Applying Agreed-Upon Procedures: Federal Unemployment Taxes	 
(14-NOV-03, GAO-04-212R).					 
                                                                 
We have performed the procedures contained in the enclosure to	 
this report, which we agreed to perform, solely to assist the	 
Department of Labor in ascertaining whether the net federal	 
unemployment tax (FUTA) revenue distributed to the Unemployment  
Trust Fund (UTF) for the fiscal year ended September 30, 2003, is
supported by the underlying records. As agreed with the Inspector
General, we evaluated fiscal year 2003 activity affecting	 
distributions to the UTF.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-212R					        
    ACCNO:   A08859						        
  TITLE:     Applying Agreed-Upon Procedures: Federal Unemployment    
Taxes								 
     DATE:   11/14/2003 
  SUBJECT:   Auditing procedures				 
	     Financial statement audits 			 
	     Trust funds					 
	     Funds management					 
	     Policies and procedures				 
	     Treasury Unemployment Trust Fund			 
	     Government On-Line Accounting Link 		 
	     System						 
                                                                 

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GAO-04-212R

United States General Accounting Office Washington, DC 20548

November 14, 2003

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
report, 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, 2003, is supported by the underlying
records. As agreed with your office, we evaluated fiscal year 2003
activity affecting distributions to the 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 (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 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 October 31, 2003.

We provided a draft of this report to IRS officials, along with its
enclosure, for review and comment. They agreed with the results and
findings presented in this report. In response to our finding concerning
an error on monthly FUTA refund data entered into the Government Online
Accounting Link System (GOALS), IRS stated that it has

instituted additional internal control procedures to promptly detect and
correct any
future errors.

This report is intended solely for the use of the Office of Inspector
General of the
Department of 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 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

                 Unemployment Trust Fund Procedures and Results

I. Detailed tests of transactions

A. 	Obtain from IRS total FUTA collections and refunds activity posted to
the master file for the first 8 months of fiscal year 2003.1 Determine if
FUTA collections and refund data per the master file materially reconcile
to the

2

general ledger.

Description of findings and results

Total FUTA collections and refunds for the first 8 months of fiscal year
2003 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 8
months of fiscal year 2003, using a confidence level of 80 percent, a test
materiality of $333 million, and an expected aggregate error amount of
$99.9 million.

Description of findings and results

Use of DUS with a confidence level of 80 percent, a test materiality of
$333 million, and an expected aggregate error amount of $99.9 million
resulted in a sample of 45 transactions for the first 8 months of fiscal
year 2003. Of this total, 44 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 supporting
documents (e.g., federal tax deposit coupons).

Description of findings and results

Based on supporting documentation, collection amounts were accurately
recorded for all 44 sampled FUTA collection transactions.

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

1The master file is a detailed database containing taxpayer information.
2Except where noted for certain procedures, significant or material is
defined as $333 million. This represents 1 percent of the UTF collections
made by federal and state government agencies for fiscal year 2002.

Description of findings and results

Based on supporting documentation, collection amounts were recorded to the
appropriate period for all 44 sampled FUTA collection transactions.

3. 	Determine whether the transactions were properly classified 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 44 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 classified as FUTA receipts.

Description of findings and results

Thirty-eight of the 44 sampled FUTA receipt transactions were paid via the
EFTPS. The bank confirmation showed that all 44 transactions were valid
and had been recorded to the proper tax period and tax class and for the
proper amounts.

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.

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.

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

4The EFTPS is a system for initiating tax payments electronically.
Employers who make federal tax deposits exceeding $200,000 must use the
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 the EFTPS.

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 did not claim an
exempt wage payment.

3. 	For manual refunds,5 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 analytical procedures on FUTA revenue collection and refund
data for the period not subject to detailed tests of transactions to
determine if reported fiscal year 2003 revenue collections and refunds
appear reasonable.

Description of findings and results

We performed a predictive test on the final 4 months of fiscal year 2003
FUTA revenue collection and refund data. The predicted FUTA revenue
collection and refund data amounts for the final 4 months of fiscal year
2003 did not materially vary from the actual amount of revenue collections
and refunds per the IRS's records for this period.

III. Other FUTA Procedures

A. 	For each of the 12 months in fiscal year 2003, 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
the FMS.

5A manual refund is a refund manually processed by an IRS employee rather
than through the IRS's manual automated process.

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
2003.

B. 	For each of the 12 months in fiscal year 2003, obtain and review
supporting documentation for the monthly entry of FUTA refund data onto
the 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 in the GOALS.

Description of findings and results

Documentation supported the monthly FUTA refund amount entered in GOALS to
charge the UTF for FUTA tax refunds issued for 11 of the 12 months of
fiscal year 2003. For the month of May 2003, IRS incorrectly charged the
cumulative refund amount for the year through May 2003 of $73 million to
the UTF instead of the amount for May 2003 of $11 million.

We brought this to the attention of the IRS and they made an adjustment
for May 2003. The adjustment was made during September 2003. Therefore,
there was no impact on FUTA reported amounts on the financial statements.

C. 	Compare fiscal year 2003 net FUTA collections per the IRS's draft
statement of custodial activity and related footnote disclosures to (a)
the Treasury's Bureau of the Public Debt (BPD) accounting records for the
UTF and (b) drafts of the Department of Labor's (DOL) consolidated
financial statements. Obtain explanations/support for material variances.

Description of findings and results

There were no significant variances between net FUTA collections per the
IRS's draft statement of custodial activity and the BPD's accounting
records for the UTF. Similarly, there were no significant variances
between IRS's draft statement of custodial activity and related footnote
disclosures and drafts of the DOL's fiscal year 2003 consolidated
financial statements.

IV. 	Other procedures performed as part of the fiscal year 2003 IRS
financial statement audit

A. 	From the IRS's master files for the first 8 months of fiscal year
2003, use DUS to select statistical samples of (a) total tax revenue
receipts and (b) refunds. For each item in the samples of tax revenue
receipts and refunds, test that the collection or refund amount and tax
class from source documentation agrees with amounts recorded in IRS's
master files.

Description of findings and results

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

B. 	Review selected IRS 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 centers' monthly Treasury SF-224 reconciliations to determine if
IRS-reported total refunds (all tax classes) materially6 reconciled to
Treasury FMS records.7

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 procedures to determine whether revenue receipt balances by
tax class per the 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.

Description of findings and results

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.

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

(196006)

6For the purpose of this procedure and procedure IV.C, we define material
as $20 billion. This represents approximately 1 percent of the total tax
revenue receipts collected by the IRS in fiscal year 2003.

7The 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 the IRS with a Statement of Differences (TFS-6652),
which reports differences between total refunds reported by the IRS on the
SF-224 and the total refunds per Treasury records.
*** End of document. ***