Applying Agreed-Upon Procedures: Highway Trust Fund Excise Taxes 
(23-JAN-03, GAO-03-360R).					 
                                                                 
We evaluated fiscal year 2002 activity affecting distributions to
the Highway Trust Fund (HTF).					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-360R					        
    ACCNO:   A05941						        
  TITLE:     Applying Agreed-Upon Procedures: Highway Trust Fund      
Excise Taxes							 
     DATE:   01/23/2003 
  SUBJECT:   Excise taxes					 
	     Financial records					 
	     Trust funds					 
	     Aquatic Resources Trust Fund			 
	     Highway Trust Fund 				 
	     Land and Water Conservation Fund			 

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GAO-03-360R

GAO- 03- 360R Highway Trust Fund Excise Tax Procedures

United States General Accounting Office Washington, DC 20548

January 23, 2003 The Honorable Kenneth M. Mead Inspector General
Department of Transportation

Subject: Applying Agreed- Upon Procedures: Highway Trust Fund Excise Taxes
Dear Mr. Mead: We have performed the procedures contained in the enclosure
to this report, which we agreed to perform and with which you concurred,
solely to assist your office in ascertaining whether the net excise tax
revenue distributed to the Highway Trust Fund (HTF) for the fiscal year
ended September 30, 2002, is supported by the underlying records. As
agreed with your office, we evaluated fiscal year 2002 activity affecting
distributions to the HTF.

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

The adequacy of the procedures to meet your objectives is your
responsibility, and we make no representation in that respect. The
procedures we agreed to perform include (1) detailed tests of transactions
that represent the underlying basis of amounts distributed to the HTF, (2)
review of the Internal Revenue Service*s (IRS) quarterly HTF
certifications, (3) review of the Department of the Treasury Financial
Management Service (FMS) adjustments to the HTF for fiscal year 2002, (4)
review of certain procedures in the Treasury Office of Tax Analysis* (OTA)
process for estimating amounts to be distributed to the HTF for the fourth
quarter of fiscal year 2002, (5) comparison of net excise tax
distributions to the HTF during fiscal year 2002 and amounts reported in
the financial statements prepared by the Bureau of the Public Debt (BPD)
for the HTF and the HTF*s draft financial statements, and (6) 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.

While performing these procedures, we became aware of a change that we
wanted to bring to your attention. Specifically, OTA*s fiscal year 2002
estimates of transfers from the HTF to the Aquatic Resources Trust Fund
and the Land and Water

GAO- 03- 360R Highway Trust Fund Excise Tax Procedures Page 2 Conservation
Fund contained an additional transfer of $115.5 million from the HTF to

the general fund. OTA officials advised us that this was the result of an
update to Treasury*s interpretation of Section 9503 of the Internal
Revenue Code. Treasury*s most recent interpretation appears to be
consistent with the Code. As a result of this interpretation, net excise
tax distributions to the HTF for fiscal year 2002 and for future years
were, and will continue to be, less than what they would have been under
the previous interpretation.

We were not engaged to perform, and did not perform, an audit, the
objective of which would have been the expression of an opinion on the
amount of net excise taxes distributed to the HTF. Accordingly, we do not
express such an opinion. Had we performed additional procedures, other
matters might have come to our attention that would have been reported to
you. 1 We completed the agreed- upon procedures on January 10, 2003.

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

This report is intended solely for the use of the Office of Inspector
General of the Department of Transportation and should not be used by
those who have not agreed to the procedures and have not taken
responsibility for the sufficiency of the procedures for their purpose.
However, this report is a matter of public record and its distribution is
not limited. Copies are available to others upon request. This report is
also available at no charge on GAO*s home page 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 1 In our report on the results of our audit of IRS*s fiscal year
2002 financial statements, we noted a material weakness in IRS*s financial
reporting process (Financial Audit: IRS*s Fiscal Year 2002 and 2001
Financial Statements, GAO- 03- 243, November 15, 2002). 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.

Enclosure GAO- 03- 360R Highway Trust Fund Excise Tax Procedures Page 3

Highway Trust Fund Excise Tax Procedures and Results I. Detailed tests of
transactions that represent the underlying basis of amounts distributed to
the HTF in fiscal year 2002

A. Nonrepresentative selection of tax returns from the quarter ended
September 30, 2001 2 1. For the quarter ending September 30, 2001, select
the 30 largest excise tax

returns containing excise taxes related primarily to the HTF and the
Airport and Airway Trust Fund (AATF), on the basis of total tax liability
3 amount from IRS*s master file. 4 Description of findings and results We
selected the 31 largest excise tax returns from the quarter ended

September 30, 2001, for testing. 5 The selection was based on the total
tax liability amount and the type of taxes owed, for each return, from
IRS*s master file. The total tax liability amount related to these 31
returns was approximately

$8.1 billion, or 64 percent of the total excise tax liability amount ($
12.6 billion 6 ) for all excise tax types for the quarter ended September
30, 2001.

Of these 31 returns, 25 contained primarily HTF- related taxes and 6
contained primarily AATF taxes.

2 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, 2001, were completed in March 2002, and thus
affected fiscal year 2002 distributions to the HTF.

3 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.

4 The master file is a detailed database containing taxpayer information.
5 Per our agreement with the Department of Transportation Inspector
General regarding the AATF agreed- upon procedures, we selected one
additional AATF related return in order to test a minimum of six AATF
returns.

6 Per IRS, this was the total excise tax liability amount, from its master
file, for the quarter ended September 30, 2001.

Enclosure GAO- 03- 360R Highway Trust Fund Excise Tax Procedures Page 4 2.
For each of 25 returns related primarily to the HTF, we performed the

following procedures, which resulted in our testing approximately $6.6
billion in prorated collections 7 affecting fiscal year 2002 distributions
to the HTF:

(a) Trace the liability amount for abstracts 8 59, 60, and 62 from the tax
return to IRS's master file.

Description of findings and results The liability amount for abstracts 59,
60, and 62 on the tax returns agreed with IRS*s master file for 24 of the
25 selected items. On one return, IRS netted credits for abstracts 59, 60,
and 62 into abstract 60. This resulted in a difference between the
liability amounts, per abstract, on the tax return and the master file,
but had no effect on the overall liability of the three abstracts
combined. This is also discussed in the description of findings and
results for Step 2 (c).

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

7 IRS certifies to trust funds the amount of actual excise taxes
collected. Because there are occasions in which taxpayers have not fully
paid their tax liability at the time of IRS*s certification, IRS must
allocate the amount of payments actually received among the different
excise taxes reported as owed on the taxpayer*s return. This proration is
based on (1) the amount of tax reported by the taxpayer or assessment
amount and (2) the amount of taxpayer payments and credits. IRS*s
Collection Certification System prorates a taxpayer*s payments
proportionately among all taxes reported on the tax return. For example,
if a taxpayer 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.

8 The abstract numbers identify the tax type (e. g., gasoline and ticket
tax) and are used as the basis for determining the distribution of the
excise taxes to the various trust funds. Abstract numbers are preprinted
on the Form 720 Quarterly Federal Excise Tax Return and are used by the
taxpayer to report excise tax assessments. If the return was related to
the HTF, we selected (1) tax on 10 percent gasohol (abstract 59), (2)
diesel fuel tax (abstract 60), and (3) gasoline tax (abstract 62). If the
return was related to the AATF, we selected (1) tax on transportation of
persons by air- ticket tax (abstract 26), (2) tax on use of international
air facilities (abstract 27), and (3) tax on transportation of property by
air (abstract 28). The tax amounts related to the selected abstracts for
each trust fund are the largest tax amounts reported on the taxpayer*s
excise tax return and make up over 87 percent of the total amount
certified to the HTF and over 90 percent of the total amount certified to
the AATF.

Enclosure GAO- 03- 360R Highway Trust Fund Excise Tax Procedures Page 5
Description of findings and results The taxpayers* calculations on all 25
selected 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. 9 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 23 of the 25 returns. On the remaining two returns, IRS
made data entry errors when recording credits claimed by the taxpayer. On
one return, IRS did not record a credit the taxpayer claimed for aviation
fuel. As a result, IRS understated prorated collections to the HTF by
approximately $2.3 million. 10 On the other return, IRS combined the
credit amounts for abstracts 59, 60, and 62 and recorded the total into
abstract 60. This resulted in the individual prorated collection amounts
for the three abstracts being misstated. However, there was no significant
effect on IRS- certified amounts to the HTF since all three abstracts are
related to the HTF. 11 IRS corrected these errors after we brought them to
its attention. The

corrections were included in IRS*s subsequent trust fund certifications 9
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.

10 As explained in footnote 7, IRS prorates the amount of excise tax
collections based on (1) the amount of tax reported by the taxpayer or
assessment amount and (2) the amount of taxpayer payments and credits.
When IRS omitted the credit, it understated the amount available for
allocation. As a result, IRS understated the prorated collections to the
HTF.

11 IRS calculates certified collections to the HTF using the total
prorated collection amount, tax rate, and distribution rates to trust
funds and trust fund accounts, for each tax type. Although the prorated
collections amounts are primarily distributed to the HTF for all three of
the abstracts, the distribution rates vary. For 10 percent gasohol
(abstract 59), the distribution rates are 7.64 cents/ gallon to the
Highway Account, 2.86 cents/ gallon to the Mass Transit Account, 0.1
cents/ gallon to the Leaking Underground Storage Tank Trust Fund, and 2.5
cents/ gallon to the General Fund. For diesel fuel (abstract 60) the
distribution rates are 21.44 cents/ gallon to the Highway Account, 2.86
cents/ gallon to the Mass Transit Account, and 0.1 cents/ gallon to the
Leaking Underground Storage Tank Trust Fund. For gasoline (abstract 62)
the distribution rates are 15.44 cents/ gallon to the Highway Account,
2.86 cents/ gallon to the Mass Transit Account, and 0.1 cents/ gallon to
the Leaking Underground Storage Tank Trust Fund.

Enclosure GAO- 03- 360R Highway Trust Fund Excise Tax Procedures Page 6
for fiscal year 2002. Consequently, there was no net impact on fiscal

year 2002 distributions to the HTF resulting from these errors. B. Dollar
unit sample (DUS) of transactions from the quarters ended December 31,

2001, and March 31, 2002 1. Sampling (a) Obtain excise tax assessments and
collection data from IRS's master file

for the first 6 months of fiscal year 2002. Determine if excise tax
collections per 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 materially 12 agree.

Description of findings and results Excise tax collections for the first 6
months of fiscal year 2002 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 IRS*s

master file. 13 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.

12 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, 2001, and March 31, 2002. For fiscal year
2002, the materiality amount was $210 million for the two quarters

combined. 13 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.

Enclosure GAO- 03- 360R Highway Trust Fund Excise Tax Procedures Page 7
(c) To determine if the Collection Certification System properly
summarized

the prorated collections, total the prorated collections for selected
abstracts 14 from the audit files and compare these amounts to amounts in
the Reports of Excise Tax Collection. 15 Description of findings and
results The Collection Certification System properly summarized the
prorated

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

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

Description of findings and results Use of DUS with a confidence level of
80 percent, a test materiality of $315 million, and an expected aggregate
error amount of $94.5 million resulted in a sample of 94 16 prorated
collections for the first 6 months of fiscal year 2002.

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

14 The selected abstracts include the following: (1) tax on 10 percent
gasohol (abstract 59), (2) diesel fuel tax (abstract 60), (3) gasoline tax
(abstract 62), (4) tax on transportation of persons by air (abstract 26),
(5) tax on use of international air facilities (abstract 27), (6) tax on
transportation of property by air (abstract 28), and (7) tax on aviation
fuel for commercial use (abstract 77). The tax amounts for the three HTF-
related abstracts make up over 87 percent of the total amount certified to
the HTF and the tax amounts for the four AATF- related abstracts make up
over 96 percent of the total amounts certified to the AATF.

15 The Report of Excise Tax Collection contains prorated collections,
classified by abstracts, that serve as the basis for IRS*s quarterly trust
fund certifications. 16 The planned sample size using DUS was 136 items.
DUS selects dollars versus specific transaction items by dividing the
population by dollar intervals. The dollar interval for the HTF was $116
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 $232
million would cover two dollar- intervals, but represent one sample

item. Due to large dollar items covering more than one interval, the 94
unique sampled transactions selected represent 136 dollar- intervals.

Enclosure GAO- 03- 360R Highway Trust Fund Excise Tax Procedures Page 8
Description of findings and results Use of DUS with a confidence level of
80 percent, a test materiality of

$91 million, and an expected aggregate error amount of $27.3 million
resulted in a sample of 62 17 prorated collections for the first 6 months
of fiscal year 2002 for the AATF. A random attribute sample of 45 items
from the population of prorated tax collections related to all excise
taxes other than the HTF and the AATF was selected for testing. 18 2.
Detailed tests of transactions

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

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

Description of findings and results The assessment amounts on the tax
returns agreed with the amounts recorded in IRS*s master file for 76 of
the 94 sampled items. On 18 of the sampled items, IRS data entry errors
erroneously decreased the assessment amount for the abstract. As a result,
the prorated amounts for these sample items were understated by an
aggregate amount of $10.5 million. 19 IRS became aware of and corrected
these errors. The correction was

included in IRS*s trust fund certification total for the quarter ended 17
The planned sample size using DUS was 111 items. As explained in footnote
16, DUS selects dollars versus specific transaction items by dividing the
population by dollar intervals. The dollar interval for the AATF was $34
million. Due to large dollar items covering more than one interval, the 62
unique sampled transactions selected represent 111 dollar- intervals.

18 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. 19 As explained in footnote 7, IRS prorates the
amount of excise tax collections based on (1) the amount of tax reported
by the taxpayer or assessment amount and (2) the amount of taxpayer
payments and credits. Since IRS*s Collection Certification System is
programmed to allocate no more than 100 percent of the tax assessment,
decreasing the assessment amount will decrease

the amount available for allocation. For example, if the taxpayer reports
that it owes $1 million for gasoline tax and paid $1 million, but IRS
erroneously decreases the tax owed by $200,000, IRS*s Collection
Certification System will allocate only $800,000 to gasoline tax.

Enclosure GAO- 03- 360R Highway Trust Fund Excise Tax Procedures Page 9
June 30, 2002. Consequently, there was no net impact on fiscal year

2002 distributions to the HTF resulting from these errors.

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 selected from the
Collection Certification System audit file. 20 Description of findings and
results The recomputed prorated collection based on information from the

master file agreed with the amounts in all of the sampled items. (b)
Perform detailed testing on the two samples of prorated collections

from the non- HTF populations to determine if they contain any HTF excise
tax collections.

Description of findings and results The two samples of prorated
collections from the non- HTF populations did not contain any HTF excise
tax collections. (c) Evaluate the results of conducting steps (a) and (b).

Description of findings and results For the first 6 months of fiscal year
2002, the net most likely error is ($ 14.1 million) with an upper error
limit of ($ 198.2 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
HTF.

20 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.

Enclosure GAO- 03- 360R Highway Trust Fund Excise Tax Procedures Page 10

II. Review of IRS*s quarterly HTF certifications

A. Receipt certifications Perform the following steps on IRS*s HTF receipt
certifications for the quarters ended September 30, 2001, December 31,
2001, March 31, 2002, and June 30, 2002: 21 1. Inspect the certification
letters 22 for authorizing signatures.

Description of findings and results The HTF certification letters for all
four quarters had authorizing signatures. 2. Determine if evidence exists
that the supervisor or another analyst

checked the certification letters and supporting worksheets. Description
of findings and results There was evidence that another analyst and a
supervisor checked the

certification letters and supporting worksheets for all four 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 four quarters were

mathematically correct. 21 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, will not be
completed in time to affect the recorded fiscal year 2002 distributions to
the HTF.

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

Enclosure GAO- 03- 360R Highway Trust Fund Excise Tax Procedures Page 11
4. Trace the certified amounts for diesel fuel tax (abstract 60), gasoline
tax

(abstract 62), and tax on 10 percent gasohol (abstract 59) 23 from the
certification letters back to the Reports of Excise Tax Collection. 24
Description of findings and results The certified amounts for diesel fuel
tax (abstract 60), gasoline tax (abstract 62), and tax on 10 percent
gasohol (abstract 59) per the certification letters agreed with the
related Reports of Excise Tax Collection for all four quarters.

However, IRS omitted $847.5 million in excise tax collections from its
normal receipt certification for the quarter ended March 31, 2002, because
of processing delays. Specifically, IRS did not record information from
two large excise tax returns into its master file in time for inclusion in
the

Report of Excise Tax Collection. As a result, IRS performed a supplemental
certification in order to timely certify an additional $714.1 million to
the Highway Account and $133.4 million to the Mass Transit Account. We (1)
recalculated the totals on the supplemental certification letters and (2)
traced the certified amounts for diesel fuel tax (abstract 60), gasoline
tax (abstract 62), and tax on 10 percent gasohol (abstract 59) from the
supplemental certification letters back to the two supporting tax returns.
We did not find any discrepancies.

5. Review the Reports of Excise Tax Collection used in the certification
to determine if they contain significant 25 collections from prior
quarters.

Description of findings and results IRS- certified collections to the HTF
did not contain significant prior quarter collections in any of the four
quarters. 23 The certified amounts for diesel fuel tax (abstract 60),
gasoline tax (abstract 62), and tax on 10 percent gasohol (abstract 59),
along with the heavy vehicle use tax (traced separately), make up over 90
percent of the total amount certified to the HTF.

24 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.

25 For this test, *significant* is defined as $90 million. This represents
approximately 1 percent of the total amount certified to the HTF for a
quarter.

Enclosure GAO- 03- 360R Highway Trust Fund Excise Tax Procedures Page 12
6. Heavy vehicle use taxes, which go to the HTF, are reported on Form 2290

and are not included in the Collection Certification System. Trace these
amounts from the Highway Account certification letters to the master file.

Description of findings and results Heavy vehicle use tax per the Highway
Account certification letters agreed with the master file for all four
quarters. 7. Review the distribution rates used by IRS to determine
whether the

distribution rates for diesel fuel tax (abstract 60), gasoline tax
(abstract 62), and tax on 10 percent gasohol (abstract 59) agree with the
applicable laws. 26 Description of findings and results We saw no evidence
that the distribution rates used by IRS for diesel fuel

tax (abstract 60), gasoline tax (abstract 62), and tax on 10 percent
gasohol (abstract 59) did not agree with the applicable laws in effect
during the four quarters.

B. Refund/ credit reclassification 27 Perform the following steps on IRS*s
HTF refund/ credit certifications for the quarters ended December 31,
2001, March 31, 2002, June 30, 2002, and September 30, 2002: 28 1. Inspect
the certification letters for authorizing signatures.

Description of findings and results The certification letters for all four
quarters had authorizing signatures. 26 IRS calculates certified
collections to the Highway Account and the Mass Transit Account using the
total prorated collection amount, tax rate, and distribution rates
applicable to each account. 27 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.

28 In order to meet certain reporting deadlines, IRS- certified refunds
and credits for the fourth quarter of fiscal year 2002 as of September 6,
2002.

Enclosure GAO- 03- 360R Highway Trust Fund Excise Tax Procedures Page 13
2. Determine if evidence exists that the certification letters and
accompanying

schedules 29 were checked by the supervisor or another analyst.
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. 4. Trace the refund and
credit amounts for diesel and gasoline 30 from the schedules accompanying
the certification letters to other summary refund/ credit schedules. These
other refund/ credit summary schedules summarize refund and credit data
obtained from service center campuses* records.

Description of findings and results The refund and credit amounts for
gasoline tax and diesel tax on the schedules accompanying the
certification letters agreed with the amounts on the summary schedules for
the quarters ended March 31, 2002, and June 30, 2002.

IRS*s certification letter for the quarter ended December 31, 2001,
included erroneous amounts for gasohol and bus diesel fuel refunds. As a
result, IRS overstated its HTF refund certification by approximately $81
million. After we brought this to its attention, IRS made a correction on
the subsequent

certification. As a result, there was no net impact on fiscal year 2002
distributions to the HTF.

On IRS*s refund and credit certification for the quarter ended September
30, 2002, the IRS analyst entered data from the summary schedules into the
wrong sections of a schedule accompanying the certification letter. As a
result, IRS reported

29 IRS attaches a separate schedule to the HTF refund/ credit
certification letter that includes the detailed excise tax amounts that
support the total amount shown on the letter. IRS compiles the amounts on
these schedules from service center campus systems and its Interim Revenue
Accounting Control System. IRS has 10 service center campuses that process
tax returns and tax receipts.

30 The certified refund/ credit amounts for diesel and gasoline make up at
least 88 percent of the total certified refund/ credit amount for the HTF.

Enclosure GAO- 03- 360R Highway Trust Fund Excise Tax Procedures Page 14
$152.2 million in HTF refunds as credits and $38.4 million in HTF credits
as

refunds. There was no impact on distributions to the HTF because the BPD
deducts the total amount of refunds and credits in calculating
distributions to the trust fund.

III. Review of FMS adjustments

Perform the following steps on FMS adjustments to the HTF excise tax
distributions for the quarters ended September 30, 2001, December 31,
2001, March 31, 2002, and June 30, 2002.

A. Compare the FMS adjustments made to the HTF for fiscal year 2002 with
original OTA estimates and IRS- certified amounts to see if they agree
with the supporting schedules. 31 Description of findings and results For
the FMS adjustments made to the HTF accounts (Highway and Mass

Transit), the original OTA estimates and IRS- certified amounts agreed
with the supporting schedules for all four 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 Highway Account agreed with the differences computed by FMS for
all four quarters.

These amounts were 32 for the quarter ended September 30, 2001,
$81,501,000;

for the quarter ended December 31, 2001, ($ 29,699,000);

for the quarter ended March 31, 2002, $7,806,000; and 31 An FMS accountant
compiles this schedule, called the Subsidiary Quarterly Account of
Estimates and Actual Related Excise Taxes Appropriated to the Highway
Account. It computes the difference between IRS- certified amounts and the
OTA estimate for excise taxes, individually and in total, that relate to
the Highway Account. A similar schedule is prepared for the Mass Transit
Account. The schedules, along with OTA transfer forms and IRS
certifications, support the FMS adjustment.

32 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.

Enclosure GAO- 03- 360R Highway Trust Fund Excise Tax Procedures Page 15

for the quarter ended June 30, 2002, ($ 378,864,000). The independently
recalculated differences between the OTA estimates and the final IRS-
certified amounts for the Mass Transit Account agreed with the differences
computed by FMS for all four quarters.

These amounts were

for the quarter ended September 30, 2001, $11,830,000;

for the quarter ended December 31, 2001, $52,115,000;

for the quarter ended March 31, 2002, ($ 1,262,000); and

for the quarter ended June 30, 2002, ($ 9,697,000).

IV. Procedures performed on excise tax distributions to the HTF for the
quarter ended September 30, 2002

A. Determine if OTA*s process for identifying and incorporating into its
trust fund estimates 33 the effect of new legislation on excise tax
receipts was in place during fiscal year 2002. 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 2002. OTA prepares a tax rate table 34 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 HTF for the quarter
ended September 30, 2002.

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

33 OTA makes semimonthly estimates of excise tax collections for transfer
to trust funds. 34 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.

Enclosure GAO- 03- 360R Highway Trust Fund Excise Tax Procedures Page 16
Description of findings and results The totals on the transfer forms
affecting distributions to the HTF for the

quarter ended September 30, 2002, were mathematically correct. D. Trace
the transfer amounts for diesel fuel tax (abstract 60), gasoline tax

(abstract 62), tax on 10 percent gasohol (abstract 59), and heavy vehicle
use tax, 35 from the transfer letter, through the supporting schedules and
back to the related source documents. 36 Description of findings and
results The transfer amounts for diesel fuel tax (abstract 60), gasoline
tax (abstract

62), tax on 10 percent gasohol (abstract 59), and heavy vehicle use tax
from the transfer forms affecting distributions to the HTF for the quarter
ended September 30, 2002, agreed with the supporting schedules and source
documents.

V. Other procedures

A. Compare total fiscal year 2002 excise taxes distributed to the HTF with
(1) draft HTF fiscal year 2002 financial statements and (2) BPD fiscal
year 2002 financial statements for the HTF to determine if they agree.

Description of findings and results Fiscal year 2002 excise taxes of $32.2
billion distributed to the HTF agreed with the amount reported on the
draft HTF financial statements but did not agree with the amount reported
on the BPD fiscal year 2002 financial statements for the HTF. The BPD
fiscal year 2002 financial statements for the HTF reported excise tax
distributions to the HTF of $32.6 billion. The difference is due to the
$388.6 million downward FMS adjustment for the quarter ended June 30, 2002
-- $378.9 million to the Highway Account and $9.7 million to the Mass
Transit Account, which FMS recorded in December 2002. This was after the
November 1, 2002, issue date of BPD*s financial statements for the HTF.

B. Procedures performed as part of fiscal year 2002 IRS financial
statement audit: 35 The transfer amounts for diesel fuel tax (abstract
60), gasoline tax (abstract 62), tax on 10 percent gasohol (abstract 59),
and heavy vehicle use tax made up over 92 percent of the total amount
transferred to the HTF during the fourth quarter of fiscal year 2002.

36 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.

Enclosure GAO- 03- 360R Highway Trust Fund Excise Tax Procedures Page 17
1. From IRS*s master files for the first 8 months of fiscal year 2002, use
DUS to

select statistical samples of (1) total tax revenue receipts and (2)
refunds. For each sample item, test that the collection or refund amount,
tax period, and tax class 37 from source documentation agree with the
information recorded in IRS*s master files.

Description of findings and results Detailed testing of 153 revenue
receipts and 50 refund sample transactions showed that the collection or
refund amount, tax period, and tax class from source documents agreed with
the information recorded in IRS*s master files. 2. 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) materially 38 reconciled to Treasury FMS records. 39 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.

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

37 IRS assigns a tax class number to specific types of taxes. Excise taxes
are tax class 4. 38 For the purpose of this procedure and procedure V. B.
3, we define material as $20 billion. This represents 1 percent of the
total tax revenue receipts collected by IRS in fiscal year 2002. 39 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.

Enclosure GAO- 03- 360R Highway Trust Fund Excise Tax Procedures Page 18
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.

(191026)
*** End of document. ***