Applying Agreed-Upon Procedures: Federal Unemployment Taxes	 
(26-FEB-01, GAO-01-382R).					 
								 
GAO performed procedures to ascertain whether the net federal	 
unemployment tax revenue distributed to the Unemployment Trust	 
Fund for the fiscal year ending September 30, 2000, was supported
by the underlying records. The procedures GAO agreed to perform  
include (1) detailed tests of transactions that represent the	 
underlying basis of amounts distributed to the UTF and (2) a	 
review of key reconciliations of the Internal Revenue Service	 
records to the Department of the Treasury records.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-382R					        
    ACCNO:   164537						        
    TITLE:   Applying Agreed-Upon Procedures: Federal Unemployment    
             Taxes                                                            
     DATE:   02/26/2001 
  SUBJECT:   Accounting procedures				 
	     Auditing procedures				 
	     Auditing standards 				 
	     Federal taxes					 
	     Financial records					 
	     Internal controls					 
	     Trust funds					 
	     Unemployment insurance				 
	     Unemployment Insurance Trust Fund			 

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GAO-01-382R

Unemployment Trust Fund Procedures

United States General Accounting Office Washington, DC 20548

February 26, 2001 The Honorable Gordon S. Heddell Inspector General
Department of Labor

Subject: Applying Agreed- Upon Procedures: Federal Unemployment Taxes Dear
Mr. Heddell: We have performed the procedures contained in the enclosure to
this letter, which we agreed to perform and with which you concurred, solely
to assist your office in ascertaining whether the net federal unemployment
tax (FUTA) revenue distributed to the Unemployment Trust Fund (UTF) for the
fiscal year ended September 30, 2000, is supported by the underlying
records. As agreed with your office, we evaluated fiscal year 2000 activity
affecting distributions to UTF.

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

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

We were not engaged to perform, and did not perform, an audit, the objective
of which would have been the expression of an opinion on the net amount of
FUTA taxes distributed to the UTF. Accordingly, we do not express such an
opinion. Had we performed additional procedures, other matters might have
come to our attention that would have been reported to you. We completed the
agreed- upon procedures on February 16, 2001.

We provided a draft of this letter to IRS, along with its enclosure, for
review and comment. IRS officials agreed with the contents of this letter.

GAO- 01- 382R Unemployment Trust Fund Procedures Page 2 This letter is
intended solely for the use of the Office of Inspector General of the

Department of Labor and should not be used by those who have not agreed to
the procedures and have not taken responsibility for the sufficiency of the
procedures for their purposes. However, this letter is a matter of public
record and its distribution is not limited. Consequently, copies are
available to others upon request. If you have any questions, please call
Steven J. Sebastian, Acting Director at (202) 512- 3406.

Sincerely yours, Jeffrey C. Steinhoff Managing Director Financial Management
and Assurance

Enclosure

Enclosure GAO- 01- 382R Unemployment Trust Fund Procedures Page 3

Unemployment Trust Fund Procedures and Results (A) General

(1) Compare fiscal year 2000 net FUTA collections per the Internal Revenue
Service's (IRS) statement of custodial activity and related footnote
disclosures to (a) the Treasury's Bureau of Public Debt (BPD) accounting
records for the Unemployment Trust Fund (UTF) and (b) drafts of the
Department of Labor's (DOL) consolidated financial statements. Obtain
explanations/ support for material variances. a

Description of findings and results There were no significant variances
between net FUTA collections per IRS' statement of custodial activity and
BPD's accounting records for UTF. Similarly, there were no significant
variances between IRS' statement of custodial activity and related footnote
disclosures and drafts of DOL's consolidated financial statements.

(B) Sampling

(1) Obtain from IRS total FUTA collections and refunds reflecting the first
9 months of fiscal year 2000 posted to the master file. b Determine if FUTA
collections and refund data per the master file materially reconcile to the
general ledger.

Description of findings and results Total FUTA collections and refunds for
the first 9 months of fiscal year 2000 per the IRS master file materially
reconciled to IRS' general ledger.

(2) Use Dollar Unit Sampling (DUS) to select a sample of combined FUTA
collection and refund transactions from the master file for the first 9
months of fiscal year 2000, using a confidence level of 80 percent, a test
materiality of $318 million, and an expected aggregate error amount of $159
million.

Description of findings and results Use of Dollar Unit Sampling with a
confidence level of 80 percent, a test materiality of $318 million, and an
expected aggregate error amount of $159 million resulted in a sample of 84
transactions for the first 9 months of

a Except where noted for certain procedures, significant or material is
defined as $318 million. This represents one percent of the Unemployment
Trust Fund collections for fiscal year 1999. b The master file is a detailed
database containing taxpayer information.

Enclosure GAO- 01- 382R Unemployment Trust Fund Procedures Page 4 fiscal
year 2000. Of this total, 82 transactions represented collections and 2

transactions represented refunds.

(C) Detailed tests of transactions

(1) For each sampled FUTA tax collection transaction: (a) Determine if
collection amounts are accurately recorded by tracing

collection transaction amounts from IRS' master files to deposit
confirmation documents (e. g., federal tax deposit coupons).

Description of findings and results Based on supporting documentation,
collection amounts were accurately recorded for all of the 82 sampled FUTA
collection transactions.

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

Description of findings and results Based on supporting documentation,
collection amounts were recorded to the appropriate period for all of the 82
sampled FUTA collection transactions.

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

Description of findings and results Based on supporting documentation,
collection amounts were recorded in the correct tax class c for all of the
82 sampled FUTA collection transactions.

(d) Confirm FUTA transactions paid via the Electronic Federal Tax Payment
System (EFTPS) d to determine whether the recorded transactions are valid

c IRS assigns a tax class number to specific types of taxes. FUTA taxes are
tax class 8. d EFTPS is a system for initiating tax payments electronically.
Starting January 1, 2000, employers who made Federal tax deposits exceeding
$200,000 in 1998 must use EFTPS to pay their FUTA taxes. The $200,000
threshold includes all federal tax deposits, such as deposits for employment
tax, excise tax, and corporate income tax. Taxpayers who are not required to
make electronic deposits may voluntarily participate in EFTPS.

Enclosure GAO- 01- 382R Unemployment Trust Fund Procedures Page 5 and
reflect the proper amounts, are applied to the proper tax period, and

are properly categorized as FUTA receipts. Description of findings and
results Of the 82 sampled FUTA receipt transactions, 68 were paid via EFTPS.
The bank confirmation showed that all 68 transactions are valid and had been
recorded to the proper tax period and tax class and for the proper amounts.

(e) Recalculate each tax return to check mathematical accuracy. Description
of findings and results The tax returns associated with all of the 82 FUTA
collection sampled transactions were mathematically correct.

(2) For each sampled FUTA tax refund transaction: (a) Confirm sampled FUTA
refund transactions with Treasury's Financial

Management Service (FMS) by checking that the amount of the refund is
correct, and that it was recorded to the appropriate period and tax class.

Description of findings and results For both of the FUTA refund transactions
sampled, confirmation with Treasury's FMS showed that the amount of the
refund was correct and that it was recorded to the appropriate period and
tax class.

(b) Recalculate each tax return to verify mathematical accuracy. Description
of findings and results The tax returns for the two FUTA refund transactions
were mathematically correct.

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

Enclosure GAO- 01- 382R Unemployment Trust Fund Procedures Page 6
Description of findings and results

For both of the FUTA transactions sampled, the taxpayer did not claim exempt
wage payments requiring an explanation.

(d) For manual refunds, check to see that the appropriate supporting
documentation is attached and that individuals who approved the manual
refunds were authorized to do so.

Description of findings and results Neither of the two sampled FUTA refund
transactions were manual refunds.

(D) Analytical Procedures

(1) Perform a predictive test on FUTA revenue collection and refund data for
the final 3 months of the fiscal year to determine if reported fiscal year
2000 revenue collections and refunds appear consistent and reasonable.
Project the expected fourth quarter FUTA revenue collection and refund
amounts for fiscal year 2000, based on fiscal year 1999 quarterly amounts,
and compare the projection to actual revenue collections and refunds. If a
material variance exists, discuss with IRS to obtain an explanation/
support.

Description of findings and results The predicted fourth quarter FUTA
revenue collection and refund amounts for fiscal year 2000 did not
materially vary from the actual amount of revenue collections and refunds
during this period.

(2) Perform an analytical test comparing reported FUTA net revenue
collections as of the interim test period (June 30, 2000) and as of the end
of the fiscal year (September 30, 2000) to the respective prior periods.

Description of findings and results FUTA net revenue collections as of the
interim test period and the fiscal year ended September 30, 2000 increased
by $328.5 million and $337 million respectively. Both of these variances
exceed FUTA test materiality of $318 million.

Enclosure GAO- 01- 382R Unemployment Trust Fund Procedures Page 7

(E) Other FUTA Procedures

(1) For each of the 12 months in fiscal year 2000, obtain and review
supporting documentation for monthly revenue reclassification adjustments
transmitted by IRS to Treasury's FMS. Check to see that the supporting
documentation agrees with the reclassification adjustment transmitted to
FMS.

Description of findings and results Documentation supported the monthly FUTA
reclassification adjustment amount transmitted to Treasury's FMS for all 12
months of fiscal year 2000.

(2) For each of the 12 months in fiscal year 2000, obtain and review
supporting documentation for the monthly entry of FUTA refund data onto the
Government Online Accounting Link System (GOALS) to charge back the
Unemployment Trust Fund account for FUTA tax refunds issued. Check to see
that the supporting documentation agrees with the monthly entries reported
on GOALS.

Description of findings and results Documentation supported the monthly FUTA
refund amount entered on GOALS to charge the Unemployment Trust Fund for
FUTA tax refunds issued for all 12 months of fiscal year 2000.

(F) Other procedures performed as part of the Fiscal Year 2000 IRS financial
statement audit

(1) Use DUS to select statistical samples of a) total revenue receipts and
b) refunds from IRS master files for the first 9 months of fiscal year 2000.
For each item in the samples of revenue receipts and refunds, test that the
collection or refund amount and tax class from source documentation agrees
with amounts recorded in IRS master files.

Description of findings and results Detailed testing of 199 revenue receipts
and 18 refund sample transactions showed that the collection or refund
amount and tax class from source documents agreed with amounts recorded in
the IRS master files.

Enclosure GAO- 01- 382R Unemployment Trust Fund Procedures Page 8 (2) Review
selected IRS service centers' monthly Treasury SF- 224 reconciliations to

determine if IRS- reported revenue receipts were properly classified and
reconciled to Treasury FMS records. For refunds, review selected IRS service
centers' monthly Treasury SF- 224 reconciliations to determine if IRS-
reported total refunds (all tax classes) materially e reconciled to Treasury
FMS records. f

Description of findings and results Tax revenue receipts reported by
selected IRS service centers via the monthly Treasury SF- 224 reconciliation
process were properly classified and materially agreed with Treasury FMS
records.

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

(3) Perform a proof of cash for fiscal year 2000 to determine whether
revenue receipt balances by tax class per the 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. Also, compare FUTA refunds per the master file
to the general ledger.

Description of findings and results Fiscal year- end tax receipt balances
for all tax classes, including FUTA, per IRS' general ledger materially
agreed with IRS' master files and with Treasury records.

Fiscal year- end refund balances per IRS' general ledger materially agreed
with the master file and with Treasury records.

(901813) e For the purpose of this section, we define material as $20
billion. f IRS maintains records of refund balances by tax class in its
master file, and reports this information monthly to Treasury via the SF-
224. Treasury provides IRS with a Statement of Differences (TFS6652), which
reports differences between total refunds reported by IRS on the SF- 224 and
the total refunds per Treasury records.
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