Applying Agreed-Upon Procedures: Federal Unemployment Taxes	 
(05-NOV-05, GAO-05-27R).					 
                                                                 
We have performed the procedures contained in the enclosure to	 
this report, which we agreed to perform and with which GAO	 
concurred, solely to assist GAO's 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, 2004, is supported by the underlying records. As	 
agreed with GAO's office, we evaluated fiscal year 2004 activity 
affecting distributions to the UTF. In performing the agreed-upon
procedures, we conducted our work in accordance with U.S.	 
generally accepted government auditing standards, which 	 
incorporate financial audit and attestation standards established
by the American Institute of Certified Public Accountants. These 
standards also provide guidance for performing and reporting the 
results of agreed-upon procedures. The adequacy of the procedures
to meet GAO's objectives is GAO's responsibility, and we make no 
representation in that respect. The procedures we agreed to	 
perform include (1) detailed tests of transactions that represent
the underlying basis of amounts distributed to the UTF and (2)	 
review of key reconciliations of the Internal Revenue Service	 
records to the Department of the Treasury records.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-27R 					        
    ACCNO:   A13413						        
  TITLE:     Applying Agreed-Upon Procedures: Federal Unemployment    
Taxes								 
     DATE:   11/05/2005 
  SUBJECT:   Federal taxes					 
	     Reconciliation process				 
	     Records (documents)				 
	     Tax information confidentiality			 
	     Tax refunds					 
	     Trust funds					 
	     Unemployment insurance				 
	     Financial statement audits 			 
	     Policies and procedures				 
	     Treasury Unemployment Trust Fund			 

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GAO-05-27R

United States Government Accountability Office Washington, DC 20548

November 5, 2004

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, 2004, is supported by the underlying
records. As agreed with your office, we evaluated fiscal year 2004
activity affecting distributions to the UTF.

In performing the agreed-upon procedures, we conducted our work in
accordance with U.S. generally accepted government auditing standards,
which incorporate financial audit and attestation standards established by
the American Institute of Certified Public Accountants. These standards
also provide guidance 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 UTF and
(2) review of key reconciliations of the Internal Revenue Service records
to the Department of the Treasury records. The enclosure contains the
agreed-upon procedures and our findings from performing each of the
procedures.

We were not engaged to perform, and did not perform, an audit, the
objective of which would have been the expression of an opinion on the net
amount of FUTA taxes distributed to the UTF. Accordingly, we do not
express such an opinion. Had we performed additional procedures, other
matters might have come to our attention that would have been reported to
you. We completed the agreed-upon procedures on October 27, 2004.

We provided a draft of this report to IRS officials 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 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 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

                 Unemployment Trust Fund Procedures and Results

I. Detailed tests of transactions

A.	Obtain from the Internal Revenue Service (IRS) total Federal
Unemployment Tax (FUTA) collections and refunds reflecting the first 8
months of fiscal year 2004 posted to the master file.1 Determine whether
FUTA collections and

2

refund data per the master file materially reconcile to the general
ledger.

Description of findings and results

Total FUTA collections and refunds for the first 8 months of fiscal year
2004 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 2004, using a confidence level of 80 percent, a test
materiality of $374 million, and an expected aggregate error amount of
$112 million.

Description of findings and results

Use of DUS with a confidence level of 80 percent, a test materiality of
$374 million, and an expected aggregate error amount of $112 million
resulted in a sample of 40 transactions for the first 8 months of fiscal
year 2004. All of the 40 transactions represented collection sample items.

C. For each sampled FUTA tax collection transaction:

1. 	Determine whether 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 40 sampled FUTA collection transactions.

2. 	Determine whether 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 $374 million. This represents 1 percent of net Unemployment
Trust Fund collections for fiscal year 2003.

Description of findings and results

Based on supporting documentation, collection amounts were recorded to the
appropriate period for all 40 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 39 of the 40 sampled transactions. One sampled
transaction, which was classified as a FUTA receipt, should have been
classified as a corporate tax payment (tax class 3). IRS discovered the
error and made the correction after our sample cutoff date but before the
end of the fiscal year.

Based on our testing results, the net most likely error for the first 8
months of fiscal year 2004 is $141 million. The net upper error limit is
$414 million.

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

Of the 40 sampled FUTA collection transactions, 33 were paid via EFTPS.
The bank confirmations showed that all 33 transactions were valid and had
been recorded to the proper tax period and tax class and for the proper
amounts.

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 whether reported fiscal year 2004 revenue collections and
refunds appear reasonable.

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

4EFTPS is a Financial Management Service system maintained by two
financial agents for the government. EFTPS is used for initiating tax
payments electronically. Employers who make federal tax deposits exceeding
$200,000 must use EFTPS to pay their FUTA taxes. The $200,000 threshold
includes all federal tax deposits, such as deposits for employment tax,
excise tax, and corporate income tax. Taxpayers who are not required to
make electronic deposits may voluntarily participate in EFTPS.

Description of findings and results

We performed a predictive test on the final 4 months of fiscal year 2004
FUTA revenue collection and refund data. The predicted FUTA revenue
collection and refund data amounts for the final 4 months of fiscal year
2004 did not materially vary from the actual amount of revenue collections
and refunds per IRS's records for this period.

III. Other FUTA procedures

A. 	For each of the 12 months in fiscal year 2004, obtain and review
supporting documentation for monthly revenue reclassification adjustments
transmitted by IRS to the Department of the Treasury's Financial
Management Service (FMS). Check to see whether the supporting
documentation agrees with the reclassification adjustment transmitted to
FMS.

Description of findings and results

Documentation supported the monthly FUTA reclassification adjustment
amount transmitted to FMS for all 12 months of fiscal year 2004.

B. 	For each of the 12 months in fiscal year 2004, obtain and review
supporting documentation for the monthly entry of FUTA refund data into
the Government Online Accounting Link System (GOALS) to charge back the
Unemployment Trust Fund (UTF) account for FUTA tax refunds issued. Check
to see whether the supporting documentation agrees with the monthly
entries reported on GOALS.

Description of findings and results

Documentation supported the monthly FUTA refund amount entered into GOALS
to charge the UTF for FUTA tax refunds issued for all 12 months of fiscal
year 2004.

C. 	Compare fiscal year 2004 net FUTA collections per 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.

Description of findings and results

There were no significant variances between net FUTA collections per IRS's
draft statement of custodial activity and BPD's accounting records for
UTF. Similarly, there were no significant variances between IRS's draft
statement of custodial activity and related footnote disclosures and
drafts of DOL's fiscal year 2004 consolidated financial statements.

IV. Other procedures performed as part of the fiscal year 2004 IRS
financial statement audit

A. 	From IRS's master files for the first 8 months of fiscal year 2004,
use DUS to select statistical samples of (1) total tax revenue receipts
and (2) refunds. For each sample item, test whether the collection or
refund amount, tax period, and tax class from source documentation agree
with those recorded in IRS's master files.

Description of findings and results

Detailed testing of 135 revenue receipts and 48 refund sample transactions
showed that the collection or refund amount, tax period, and tax class
from source documentation agreed with those recorded in IRS's master
files.

B. 	Review selected IRS service center campuses' monthly Treasury SF-224
reconciliations to determine whether 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 whether IRS-reported total refunds (all tax
classes) materially5 reconciled to Treasury FMS records.6

Description of findings and results

Tax revenue receipts reported by selected IRS service center campuses
through the monthly Treasury SF-224 reconciliation process were properly
classified and materially reconciled to Treasury FMS records.

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

C. 	Perform procedures to determine whether tax revenue receipt balances
by tax class, including FUTA, recorded in 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 files, the general
ledger, and Treasury records.

5For the purpose of this procedure and procedure IV.C, we define
"material" as $20 billion. This represents 1 percent of the estimated
total tax revenue receipts collected by IRS in fiscal year 2004.

6IRS maintains records of refund balances by tax class in its master file
and reports this information monthly to Treasury on the SF-224. Treasury
provides IRS with a Statement of Differences (TFS-6652), which reports
differences between total refunds reported by IRS on the SF-224 and the
total refunds in 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 Treasury
records.

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

(196008)

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