Applying Agreed-Upon Procedures: Highway Trust Fund Excise Taxes 
(20-NOV-03, GAO-04-213R).					 
                                                                 
The Inspector General (IG) of the Department of Transportation	 
requested that GAO perform procedures to assist the IG's office  
in ascertaining whether the net excise tax revenue distributed to
the Highway Trust Fund (HTF) for the fiscal year ended September 
30, 2003, is supported by the underlying records. GAO evaluated  
fiscal year 2003 activity affecting distributions to the HTF.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-213R					        
    ACCNO:   A08916						        
  TITLE:     Applying Agreed-Upon Procedures: Highway Trust Fund      
Excise Taxes							 
     DATE:   11/20/2003 
  SUBJECT:   Allocation (Government accounting) 		 
	     Excise taxes					 
	     Federal aid for highways				 
	     Fund audits					 
	     Trust funds					 
	     Highway Trust Fund 				 

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GAO-04-213R

United States General Accounting Office Washington, DC 20548

November 20, 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, 2003, is supported by the underlying records. As agreed with
your office, we evaluated fiscal year 2003 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 2003, (4)
review of IRS's precertification1 of receipts for the third quarter of
fiscal year 2003, (5) review of certain procedures of the Department of
the Treasury Office of Tax Analysis' (OTA) process for estimating amounts
to be distributed to the HTF for the fourth quarter of fiscal year 2003,
and other procedures including (6) comparison of net excise tax
distributions to the HTF during fiscal year 2003 and amounts reported in
the draft financial statements prepared by the Bureau of the Public Debt
(BPD) for

1To accommodate the Department of Transportation's accelerated reporting
date for fiscal year 2003, IRS performed a precertification of excise tax
collections for the quarter ended June 30, 2003. The data are for
information purposes only and the precertification does not constitute an
official certification.

              GAO-04-213R Highway Trust Fund Excise Tax Procedures

the HTF and the HTF's draft financial statements, (7) detailed tests of
transactions that represent total IRS tax revenue receipts and refunds,
and (8) 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.

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

                                       2

that would have been reported to you. We completed the agreed-upon
procedures
on November 7, 2003.

We provided a draft of this report to IRS and OTA officials for review and
comment.
They agreed with the results and findings presented in this report. In
response to our
findings concerning errors in its estimates, OTA 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 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 Internet Web site 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

2In our report on the results of our audit of IRS's fiscal year 2003
financial statements, we noted a material weakness in IRS's financial
reporting process (U.S. General Accounting Office, Financial Audit: IRS's
Fiscal Years 2003 and 2002 Financial Statements, GAO-04-126, November 13,
2003). 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.

          Page 2 GAO-04-213R Highway Trust Fund Excise Tax Procedures

              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 2003

A. Nonrepresentative selection of tax returns from the quarter ended
September 30, 20023

1. For the quarter ending September 30, 2002, select the 30 largest excise
tax returns containing excise taxes related primarily to the HTF and the

4

Airport and Airway Trust Fund (AATF), on the basis of total tax liability
amount, from IRS's master file.5

Description of findings and results

We selected the 30 largest excise tax returns related primarily to the HTF
and the AATF from the quarter ended September 30, 2002, for testing. The
selection was based on the total tax liability amount and type of taxes
owed, for each return, from IRS's master file.

The total tax liability amount related to these 30 returns was
approximately $8.6 billion, or 66 percent of the total excise tax
liability amount -$13 billion -for all excise tax types for the quarter
ended September 30, 2002.

Of these 30 returns, 22 contained primarily HTF-related taxes and 8
contained primarily AATF taxes.

2. 	For each of the 22 returns related primarily to the HTF we performed
the following procedures, which resulted in our testing approximately $6.4

3Since 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, were completed in March 2003, and thus
affected fiscal year 2003 distributions to the HTF.

4Although 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.

5The master file is a detailed database containing taxpayer information.

billion in prorated collections6 affecting fiscal year 2003 distributions
to the HTF:

(a) 	Trace the liability amount for abstracts7 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 return agreed
with IRS's master file for 22 of the 22 returns.

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

Description of findings and results

The taxpayer's calculations on all 22 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.8

6IRS certifies to trust funds the amount of excise taxes collected.
Because there are occasions in which taxpayers have not fully paid their
tax liability, IRS must allocate the amount of payments actually received
among the different excise taxes reported on the taxpayer's return. 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 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.

7The 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 (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 86 percent of the total amount certified to
the HTF and over 89 percent of the total amount certified to the AATF each
quarter.

8The 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.

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 all 22 of the returns.

B. 	Dollar unit sample (DUS) of transactions from the quarters ended
December 31, 2002, and March 31, 2003

1. Sampling

(a) 	Obtain excise tax assessments and collection data from IRS's master
file for the first 6 months of fiscal year 2003. Determine if excise tax
collections per the 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 materially9 agree.

Description of findings and results

Excise tax collections for the first 6 months of fiscal year 2003 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.10 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.

(c) 	To determine if the Collection Certification System properly
summarized the prorated collections, total the prorated collections for

9For 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, 2002, and March 31, 2003. For fiscal year
2003, the materiality amount was $203 million for the two quarters
combined.

10For 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.

selected abstracts11 from the audit files and compare these amounts to 12

amounts in the Reports of Excise Tax Collection.

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
$322 million, and an expected aggregate error amount of $96.6 million
resulted in a sample of 9613 prorated collections for HTF for the first 6
months of fiscal year 2003.

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

Description of findings and results

Use of DUS with a confidence level of 80 percent, a test materiality of
$89 million, and an expected aggregate error amount of $26.7 million

11The 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 86 percent of the total amount
certified to the HTF and the tax amounts for the four AATF-related
abstracts make up over 95 percent of the total amounts certified to the
AATF each quarter.

12The Report of Excise Tax Collection contains prorated collections,
classified by abstracts that serve as the basis for IRS's quarterly trust
fund certifications.

13The planned sample size using DUS was 143 items. DUS selects dollars
versus specific transaction items by dividing the population by dollar
intervals. The dollar interval for the HTF was $118 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 $236 million would cover two
dollar-intervals, but represent one sample item. Due to large dollar items
covering more than one interval, the 96 unique sampled transactions
selected represent 143 dollar-intervals.

resulted in a sample of 6714 prorated collections for the first 6 months
of fiscal year 2003 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.15

2. Detailed tests of transactions

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

o  	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 all of the sampled abstracts.

o  	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.

o  	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.16

14The planned sample size using DUS was 132 items. As explained in
footnote 13, DUS selects dollars versus specific transaction items by
dividing the population by dollar intervals. The dollar interval for the
AATF was $33 million. Due to large dollar items covering more than one
interval, the 67 unique sampled transactions selected represent 132
dollar-intervals.

15For 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.

16The 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.

Description of findings and results

The recomputed prorated collection, based on information from the master
file, agreed with the amounts for 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

As noted in the results from steps (a) and (b), we found no errors.

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, 2002, December 31, 2002, and March 31, 2003:

1. Inspect the certification letters17 for authorizing signatures.

Description of findings and results

The HTF certification letters for all three 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 three quarters.

17IRS prepares two certification letters for HTF each quarter: one for the
Highway Account and the other for the Mass Transit Account.

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 three quarters were
mathematically correct.

4. 	Trace the certified amounts for diesel fuel tax (abstract 60),
gasoline tax (abstract 62), and tax on 10 percent gasohol (abstract 59)18
from the certification letters back to the Reports of Excise Tax
Collection19 and

20

Treasury 90 Report.

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 three quarters.

However, on IRS's receipt certification for the quarter ended December 31,
2002, the IRS analyst used excise tax credit information from the Treasury
90 Report for the quarter ended September 30, 2002, rather than the
Treasury 90 Report for the quarter ended December 31, 2002. As a result,
IRS understated certified receipts to the Highway Account by approximately
$12.4 million and understated certified receipts to the Mass Transit
Account by approximately $1.7 million. IRS discovered the error after it
had sent the certification letter to the FMS, and FMS had already recorded
the true-up adjustment for using the certification letters. IRS corrected
this error on the receipt certification for the following quarter ended
March 31, 2003. Therefore, this error had no net effect on fiscal year
2003 distributions to the HTF.

18The 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 89 percent of the
total amount certified to the HTF each quarter.

19IRS 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.

20During fiscal year 2002, IRS changed its process of recording and
summarizing excise tax credits related to taxpayers' Form 720 tax returns.
As a result, IRS now obtains this excise tax credit information from the
applicable Treasury 90 Report. The Treasury 90 Report summarizes excise
tax credit information and is produced quarterly by IRS submission
processing campus systems. IRS has 10 submission processing campuses that
receive and process tax returns and payments.

5. 	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

21

laws.

Description of findings and results

The distribution rates used by IRS for diesel fuel tax (abstract 60),
gasoline tax (abstract 62), and tax on 10 percent gasohol (abstract 59)
agreed with the applicable laws in effect during all three quarters.

6. Review the Reports of Excise Tax Collection used in the certification
to determine if they contain significant22 collections from prior
quarters.

Description of findings and results

The Reports of Excise Tax Collection supporting IRS's certification to HTF
for the quarter ended September 30, 2002, contained approximately $261
million in net HTF excise tax collections related to prior quarters. This
consisted of approximately $262 million from the quarter ended June 30,
2002 and ($1 million)23 from prior quarters. IRS attributed the delay in
classifying the June quarter amounts to two taxpayers who did not file
timely and five tax returns with processing delays due to taxpayer or IRS
errors.

The Reports of Excise Tax Collection supporting IRS's certification to HTF
for the quarter ended December 31, 2002, contained approximately $330
million in net HTF excise tax collections related to prior quarters. Of
this amount, approximately $253 million was from the quarter ended
September 30, 2002. IRS attributed this delay to three taxpayers who did
not file timely and two tax returns with processing delays due to taxpayer
or IRS errors.

The Reports of Excise Tax Collections supporting IRS's certification to
the HTF for the quarter ended March 31, 2003, did not contain significant
prior quarter collections.

21IRS 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.

22For this test, "significant" is defined as $170 million. This represents
approximately 2 percent of the quarterly total certified to the HTF.

23Negative amounts occur due to taxpayer amendments or IRS corrections.

7. 	Heavy vehicle use taxes, which go to the HTF, are reported on Form
2290 and are not included in the Collection Certification System. Trace
the heavy vehicle use tax 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 three quarters.

B. Refund/credit reclassification24

Perform the following steps on IRS's HTF refund/credit certifications for
the quarters ended December 31, 2002, March 31, 2003, June 30, 2003, and
September 30, 2003:25

1. Inspect the certification letters for authorizing signatures.

Description of findings and results

The certification letters for all four quarters had authorizing
signatures.

2. 	Determine if evidence exists that a supervisor or another analyst
checked the certification letters and accompanying schedules.26

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.

24IRS 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.

25In order to meet certain reporting deadlines, IRS certified refunds and
credits for the fourth quarter of fiscal year 2003 as of September 5,
2003.

26IRS 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 submission processing campus systems and its Interim
Revenue Accounting Control System. IRS has 10 submission processing
campuses that process tax returns and taxpayer receipts.

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 gasoline tax and diesel tax27
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 submission processing
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 all four quarters.

III. Review of FMS adjustments

Perform the following steps on FMS adjustments to the HTF excise tax
distributions for the quarters ended September 30, 2002, December 31,
2002, and March 31, 2003.

A. 	Compare the FMS adjustments made to the HTF for fiscal year 2003 with
original OTA estimates and IRS-certified amounts to see if they agree with
the

28

supporting schedules.

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 three 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.

27The certified refund/credit amounts for gasoline and diesel make up at
least 91 percent of the total certified refund/credit amount for the HTF.

28An FMS accountant compiles this schedule, called "Subsidiary Quarterly
Account of Estimates and Actual Related Taxes Appropriated to the Highway
Account." The schedule computes the difference between IRScertified
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.

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 three quarters.

29

These amounts were

o  for the quarter ended September 30, 2002, $636,666,000;

o  for the quarter ended December 31, 2002, ($319,825,000); and

o  for the quarter ended March 31, 2003, $205,901,000.

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 three quarters.

These amounts were

o  for the quarter ended September 30, 2002, $16,750,000;

o  for the quarter ended December 31, 2002, ($17,123,000); and

o  for the quarter ended March 31, 2003, $48,083,000.

IV. Review of IRS precertification for the quarter ended June 30, 200330

A. 	Determine if evidence exists that the supervisor or another analyst
checked the results and supporting worksheets.

Description of findings and results

There was evidence that another analyst and a supervisor checked the
results and supporting worksheets.

B. 	Recalculate the totals on the precertification to determine if they
are mathematically correct.

29A 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. Since the adjustment amount is the
difference between OTA's estimate and IRS's certified amount, it may be
significantly affected by IRS's ability to certify receipts in the
appropriate quarter.

30To accommodate the Department of Transportation's accelerated reporting
date for fiscal year 2003, IRS performed a precertification of excise tax
collections for the quarter ended June 30, 2003. The data are for
information purposes only and the precertification does not constitute an
official certification.

Description of findings and results

The totals on the precertification were mathematically correct.

C. 	Trace the amounts for diesel fuel tax (abstract 60), gasoline tax
(abstract 62), and tax on 10 percent gasohol (abstract 59) 31 from the
precertification back to the Reports of Excise Tax Collection and Treasury
90 Report.

Description of findings and results

The amounts for diesel fuel tax (abstract 60), gasoline tax (abstract 62),
and tax on 10 percent gasohol (abstract 59) per the precertification
agreed with the related Reports of Excise Tax Collection and Treasury 90
Report.

D. 	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.

Description of findings and results

The distribution rates used by IRS for diesel fuel tax (abstract 60),
gasoline tax (abstract 62), and tax on 10 percent gasohol (abstract 59)
agreed with the applicable laws in effect during the quarter ended June
30, 2003.

E. Review the Reports of Excise Tax Collection used in the
precertification to determine if they contain significant32 collections
from prior quarters.

Description of findings and results

The Reports of Excise Tax Collection supporting IRS's precertification for
the quarter ended June 30, 2003, did not contain significant prior quarter
collections.

F. 	Review the Collection Certification System information to determine
whether IRS omitted any significant returns33 from the precertification.
If so, report for the Highway Account and the Mass Transit Account: (1)
the average amount of

31The 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 89 percent of the
precertified total to the HTF.

32For this test, "significant" is defined as $170 million, which
represents approximately 2 percent of the precertified total to the HTF.

33For this test, "significant returns" are defined as those from taxpayers
with a total quarterly excise tax liability equal to or greater than $10
million during each of the prior four quarters. Tax returns related
specifically to HTF from taxpayers with liabilities equal to or greater
than $10 million have, in the aggregate, historically accounted for over
91 percent of distributions certified to HTF.

HTF-related excise taxes from these taxpayers' returns that were included
in IRS's certification from the four previous quarters and (2) the amount
of HTFrelated excise taxes from these taxpayers' returns that were
included in IRS's certification for the quarter ended June 30, 2002.

Description of findings and results

IRS did not omit any returns of historically significant excise tax
taxpayers from its precertification to the HTF.

G. 	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 precertification letter to the
master file.

Description of findings and results

Heavy vehicle use tax per the Highway Account precertification agreed with
the master file.

V. 	Procedures performed on excise tax distributions to the HTF for the
quarter ended September 30, 2003

A. 	Determine if OTA's process for identifying and incorporating into its
trust fund estimates34 the effect of new legislation on excise tax
receipts was in place during fiscal year 2003.

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 2003. OTA prepares a tax rate table35 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.

34OTA makes semimonthly estimates of excise tax collections for transfer
to trust funds. There are five semimonthly estimates for the quarter ended
September 30, 2003, which affect fiscal year 2003 distributions to the
HTF.

35OTA 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.

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, 2003.

C. 	Recalculate 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, 2003, 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,36 from the transfer forms, through the supporting
schedules and back to

                                       37

the related source documents.

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 did not agree with the supporting
schedules and source documents on the first two semimonthly estimates
affecting distributions to the HTF for the quarter ended September 30,
2003. An error on one of OTA's electronic spreadsheets resulted in the
collection percentages for all tax types being miscalculated. After we
brought this to its attention, OTA corrected the spreadsheet error so it
did not affect the remaining estimates for the quarter. However, since the
effect of this error on the total quarterly estimate would be only a
fraction of a percent, OTA did not correct for the effects of this error
on the two affected semimonthly estimates. Consequently, OTA understated
its estimate for these four taxes to the HTF by approximately $4.2
million.

In addition, there was another error affecting distributions to the HTF
that was not directly related to the tax types selected for review. An
error on OTA's

36The transfer amounts for diesel fuel tax (abstract 60), gasoline tax
(abstract 62), tax on 10 percent gasohol (abstract 59), and heavy vehicle
use tax make up over 92 percent of the total amount transferred quarterly
to the HTF.

37The 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 tables.

electronic spreadsheets resulted in the omission of the estimated amounts
for retail tax on trucks (abstract 33) from its estimates to the Highway
Account for the first four semimonthly periods of the quarter. As a
result, OTA understated its estimates to the HTF by approximately $305
million. OTA corrected for the effects of this error through its final
semimonthly estimate affecting fiscal year 2003 distributions to the HTF.
Consequently, this error had no net effect on fiscal year 2003
distributions to the HTF.

VI. Other procedures

A. 	Compare total fiscal year 2003 excise taxes distributed to the HTF
with drafts of (1) HTF's fiscal year 2003 financial statements and (2)
BPD's fiscal year 2003 financial statements for the HTF to determine if
they agree.

Description of findings and results

The $34.1 billion of fiscal year 2003 excise taxes 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 draft BPD fiscal year 2003
financial statements for the HTF. The BPD fiscal year 2003 financial
statements for the HTF reported excise tax distributions to the HTF of
$33.7 billion. The difference is due to FMS's $388.6 million downward
adjustment for the quarter ended June 30, 2002-a $378.9 million adjustment
to the Highway Account and a $9.7 million adjustment to the Mass Transit
Account-which FMS recorded in December 2002. The trust fund's
administrator included this transaction as part of the fiscal year 2002
distributions to the HTF because the HTF had time to record the adjustment
on its fiscal year 2002 financial statements, which were issued in January
2003. However, BPD included this transaction as part of the fiscal year
2003 distributions because it was recorded after the November 1, 2002,
issuance date of BPD's fiscal year 2002 financial statements for the HTF.

B. Procedures performed as part of the fiscal year 2003 IRS financial
statement audit:

1. 	From IRS's master files for the first 8 months of fiscal year 2003,
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 class38 from source documentation agree with
those recorded in IRS's master files.

38IRS assigns a tax class number to specific types of taxes. Excise taxes
are tax class 4.

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 IRS's master files.

2. 	Review selected IRS submission processing 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 submission processing campuses' monthly Treasury
SF-224 reconciliations to determine if IRS-reported total refunds (all tax
classes) materially39 reconciled to Treasury FMS records.40

Description of findings and results

Tax revenue receipts reported by selected IRS submission processing
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 submission processing 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.

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.

39For the purpose of this procedure and procedure VI.B.3, we define
material as $20 billion. This represents approximately 1 percent of the
total tax revenue receipts collected by IRS in fiscal year 2003.

40IRS 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.

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

(196003)

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