiscal year 2012 distributions to the AATF. The sixth semimonthly estimate, covering
the period from October 1 through 15, will affect distribution to AATF for fiscal year 2013.



Page 10                                                                GAO-13-73R Excise Tax Procedures
Enclosure I


             Description of Findings and Results

             OTA prepared a tax rate table to capture information concerning tax rates, tax
             basis, accounts, and deposit rules in effect during the quarter ended
             September 30, 2012. OTA used the rate table in preparing the five
             semimonthly estimates that affect fiscal year 2012 distributions to the AATF.

        B. Inspect the transfer forms and supporting schedules to determine if there is
           evidence of review.

             Description of Findings and Results

             There was evidence that an OTA economist, other than the one who
             prepared the estimate, reviewed the transfer forms and supporting schedules
             affecting distributions from the general fund to the AATF for the quarter ended
             September 30, 2012.

        C. Calculate 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, 2012, were mathematically correct.

        D. Trace the transfer amounts for tax on transportation of persons by air
           (abstract 26), tax on the use of international air travel facilities (abstract 27),
           tax on transportation of property by air (abstract 28), and tax on kerosene for
           use in commercial aviation (abstract 77) from the transfer forms back to the
           related source documents for agreement. 24,25

             Description of Findings and Results

             The transfer amounts for tax on transportation of persons by air (abstract 26),
             tax on the use of international air travel facilities (abstract 27), tax on
             transportation of property by air (abstract 28), and tax on kerosene for use in
             commercial aviation (abstract 77) from the transfer forms agreed with the
             related source documents for the quarter ended September 30, 2012.


24
 The OTA estimated transfer amounts for tax on transportation of persons by air (abstract 26), tax on the
use of international air travel facilities (abstract 27), tax on transportation of property by air (abstract 28),
and tax on kerosene for use in commercial aviation (abstract 77) made up at least 97 percent of the total
amount transferred to the AATF for the fourth quarter of fiscal year 2012.
25
  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
table.



Page 11                                                                  GAO-13-73R Excise Tax Procedures
Enclosure I


IV.   Other Procedures

      A. Using IRS’s quarterly certifications, OTA’s estimated distributions, and any
         adjustments, compile and report the amount of net excise taxes to be
         distributed to the AATF in fiscal year 2012.

          Description of Findings and Results

          Based on a compilation of IRS’s quarterly certifications, OTA’s estimations,
          and adjustments, the amount of net excise taxes to be distributed to the AATF
          in fiscal year 2012 was $12,532,215,000.




Page 12                                                  GAO-13-73R Excise Tax Procedures
Enclosure II


                         Highway Trust Fund Excise Tax Procedures

I.      Procedures on Transactions That Represent the Underlying Basis of
        Amounts Distributed to the Highway Trust Fund (HTF) in Fiscal Year 2012

        A. Statistical selection of attribute and monetary unit samples (MUS) from the
           quarters ended September 30, 2011; December 31, 2011; and March 31,
           2012 1

            1. Procedures on population of transactions and sample selection:

                (a) Compare the total excise tax collections from the Internal Revenue
                    Service’s (IRS) master file with excise tax collections from IRS’s
                    Collection Certification System audit files for all three quarters to
                    determine whether there is any variance that exceeds 1 percent of total
                    excise tax collections per the master file. 2,3

                    Description of Findings and Results

                    Excise tax collections for all three quarters from IRS’s master file
                    agreed with excise tax collections from IRS’s Collection Certification
                    System audit files with less than a 1 percent variance.

                (b) Select a random attribute sample of 45 excise tax assessments from
                    IRS’s master file, which are based on Form 720 excise tax returns IRS
                    received and recorded during these three quarters. Compare
                    assessment and receipt information for each return from IRS’s master
                    file to IRS’s Collection Certification System for agreement. 4

                     Description of Findings and Results

                     For all 45 excise tax assessments, assessment and receipt
                     information from IRS’s master file agreed with the information in IRS’s
                     Collection Certification System.


1
 The Internal Revenue Service certification of excise tax distributions and corresponding U.S. Department
of the Treasury Financial Management Service adjustment for the quarter ended September 30, 2011,
were completed in February 2012, and thus affected distributions to the HTF during fiscal year 2012.
2
 IRS’s master file contains the detailed records of taxpayer accounts.
3
 The Collection Certification System produces what IRS refers to as audit files. These audit files contain
the individual prorated collections by tax type and taxpayer identification number. IRS calculates the
amount it certifies to the trust funds by first subtracting credits claimed by taxpayers from the prorated
collections, and then multiplying the result by the applicable trust fund distribution rates.
4
 For this sample, if no errors were found in our comparison of the 45 items, we would be 90 percent
confident that the error rate in the population would not exceed 5 percent.



Page 13                                                               GAO-13-73R Excise Tax Procedures
Enclosure II


                 (c) For each quarter, sum the prorated collections for selected abstracts
                     from IRS’s Collection Certification System audit files and compare
                     these amounts to amounts in the Report of Excise Tax Collection to
                     determine if the Collection Certification System properly summarized
                     the prorated collections. 5,6,7

                      Description of Findings and Results

                      For each of the three quarters, the independently calculated sum of
                      prorated collections from the audit files for the selected abstracts
                      agreed with the corresponding amounts in the Report of Excise Tax
                      Collection.

                 (d) Combine the total population of prorated collections from IRS’s
                     Collection Certification System audit files for all three quarters, and
                     then separate the combined population into the following distinct
                     subpopulations: (1) HTF, (2) Airport and Airway Trust Fund (AATF),
                     and (3) all other abstracts. Use MUS to select a sample of prorated
                     excise tax collections from the HTF population using a confidence level
                     of 63 percent, a tolerable misstatement of $727 million, and an
                     expected aggregate error amount of $124 million. 8




5
 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. The selected abstracts are diesel fuel tax (abstract 60) and gasoline tax (abstract 62) for
HTF, and tax on transportation of persons by air (abstract 26), tax on the use of international air travel
facilities (abstract 27), tax on transportation of property by air (abstract 28), and tax on kerosene for use
in commercial aviation (abstract 77) for Airport and Airway Trust Fund (AATF). The tax amounts for the
two HTF-related abstracts made up over 84 percent of the total amount of excise tax receipts certified by
IRS to the HTF in fiscal year 2012. The tax amounts for the four AATF-related abstracts made up over 97
percent of the total amount of excise tax receipts certified by IRS to the AATF in fiscal year 2012.
6
 The Report of Excise Tax Collection contains prorated collections, classified by abstracts, which serve as
the basis for IRS’s quarterly trust fund certifications.
7
 IRS certifies to trust funds the amount of excise taxes collected. Because taxpayers have sometimes not
fully paid their tax liability, IRS must allocate the amount of payments actually received among the
different excise taxes reported on the taxpayers’ returns. 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 kerosene 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 kerosene tax.
8
 The $727 million tolerable misstatement represents 1.97 percent of the net excise tax revenue
distributed to the HTF in fiscal year 2011. The expected aggregate error amount of $124 million
represents approximately 17 percent of the tolerable misstatement amount.



Page 14                                                                GAO-13-73R Excise Tax Procedures
Enclosure II


                     Description of Findings and Results

                     Use of MUS with a confidence level of 63 percent, a tolerable
                     misstatement of $727 million, and an expected aggregate error amount
                     of $124 million resulted in a sample of 47 prorated excise tax
                     collections for the HTF. 9

                 (e) Select samples of prorated excise tax collections from the two non-
                     HTF populations. Use MUS to select a sample of prorated excise tax
                     collections from the AATF population using a confidence level of 63
                     percent, a tolerable misstatement of $161 million, and an expected
                     aggregate error amount of $28 million. 10 Select a random attribute
                     sample of 45 items from the population of prorated tax collections
                     related to all abstracts other than the HTF and the AATF. 11

                     Description of Findings and Results

                     Use of MUS with a confidence level of 63 percent, a tolerable
                     misstatement of $161 million, and an expected aggregate error amount
                     of $28 million resulted in a sample of 49 prorated excise tax collections
                     for the AATF. 12

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




9
  The planned sample size using MUS was 50 items. MUS selects dollars versus specific transaction
items by dividing the population of prorated excise tax collections by dollar intervals. The dollar interval for
HTF was $591 million. Accordingly, any item with a dollar value equal to or exceeding the interval would
be selected. Items with a dollar value less than the interval might not be selected but may also be
selected more than once. The 47 unique sampled transactions selected represented 50 dollar intervals.
10
  The $161 million tolerable misstatement represents 1.4 percent of the net excise tax revenue distributed
to the AATF in fiscal year 2011. The expected aggregate error amount of $28 million represents
approximately 17 percent of the tolerable misstatement amount.
11
 For this sample, if no errors are found in performing procedures on the 45 items, we would be 90
percent confident that the error rate in the population would not exceed 5 percent.
12
  The planned sample size using MUS was 68 items. As explained in footnote 9, MUS selects dollars
instead of specific transaction items by dividing the population of prorated excise tax collections by dollar
intervals. The dollar interval for the AATF was $128 million. Accordingly, any item with a dollar value
equal to or exceeding the interval would be selected. Items with a dollar value less than the interval might
not be selected, but may also be selected more than once. The 49 unique sampled transactions
represented 68 dollar intervals.



Page 15                                                                 GAO-13-73R Excise Tax Procedures
Enclosure II


           2. Procedures on transactions:

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

                   •   Compare the assessment or adjustment amount from the
                       supporting document to IRS’s master file for agreement. 13

                       Description of Findings and Results

                       The assessment or adjustment amount on the supporting
                       documentation agreed with the amount recorded in IRS’s master
                       file for each of the 47 sampled items.

                   •   Calculate the assessment or adjustment amount on the supporting
                       documentation to determine whether it is mathematically correct.

                       Description of Findings and Results

                       The assessment or adjustment amount on the supporting
                       documentation was mathematically correct for each of the 47
                       sampled items.

                   •   Calculate the prorated collection amount for the sampled item
                       based on information from IRS’s master file and compare this
                       amount to the amount in IRS’s Collection Certification System audit
                       files for agreement.

                       Description of Findings and Results

                       The independently calculated prorated collection amount agreed
                       with the amount in IRS’s Collection Certification System audit files
                       for each of the 47 sampled items.

               (b) Inspect the supporting documentation and master file information for
                   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 supporting documentation and master file information for the two
                   samples of 94 prorated collections from the non-HTF populations did
                   not contain any HTF excise tax collections.

13
  Supporting documentation includes Form 720 excise tax returns and other forms submitted by the
taxpayer or prepared by IRS.



Page 16                                                           GAO-13-73R Excise Tax Procedures
Enclosure II



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

                    Description of Findings and Results

                    The net most likely error related to HTF was $0 with an upper error
                    limit of $582 million at the 63 percent confidence level. The upper error
                    limit did not exceed the tolerable misstatement amount of $727 million
                    designed for this procedure.

II.     Procedures on IRS’s Quarterly HTF Receipt Certifications

        Perform the following procedures on IRS’s HTF receipt certifications for the
        quarters ended September 30, 2011; December 31, 2011; March 31, 2012; and
        June 30, 2012:

        A. Inspect the certification letters for authorizing signatures. 14

             Description of Findings and Results

             The certification letters for all four quarters had authorizing signatures.

        B. Inspect the certification letters and supporting worksheets to determine if
           evidence exists that they were reviewed by the supervisor or another
           analyst.

             Description of Findings and Results

             There was evidence that the supervisor or another analyst reviewed the
             certification letters and supporting worksheets for all four quarters.

        C. Calculate the totals on the certification letters to determine if they are
           mathematically correct.

             Description of Findings and Results

             The totals on the final certification letters for all four quarters were
             mathematically correct. However, for the quarter ended March 31, 2012, IRS
             twice reissued its certification letters for the HTF to correct errors identified
             by the Financial Management Service and the Department of Transportation.




14
  IRS prepares two certification letters for the HTF each quarter: one for the Highway Account and the
other for the Mass Transit Account.



Page 17                                                             GAO-13-73R Excise Tax Procedures
Enclosure II


        D. Trace the certified amounts for diesel fuel tax (abstract 60) and gasoline tax
           (abstract 62) from the certification letters back to the Report of Excise Tax
           Collection and the Treasury 90 Report for agreement. 15,16,17

             Description of Findings and Results

             The certified amounts for diesel fuel tax (abstract 60) and gasoline tax
             (abstract 62) from the certification letters agreed with the related Report of
             Excise Tax Collection and the Treasury 90 Report for the quarters ended
             December 31, 2011, and March 31, 2012.

             For the quarter ended September 30, 2011, IRS calculated certified
             collections for diesel fuel tax (abstract 60) using a diesel fuel credit amount
             of $94,609,888, when the correct amount was $94,612,134. As a result, the
             amount IRS certified to the HTF was about $2,000 more than it should have
             been.

             For the quarter ended June 30, 2012, IRS used the wrong version of the
             Report of Excise Tax Collection. 18 As a result, the amount IRS certified to the
             HTF was almost $1.7 billion less than it should have been. IRS detected this
             error when researching another issue, and after it had sent out its original
             certification letters for the HTF. Once IRS detected its error, IRS made
             corrections and issued revised certification letters for the HTF 6 days after
             issuing its original certification letters. The certified amounts for diesel fuel
             tax (abstract 60) and gasoline tax (abstract 62) from the revised certification
             letters agreed with the correct Report of Excise Tax Collection and the
             Treasury 90 Report.

        E. Compare the distribution rates used by IRS for diesel fuel tax (abstract 60)
           and gasoline tax (abstract 62) for agreement with the applicable laws.




15
  The certified amounts for diesel fuel tax (abstract 60) and gasoline tax (abstract 62), along with the
heavy vehicle use tax (traced separately), made up over 88 percent of the total amount of excise tax
receipts certified by IRS to the HTF for each quarter during fiscal year 2012.
16
   The Report of Excise Tax Collection is produced by the Collection Certification System. Collections are
classified by abstract on the report when the related Form 720 tax return has been posted to IRS’s master
file during the processing period covered by the report. IRS uses data from one report for each quarterly
certification.
17
 The Treasury 90 Report summarizes excise tax credit information and is produced quarterly by IRS
service center campuses. IRS has six service center campuses that receive and process tax returns and
payments.
18
  IRS used the Report of Excise Tax Collection that was produced by the Collection Certification System
5 weeks earlier than its actual cut-off for performing the certification.



Page 18                                                                GAO-13-73R Excise Tax Procedures
Enclosure II


             Description of Findings and Results

             The distribution rates used by IRS for diesel fuel tax (abstract 60) and
             gasoline tax (abstract 62) agreed with the applicable laws in effect during all
             four quarters.

        F. Inspect the Report of Excise Tax Collection used in the certification to
           determine if it contains more than $185 million in collections from prior
           quarters. 19

             Description of Findings and Results

             None of these reports used in the certification for any of the four quarters
             contained more than $185 million in collections from prior quarters.

        G. Inspect the Report of Excise Tax Collection used in the certification to
           determine if it contains more than $185 million in collections from future
           quarters. 20

             Description of Findings and Results

             None of these reports used in the certification for any of the four quarters
             contained more than $185 million in collections from future quarters.

        H. Trace heavy vehicle use tax amounts from the Highway Account certification
           letters to the master file and Treasury 90 Report. 21

             Description of Findings and Results

             The heavy vehicle use tax amounts from the Highway Account certification
             letters agreed with the master file and Treasury 90 Report for all four
             quarters.




19
 The $185 million represents approximately 2 percent of the total amount of excise tax receipts certified
by IRS to the HTF for each quarter of fiscal year 2012.
20
 The Report of Excise Tax Collection may contain collections related to future quarters that IRS certifies
as part of the current quarter’s collections because the taxpayer filed the tax return before the due date
and paid the taxes owed, and IRS posted the tax return to its master file during the current processing
period.
21
  These taxes, which go to the HTF, are reported on Form 2290. IRS obtains these amounts directly from
its master file and campus systems, rather than from its Collection Certification System.



Page 19                                                              GAO-13-73R Excise Tax Procedures
Enclosure II


        I.   For the quarter ended June 30, 2012, only, inquire with IRS whether any
             excise tax returns from its list of the largest excise taxpayers were omitted
             from its certification. 22 For any such returns that were omitted but were
             subsequently received by IRS, report the total amount of HTF-related tax
             collections from these tax returns. For any such returns that were omitted
             and where IRS has not yet received these, report the average quarterly
             amount of HTF-related tax collections from the taxpayer(s) based on the
             previous four quarters.

             Description of Findings and Results

             According to IRS, no tax returns from its list of the largest excise taxpayers
             were omitted from its certification for the quarter ended June 30, 2012.

III.    Procedures on Excise Tax Distributions to the HTF for the Quarter Ended
        September 30, 2012

        A. Determine if the Department of the Treasury’s Office of Tax Analysis (OTA)
           prepares a tax rate table to capture information concerning tax rates, tax
           basis, accounts, and deposit rules in effect during the quarter ended
           September 30, 2012, and whether OTA uses this rate table in its trust fund
           estimates for the quarter. 23

             Description of Findings and Results

             OTA prepared a tax rate table to capture information concerning tax rates, tax
             basis, accounts, and deposit rules in effect during the quarter ended
             September 30, 2012. OTA used the rate table in preparing the five
             semimonthly estimates that affect fiscal year 2012 distributions to the HTF.

        B. Inspect the transfer forms and supporting schedules to determine if there is
           evidence of review.




22
  IRS maintains a list of approximately 150 taxpayers that are its largest excise taxpayers. To help ensure
that tax return data for the largest excise taxpayers are included in each quarterly excise tax certification,
IRS tracks the receipt of these returns and contacts these taxpayers when necessary.
23
  OTA makes semimonthly estimates of excise tax collections for transfer to trust funds. To better match
excise tax collections with the corresponding quarter, OTA’s estimates for each quarter cover the period
starting on the 16th day of the first month in the quarter and go through the 15th day of the first month of
the next quarter. For example, OTA’s estimates for the fourth quarter of fiscal year 2012 cover July 16,
2012, through October 15, 2012. While there are six semimonthly estimates related to the quarter, only
five of these affect fiscal year 2012 distributions to the HTF. The sixth semimonthly estimate, covering the
period from October 1 through 15, will affect distributions to HTF for fiscal year 2013.



Page 20                                                                GAO-13-73R Excise Tax Procedures
Enclosure II


            Description of Findings and Results

            There was evidence that an OTA economist, other than the one who
            prepared the estimate, reviewed the transfer forms and supporting schedules
            affecting distributions from the general fund to the HTF for the quarter ended
            September 30, 2012.

        C. Calculate 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, 2012, were mathematically correct.

        D. Trace the transfer amounts for diesel fuel tax (abstract 60), gasoline tax
           (abstract 62), and heavy vehicle use tax from the transfer forms back to the
           related source documents for agreement. 24,25

            Description of Findings and Results

            The transfer amounts for diesel fuel tax (abstract 60), gasoline tax (abstract
            62), and heavy vehicle use tax from the transfer forms agreed with the related
            source documents for the quarter ended September 30, 2012.

IV.     Other Procedures

        A. Using IRS’s quarterly certifications, OTA’s estimated distributions, and any
           adjustments, compile and report the amount of net excise taxes and penalties
           to be distributed to the HTF in fiscal year 2012. 26




24
 The OTA estimated transfer amounts for diesel fuel tax (abstract 60), gasoline tax (abstract 62), and
heavy vehicle use tax made up over 91 percent of the total amount transferred to the HTF for the fourth
quarter of fiscal year 2012.
25
  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
table.
26
  Section 868 of Pub. L. No. 108-357 (Oct. 22, 2004), Dedication of Revenues from Certain Penalties to
the Highway Trust Fund, requires that certain fuel-related penalties, which are assessed and collected by
IRS, be distributed to the HTF. IRS includes such amounts in its quarterly certification to the HTF.



Page 21                                                             GAO-13-73R Excise Tax Procedures
Enclosure II


           Description of Findings and Results

           Based on a compilation of IRS’s quarterly certifications, OTA’s estimations,
           and adjustments, the amount of net excise taxes and penalties to be
           distributed to the HTF in fiscal year 2012 was $42,550,042,000.




(196253)



Page 22                                                   GAO-13-73R Excise Tax Procedures
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