Applying Agreed-Upon Procedures: Highway Trust Fund Excise Taxes 
(05-NOV-04, GAO-05-28R).					 
                                                                 
We have performed the procedures contained in the enclosure to	 
this report, which we agreed to perform in ascertaining whether  
the net excise tax revenue distributed to the Highway Trust Fund 
(HTF) for the fiscal year ended September 30, 2004, is supported 
by the underlying records. As agreed with, we evaluated fiscal	 
year 2004 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.  
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-28R 					        
    ACCNO:   A13415						        
  TITLE:     Applying Agreed-Upon Procedures: Highway Trust Fund      
Excise Taxes							 
     DATE:   11/05/2004 
  SUBJECT:   Accounting errors					 
	     Audits						 
	     Excise taxes					 
	     Federal fund accounts				 
	     Federal funds					 
	     Fund audits					 
	     Tax administration systems 			 
	     Trust funds					 
	     Highway Trust Fund 				 

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GAO-05-28R

United States Government Accountability Office Washington, DC 20548

November 5, 2004

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, 2004, is supported by the underlying records. As agreed with
your office, we evaluated fiscal year 2004 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 were (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's Financial
Management Service adjustments to the HTF for fiscal year 2004, (4) review
of IRS's precertification1 of receipts for the second and third quarters
of fiscal year 2004, (5) review of certain procedures of the Department of
the Treasury's Office of Tax Analysis' (OTA) process for estimating
amounts to be distributed to the HTF for the fourth quarter of fiscal year
2004, and other procedures including (6) compiling and reporting the net
amount of fiscal year 2004 excise taxes distributed to the HTF, (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.

1To accommodate the Department of Transportation's accelerated reporting
date for fiscal year 2004, IRS performed precertifications of excise tax
collections. The data are for information purposes only and the
precertification does not constitute an official certification.

              GAO-05-28R Highway Trust Fund Excise Tax Procedures

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 October 27, 2004.

We provided a draft of this report to IRS and OTA officials for review and
comment.
IRS agreed with the results and findings presented in this report. OTA's
review of the
report only covered the procedures related to the estimation process for
the quarter
ended September 30, 2004. OTA agreed with the results and findings
presented in this
report relating to procedures performed on the estimation process for the
quarter
ended September 30, 2004.

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 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 (GAO, Financial Audit: IRS's Fiscal Years 2003 and 2002
Financial Statements, GAO-04-126, Nov. 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-05-28R 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 Highway Trust Fund (HTF) in fiscal year 2004

A. 	Nonrepresentative selection of tax returns from the quarters ended
June 30, 2003, and September 30, 20033

1. For each of the quarters ending June 30, 2003, and September 30, 2003,
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 amount4 from the Internal Revenue Service's
(IRS) 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 each of the two quarters 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 the 30 returns from the quarter
ended June 30, 2003, was approximately $8.8 billion, or 68 percent of the
total excise tax liability amount of $13 billion for all excise tax types
for the quarter. Of these 30 returns, 21 contained primarily HTF-related
taxes and 9 contained primarily AATF taxes.

The total tax liability amount related to the 30 returns from the quarter
ended September 30, 2003, was approximately $8.9 billion, or 67 percent of
the total excise tax liability amount of $13.3 billion for all excise tax
types for the quarter. Of these 30 returns, 21 contained primarily
HTF-related taxes and 9 contained primarily AATF taxes.

3Since certifications are not completed until 6 months after the end of
the quarter, the certification and corresponding adjustment by the
Department of the Treasury's Financial Management Service for the quarters
ended June 30, 2003, and September 30, 2003, were completed in December
2003 and March 2004, respectively, and thus affected fiscal year 2004
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.

2. 	For each of the 42 returns related primarily to the HTF from the
quarters ended June 30, 2003, and September 30, 2003, we performed the
following procedures, which resulted in our testing approximately $13.3
billion in prorated collections6 affecting fiscal year 2004 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 the master file for all 42 returns.

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

Description of findings and results

The taxpayers' calculations on all 42 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

8

the amount from the Collection Certification System audit files.

6IRS certifies to trust funds the amount of excise taxes collected.
Because taxpayers have sometimes 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 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 the 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 made up over 82 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 for
39 of the 42 returns. Of the remaining 3 returns, 1 was from the quarter
ended June 30, 2003, and 2 were from the quarter ended September 30, 2003.

On the one return from the quarter ended June 30, 2003, the taxpayer
reported a credit on Part I of Form 720 under abstract 62. IRS allowed
this credit and offset the amount against the taxpayer's reported abstract
62 assessment. IRS should have disallowed the credit because taxpayers
filing Form 720 can report credits only on Schedule C of the form. As a
result, IRS understated the prorated collections for the selected
abstracts by an aggregate amount of $14,549. IRS corrected this error on
the trust fund certification for the quarter ended September 30, 2003.
Consequently, there was no net effect on fiscal year 2004 distributions to
the HTF resulting from this error.

On the two returns from the quarter ended September 30, 2003, IRS recorded
a credit reported by the taxpayers on Schedule C of Form 720, which IRS
had previously denied. As a result, IRS overstated the prorated
collections for the selected abstracts by an aggregate amount of $126,465.
On one return, IRS received the information from the taxpayer to allow the
credit. On the other return, IRS corrected the error on the trust fund
certification for the quarter ended December 31, 2003. Consequently, there
was no net effect on fiscal year 2004 distributions to the HTF resulting
from these errors.

B. 	Dollar unit sample (DUS) of transactions from the quarters ended
December 31, 2003, and March 31, 2004

1. Sampling

(a) Obtain excise tax collection data from the master file for the first
two quarters of fiscal year 2004. Determine if excise tax collection data
from the master file agree with data from 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.

9For the purpose of this reconciliation, "material" is defined as 1
percent of the Form 720-related excise tax collections for the quarters
ended December 31, 2003, and March 31, 2004. For fiscal year 2004, the
materiality amount was $226 million for the two quarters combined.

Description of findings and results

Excise tax collections for the first two quarters of fiscal year 2004 from
the master file materially agreed with IRS's general ledger and with
excise tax collections from the Collection Certification System.

(b) Select a random attribute sample of 78 excise tax assessments from the
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
selected abstracts11 from the audit files and compare these amounts to

12

amounts in the Report of Excise Tax Collection.

Description of findings and results

The Collection Certification System properly summarized the prorated
collections for all of the selected abstracts. Prorated collections from
the audit files for the selected abstracts agreed with the corresponding
amounts in the Report 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.

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.

11The selected abstracts are (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 the 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
made up over 82 percent of the total amount certified to the HTF, and the
tax amounts for the four AATFrelated abstracts made 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.

Description of findings and results

Use of DUS with a confidence level of 80 percent, a test materiality of
$341 million, and an expected aggregate error amount of $102.3 million
resulted in a sample of 10213 prorated collections for the HTF for the
first two quarters of fiscal year 2004.

(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
$88 million, and an expected aggregate error amount of $26.4 million
resulted in a sample of 7314 prorated collections for the AATF for the
first two quarters of fiscal year 2004.

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 determine whether the assessment amount on the tax return,
for the sampled abstract, agrees with the amount recorded in the master
file.

13The planned sample size using DUS was 139 items. DUS selects dollars
instead of specific transaction items by dividing the population by dollar
intervals. The dollar interval for the HTF was $125 million. Accordingly,
any item with a dollar value matching or exceeding the sampling interval
would be selected, whereas items with dollar values below the sampling
interval might not be selected. For example, an item of $250 million would
cover 2 dollar-intervals, but represent one sample item. Due to large
dollar items covering more than one interval, the 102 unique sampled
transactions selected represent 139 dollarintervals.

14The planned sample size using DUS was 143 items. As explained in
footnote 13, DUS selects dollars instead of specific transaction items by
dividing the population by dollar intervals. The dollar interval for the
AATF was $32 million. Because large dollar items cover more than one
interval, the 73 unique sampled transactions selected represent 143
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.

Description of findings and results

The assessment amount on the tax return agreed with the amount recorded in
the master file for all of the sampled items.

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 return were mathematically correct
for all of the sampled items.

o  	Recompute the prorated collection amount based on information from the
master file and compare this amount to the sample items

16

selected from the Collection Certification System audit files.

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.

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.

II. Review of IRS's quarterly HTF receipt certifications

A. Receipt certifications

Perform the following steps on IRS's HTF receipt certification for the
quarters ended September 30, 2003, December 31, 2003, and March 31, 2004:

1. 	Inspect the certification letters17 for authorizing signatures.
Description of findings and results The 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 the supervisor or another analyst checked the
certification letters and supporting worksheets for all three 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 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 Report of Excise Tax
Collection19 and the

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

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), made up over 85 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.

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) from the
certification letters agreed with the related Report of Excise Tax
Collection and the Treasury 90 Report for all three quarters.

5. Review the distribution rates used by IRS to determine if 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.21

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 Report of Excise Tax Collection used in the certification to
determine if it contains significant22 collections from prior quarters.

Description of findings and results

The Report of Excise Tax Collection used in the certification for all
three quarters did not contain significant collections from prior
quarters.

7. 	Trace heavy vehicle use tax amounts from the Highway Account
certification letters to the master file. These taxes, which go to the
HTF, are reported on Form 2290 and are not included in the Collection
Certification System.

Description of findings and results

The heavy vehicle use tax amounts from the Highway Account certification
letter agreed with the master file for all three quarters.

20The Treasury 90 Report summarizes excise tax credit information and is
produced quarterly by IRS submission processing campus systems. IRS has
nine submission processing campuses that receive and process tax returns
and payments.

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 $175 million, which
represents approximately 2 percent of the quarterly total certified to the
HTF.

III. Review of Financial Management Service adjustments

Perform the following steps on Financial Management Service (FMS)
adjustments to HTF excise tax distributions for the quarters ended
September 30, 2003, December 31, 2003, and March 31, 2004:

A. 	Compare the FMS adjustments made to the HTF for fiscal year 2004 with
original Office of Tax Analysis (OTA) estimates and IRS-certified amounts
to

23

determine if they agree with the 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 determine 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

24

     differences computed by FMS for all three quarters. These amounts were

o  $29,543,000 for the quarter ended September 30, 2003,

o  ($750,127,000) for the quarter ended December 31, 2003, and

o  ($251,860,000) for the quarter ended March 31, 2004.

The independently recalculated differences between the OTA estimates and
final IRS-certified amounts for the Mass Transit Account agreed with the
differences computed by FMS for all three quarters. These amounts were

23An FMS accountant compiles this schedule, called the "Subsidiary
Quarterly Account of Estimates and Actual Related Taxes Appropriated to
Highway Trust Fund." This schedule 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.

24A 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.

o  ($13,769,000) for the quarter ended September 30, 2003,

o  ($78,124,000) for the quarter ended December 31, 2003, and

o  ($38,537,000) for the quarter ended March 31, 2004.

IV. Review of IRS precertification for the quarters ended March 31, 2004,
and June 30, 200425

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 the supervisor or another analyst checked the
results and supporting worksheets for both quarters.

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

Description of findings and results

The totals on the precertification were mathematically correct for both
quarters.

C. 	Trace the amounts for diesel fuel tax (abstract 60), gasoline tax
(abstract 62), and tax on 10 percent gasohol (abstract 59)26 from the
precertification back to the Report of Excise Tax Collection and the
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) from the precertification
agreed with the related Report of Excise Tax Collection and the Treasury
90 Report for the quarter ended June 30, 2004.

In the precertification for the quarter ended March 31, 2004, IRS
erroneously omitted returns related to the quarter that posted during the
month of March. The total amount of prorated collections related to the
HTF for these returns

25In order to accommodate the Department of Transportation's November 15
reporting date for fiscal year 2004, IRS performed precertifications. The
data in the precertification are for information purposes only and do not
represent an official certification.

26The certified amounts for diesel fuel tax (abstract 60), gasoline tax
(abstract 62), and tax on 10 percent gasohol (abstract 59) made up over 83
percent of the precertified total to the HTF.

was approximately $41,000. Because IRS's precertification is not an actual
certification that results in any redistributions of excise taxes among
the trust funds, this error did not have an effect on fiscal year 2004
distributions to the HTF.

D. 	Review the distribution rates used by IRS to determine if the 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 both quarters.

E. Review the Report of Excise Tax Collection used in the precertification
to determine if it contains significant27 collections from prior quarters.

Description of findings and results

The Report of Excise Tax Collection supporting IRS's precertification for
both quarters did not contain significant collections from prior quarters.

F. 	Review the Collection Certification System information to determine
whether IRS omitted any significant28 returns from the precertification.
If so, report for the Highway Account and the Mass Transit Account (1) the
average amount of 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 quarters ended
March 31, 2003, and June 30, 2003.

Description of findings and results

IRS did not omit any significant returns from the precertifications for
both quarters.

G. 	Trace heavy vehicle use tax amounts from the Highway Account
precertification letter to the master file.

27For this test, "significant" is defined as $175 million. This represents
approximately 2 percent of the precertified total to the HTF.

28For this test, "significant" is defined as tax returns 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 the
HTF with liabilities equal to or greater than $10 million have, in the
aggregate, historically accounted for over 91 percent of distributions
certified to the HTF.

Description of findings and results

The heavy vehicle use tax amount from the Highway Account precertification
letter agreed with the master file for the quarter ended June 30, 2004.

The heavy vehicle use tax amount of $89,908,000 from the precertification
letter for the quarter ended March 31, 2004, included only the amount for
the month of March rather than the total amount of $205,962,000 for the
quarter. The IRS analyst erroneously entered only the March amount from
the supporting worksheet when carrying the amount onto the
precertification letter. Because the precertification is not an actual
certification that results in any redistributions of excise taxes among
the trust funds, this error did not have an effect on fiscal year 2004
distributions to the HTF.

V. 	Procedures performed on excise tax distributions to the HTF for the
quarter ended September 30, 2004

A.	Determine if OTA's process for identifying and incorporating the effect
of new legislation on excise tax receipts into its trust fund estimates29
was in place during the quarter ended September 30, 2004.

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 the quarter ended September 30, 2004. OTA prepares a tax rate
table30 to capture information relating to legislation that affects tax
rates, tax basis, accounts, and deposit rules in effect during the
quarter.

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, 2004.

29OTA makes semimonthly estimates of excise tax collections for transfer
to trust funds. There are five semimonthly estimates for the quarter ended
September 30, 2004, which affect fiscal year 2004 distributions to the
HTF.

30OTA 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.

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, 2004, 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 tax31 from the transfer letter through the supporting
schedules and back to the

32

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 letter agreed with the supporting schedules and
source documents for the semimonthly transfers affecting distributions to
the HTF for the quarter ended September 30, 2004.

VI. Other procedures

A. 	Compile and report the net amount of fiscal year 2004 excise taxes
distributed to the HTF.

Description of findings and results

Based on a compilation of IRS's certifications, OTA's estimations, and
adjustments, the net amount of fiscal year 2004 excise taxes distributed
to the HTF was $34,692,294,040.

31The 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 88 percent of the total amount transferred to the HTF for
the fourth quarter of fiscal year 2004.

32The 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.

B. Procedures performed as part of the fiscal year 2004 IRS financial
statement audit:

1. 	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 that the collection or refund
amount, tax period, and tax class33 from source documentation agree with
those recorded in the 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 documents agreed with amounts recorded in the 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)

35

materially34 reconciled to Treasury FMS records.

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.

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

33IRS assigns a tax class number to specific types of taxes. Excise taxes
are tax class 4.

34For the purpose of this procedure and procedure VI.B.3, we define
"material" as $20 billion. This represents 1 percent of the estimated
total tax revenue receipts collected by IRS in fiscal year 2004.

35IRS 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 excise taxes, recorded
in IRS's general ledger materially agreed with the master files and
Treasury records. Refund balances recorded in IRS's general ledger
materially agreed with the master files and with Treasury records.

(196009)

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