Applying Agreed-Upon Procedures: Federal Unemployment Taxes	 
(15-FEB-02, GAO-02-381R).					 
								 
GAO performed detailed tests of transactions that represent the  
underlying basis of amounts distributed to UTF and reviewed key  
reconciliations of the Internal Revenue Service records to the	 
Department of the Treasury records. GAO found that the net	 
federal unemployment tax revenue distributed to the Unemployment 
Trust Fund (UTF) for fiscal year 2001 is supported by the	 
underlying records.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-381R					        
    ACCNO:   A02772						        
  TITLE:     Applying Agreed-Upon Procedures: Federal Unemployment    
Taxes								 
     DATE:   02/15/2002 
  SUBJECT:   Accounting procedures				 
	     Auditing standards 				 
	     Trust funds					 
	     Financial analysis 				 
	     Financial statements				 
	     Unemployment Insurance Trust Fund			 

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GAO-02-381R
     

United States General Accounting Office Washington, DC 20548

February 15, 2002

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, 2001, is supported by the underlying records. As agreed
with your office, we evaluated fiscal year 2001 activity affecting
distributions to UTF.

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 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 UTF and (2) a
review of key reconciliations of the Internal Revenue Service (IRS) records
to the Department of the Treasury records. The enclosure contains the
agreed-upon procedures and our findings from performing each of the
procedures.

We were not engaged to perform, and did not perform, an audit, the objective
of which would have been the expression of an opinion on the net amount of
FUTA taxes distributed to 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 1, 2002.

We provided a draft of this letter to IRS, along with its enclosure, for
review and comment. They agreed with the results and findings presented in
this letter.

               GAO-02-381R Unemployment Trust Fund Procedures

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. This
letter
will also be available on GAO's home page at http://www.gao.gov. If you have
any
questions, please call me at (202) 512-3406.

Sincerely yours,

Steven J. Sebastian
Acting Director
Financial Management and Assurance

Enclosure

           Page 2 GAO-02-381R Unemployment Trust Fund Procedures

I. Detailed Tests of Transactions

A. Obtain from IRS total FUTA collections and refunds reflecting the first 9
months of fiscal year 2001 activity recorded in the master file.1 Determine
if FUTA collections and refund data per the master file materially reconcile

2

to the general ledger.

Description of findings and results 
Total FUTA collections and refunds for the first 9 months of fiscal year
2001 per IRS's master file materially reconciled to IRS's general ledger.

B. Use Dollar Unit Sampling (DUS) to select a sample of combined FUTA
collection and refund transactions from the master file for the first 9
months of fiscal year 2001, using a confidence level of 80 percent, a test
materiality of $334 million, and an expected aggregate error amount of
$100.1 million.

Description of findings and results 
Use of DUS with a confidence level of 80 percent, a test materiality of $334
million, and an expected aggregate error amount of $100.1 million resulted
in a sample of 47 transactions for the first 9 months of fiscal year 2001.
Of this total, 46 transactions represented collections and 1 transaction
represented refunds.

C. For each sampled FUTA tax collection transaction:

1. Determine if collection amounts are accurately recorded by tracing
collection transaction amounts from IRS's master files to 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 46 sampled FUTA collection transactions.

1The master file is a detailed database containing taxpayer information.

2Except where noted for certain procedures, significant or material is
defined as $334 million. This represents 1 percent of the UTF collections
made by federal and state government agencies for fiscal year 2000.

2. 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 46 sampled FUTA collection transactions.

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

Description of findings and results 
Based on supporting documentation, collection amounts were recorded in the
correct tax class3 for all 46 sampled FUTA collection transactions.

4. Confirm FUTA transactions paid via the Electronic Federal Tax Payment
System (EFTPS)4 to determine whether the recorded transactions are valid and
reflect the proper amounts, are applied to the proper tax period, and are
properly categorized as FUTA receipts.

Description of findings and results 
Thirty-nine of the 46 sampled FUTA receipt transactions were paid via EFTPS.
The bank confirmation showed that all 39 transactions were valid and had
been recorded to the proper tax period and tax class and for the proper
amounts. The other seven receipts were paid by check or bank deposit, and
supporting documentation confirmed that these transactions were also valid
and properly recorded.

D. For each sampled FUTA tax refund transaction:

1. Confirm sampled FUTA refund transactions with Treasury's Financial
Management Service (FMS) by checking that the amount of the refund is
correct and that it was recorded to the appropriate period and tax class.

3IRS assigns a tax class number to specific types of taxes. FUTA taxes are
tax class 8.

4EFTPS is a system for initiating tax payments electronically. In 2001,
employers were required to use EFTPS to pay their FUTA taxes if they made
federal tax deposits exceeding $200,000 in 1999 or were required to use
EFTPS in 2000. 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.

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

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

Description of findings and results 
For the one sampled FUTA refund transaction, the taxpayer claimed an exempt
wage payment and provided a written explanation that met IRS criteria.

3. 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 
The one sampled FUTA refund transaction was not a manual refund.

II. Analytical Procedures

A. Perform a predictive test on FUTA revenue collection and refund data for
the final 3 months of fiscal year 2001 to determine if reported fiscal year
2001 revenue collections and refunds appear consistent and reasonable.
Project the expected fourth quarter FUTA revenue collection and refund
amounts for fiscal year 2001, based on fiscal year 2000 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 2001 did not materially vary from the actual amount of revenue
collections and refunds reported during this period.

B. Perform an analytical test comparing reported FUTA net revenue
collections as of the interim test period (June 30, 2001) and as of the end
of the fiscal year (September 30, 2001) 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, 2001, increased by $129.0 million and $63.5 million
respectively. Both of these variances are less than the FUTA test
materiality of $334 million.

III. Other FUTA Procedures

A. For each of the 12 months in fiscal year 2001, 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 2001.

B. For each of the 12 months in fiscal year 2001, 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 UTF
account for FUTA tax refunds issued. Check to see that the supporting
documentation agrees with the monthly entries reported in GOALS.

Description of findings and results 
Documentation supported the monthly FUTA refund amount entered on GOALS to
charge UTF for FUTA tax refunds issued for all 12 months of fiscal year
2001.

C. Compare fiscal year 2001 net FUTA collections per IRS's statement of
custodial activity and related footnote disclosures to (a) the Treasury's
Bureau of the Public Debt (BPD) accounting records for UTF and (b) drafts of
the Department of Labor's (DOL) fiscal year 2001 consolidated financial
statements. Obtain explanations/support for material variances.

Description of findings and results 
There were no significant variances between net FUTA collections per IRS's
statement of custodial activity and BPD's accounting records for UTF.
Similarly, there were no significant variances between IRS's statement of
custodial activity and related footnote disclosures and drafts of DOL's
fiscal year 2001 consolidated financial statements.

IV. Other procedures performed as part of the fiscal year 2001 IRS financial
statement audit

A. From IRS's master files for the first 9 months of fiscal year 2001, use
DUS to select statistical samples of total tax (1) revenue receipts and (2)
refunds. For each sample item, test that the collection or refund amount,
tax period, and tax class from source documentation agrees with amounts
recorded in IRS's master files.

Description of findings and results 
Detailed testing of 188 revenue receipts and 19 refund sample transactions
showed that the collection or refund amount, tax period, and tax class from
source documents agreed with amounts recorded in the IRS master files.

B. Review selected IRS service center campuses' monthly Treasury SF-224
reconciliations to determine if IRS-reported revenue receipts were properly
classified and reconciled to Treasury FMS records. For refunds, review
selected IRS service center campuses' monthly Treasury SF-224
reconciliations to determine if IRS-reported total refunds (all tax classes)
materially5 reconciled to Treasury FMS records.6

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

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

C. Perform a proof of cash for fiscal year 2001 to determine whether tax
revenue receipt balances by tax class, including FUTA, per IRS's general
ledger, materially agree with IRS's master files and Treasury records. For
refunds, perform a

5For the purpose of this procedure and procedure IV.C, we define material as
$22 billion. This represents 1 percent of the estimated total tax revenue
receipts to be collected by IRS for fiscal year 2001.

6IRS 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.

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's general ledger materially agreed with IRS's master files and with
Treasury records.

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

(191009)
*** End of document. ***