Applying Agreed-Upon Procedures: Federal Unemployment Taxes
(04-NOV-05, GAO-06-197R).
We assisted the Department of Labor in ascertaining whether the
net federal unemployment tax (FUTA) revenue distributed to the
Unemployment Trust Fund (UTF) for the fiscal year ended September
30, 2005, is supported by the underlying records. We evaluated
fiscal year 2005 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 procedures we agreed to perform relate to (1) transactions
that represent the underlying basis of amounts distributed to the
UTF and (2) key reconciliations of the Internal Revenue Service
records to the Department of the Treasury records.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-06-197R
ACCNO: A41040
TITLE: Applying Agreed-Upon Procedures: Federal Unemployment
Taxes
DATE: 11/04/2005
SUBJECT: Auditing procedures
Federal taxes
Financial records
Financial statement audits
Funds management
Trust funds
Policies and procedures
Treasury Unemployment Trust Fund
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GAO-06-197R
* LOS_ANGELES-#65920-v3-FUTA_AGREED-UPON_PROCEDURES_REPORT_FY_2005.pdf
* Description of findings and results
* Description of findings and results
* Description of findings and results
* Description of findings and results
* Description of findings and results
* Description of findings and results
* Description of findings and results
* Description of findings and results
* Description of findings and results
* IV. Other procedures performed as part of the fiscal year 20
November 4, 2005
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, 2005, is supported by the underlying
records. As agreed with your office, we evaluated fiscal year 2005
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 relate to (1) transactions that represent
the underlying basis of amounts distributed to the UTF and (2) 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 and results from performing each of the procedures.
We were not engaged to and did not conduct an examination, 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, 2005.
We provided a draft of this report to IRS for review and comment. IRS
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. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report.
Sincerely yours,
Steven J. Sebastian
Director
Financial Management and Assurance
Enclosure
Unemployment Trust Fund Procedures and Results
I. Procedures on detailed 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 2005 posted to the master file.1 Compare FUTA
collections and refund data per the master file to determine if they agree
in all material respects2 to IRS's general ledger.
Description of findings and results
Total FUTA collections and refunds for the first 8 months of fiscal year
2005 per IRS's master file materially agreed with 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 2005, using a confidence level of 80 percent, a test
materiality of $428 million, and an expected aggregate error amount of
$128 million.
Description of findings and results
Use of DUS with a confidence level of 80 percent, a test materiality of
$428 million, and an expected aggregate error amount of $128 million
resulted in a sample of 38 transactions for the first 8 months of fiscal
year 2005. All of the 38 transactions represented FUTA collections.3
C. For each sampled FUTA tax collection transaction:
1. Trace collection transaction amounts from IRS's master files to
supporting documents (e.g., federal tax deposit coupons) to determine
whether collection amounts are accurately recorded.
Description of findings and results
Based on supporting documentation, collection amounts were accurately
recorded for all 38 sampled FUTA collection transactions.
2. Compare the date in the master file with the date on source
documents to determine whether amounts were recorded to the
appropriate period.
Description of findings and results
Based on supporting documentation, collection amounts were
recorded to the appropriate period for all 38 sampled FUTA
collection transactions.
3. Inspect source documentation maintained in IRS's files (e.g.,
tax returns) to determine whether the transactions were properly
classified as FUTA receipts.
Description of findings and results
Based on supporting documentation, collection amounts were
recorded in the correct tax class4 for 37 of the 38 sampled
transactions. One sampled transaction, which was mistakenly
reported as a FUTA receipt by the taxpayer, should have been
reported as a Federal Insurance Contributions Act (FICA) tax
payment (tax class 1). 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 2005 is $155 million. The net upper
error limit is $451 million.
4. Confirm FUTA transactions paid via the Electronic Federal Tax
Payment System (EFTPS)5 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 38 sampled FUTA collection transactions, 32 were paid via
EFTPS. The bank confirmations showed that 31 of the 32
transactions were valid and had been recorded to the proper tax
period and tax class and for the proper amounts. The remaining
sampled EFTPS transaction, which was mistakenly reported as a FUTA
receipt by the taxpayer, should have been reported as a FICA tax
payment (tax class 1). IRS discovered the error and made the
correction after our sample cutoff date but before the end of the
fiscal year. This is the same error noted above in procedure
I.C.3.
1The master file is a detailed database containing taxpayer information.
2For this procedure, "material" is defined as $428 million. This
represents 1 percent of net Unemployment Trust Fund collections reported
for fiscal year 2004.
3Consequently, procedures agreed to regarding refund transactions are not
applicable.
4IRS assigns a tax class number to specific types of taxes. FUTA taxes are
tax class 8.
5EFTPS 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.
II. Analytical procedures
A. Perform a predictive test on FUTA revenue collections and
refunds for the final four months of fiscal year 2005 and
determine whether the predicted FUTA collection and refund amounts
vary materially6 from the actual FUTA revenue collection and
refund amounts per IRS's records for this period.
Description of findings and results
The predicted FUTA revenue collection and refund data amounts for
the final 4 months of fiscal year 2005 did not materially vary
from the amounts for 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 2005, obtain supporting
documentation for monthly revenue reclassification adjustments transmitted
by IRS to the Financial Management Service (FMS). Compare the supporting
documentation with the reclassification adjustments transmitted to FMS.
Description of findings and results
Documentation was consistent with the monthly FUTA reclassification
adjustment amount transmitted to FMS for all 12 months of fiscal year
2005.
B. For each of the 12 months in fiscal year 2005, obtain
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. Compare the supporting documentation with the
monthly entries reported on GOALS.
Description of findings and results
Documentation was consistent with the monthly FUTA refund amount
entered into GOALS to charge the UTF for FUTA tax refunds issued
for all 12 months of fiscal year 2005.
C. Compare fiscal year 2005 net FUTA collections per IRS's draft
statement of custodial activity and related footnote disclosures
to (a) the Department of the Treasury's Bureau of the Public Debt
(BPD) accounting records for UTF and
(b) drafts of the Department of Labor's (DOL) consolidated
financial statements to determine whether any significant
variances exist.
6For this procedure, "material" is defined as $428 million.
Description of findings and results
There were no significant variances7 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 2005 consolidated financial statements.
IV. Other procedures performed as part of the fiscal year 2005 IRS financial
statement audit
A. From IRS's master files for the first 8 months of fiscal year 2005, use
DUS to select statistical samples of (1) total tax revenue receipts and
(2) refunds. For each sample item, compare the receipt or refund amount,
tax period, and tax class from source documentation with those recorded in
IRS's master files.
Description of findings and results
The receipt or refund amount, tax period, and tax class from source
documentation for 158 revenue receipts and 48 refund sample transactions
were consistent with those recorded in IRS's master files.
B. Obtain selected IRS service center campuses' monthly Treasury FMS 224
reconciliations8 and determine whether IRS-reported revenue receipts were
properly classified and materially9 reconciled to Treasury FMS records.
For refunds, obtain selected IRS service center campuses' monthly Treasury
FMS 224 reconciliations and determine whether IRS-reported total refunds
(all tax classes) materially reconciled to Treasury FMS records.
Description of findings and results
Tax revenue receipts reported by selected IRS service center campuses
through the monthly Treasury FMS 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 FMS 224 reconciliation process materially reconciled to
Treasury FMS records.
7For this procedure, "significant" is defined as $428 million.
8At the end of each month, each IRS campus provides Treasury its FMS 224
(Statement of Transactions) generated from IRS's general ledger reporting
receipts and refunds journalized during the month. Treasury reconciles the
amounts on the FMS 224 with its records and provides IRS a Statement of
Differences for any differences identified.
9For this procedure and procedure IV.C, we define "material" as $20
billion. This represents 1 percent of the estimated total tax revenue
receipts to be collected by IRS in fiscal year 2005.
C. Compare tax revenue receipt balances by tax class, including
FUTA, recorded in IRS's general ledger with IRS's master files and
Treasury records to determine if they agree in all material
respects. For refunds, compare total refund balances between the
master files, the general ledger, and Treasury records to
determine if they agree in all material respects.
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.
(196032)
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