Applying Agreed-Upon Procedures: Highway Trust Fund Excise Taxes 
(04-NOV-05, GAO-06-198R).					 
                                                                 
We assisted the Department of Transportation (DOT) in		 
ascertaining whether the net excise tax revenue distributed to	 
the Highway Trust Fund (HTF) for the fiscal year ended September 
30, 2005, is supported by the underlying records. As agreed with 
DOT, we evaluated fiscal year 2005 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-06-198R					        
    ACCNO:   A41041						        
  TITLE:     Applying Agreed-Upon Procedures: Highway Trust Fund      
Excise Taxes							 
     DATE:   11/04/2005 
  SUBJECT:   Allocation (Government accounting) 		 
	     Auditing procedures				 
	     Auditing standards 				 
	     Excise taxes					 
	     Fund audits					 
	     Trust funds					 
	     Highway Trust Fund 				 

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GAO-06-198R

     

     * LOS_ANGELES-#65910-v4-HTF_AGREED-UPON_PROCEDURE_REPORT_FY_2005.pdf
          * Highway Trust Fund Excise Tax Procedures and Results
               * Description of findings and results
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November 4, 2005

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, 2005, is supported by the underlying records. As agreed with
your office, we evaluated fiscal year 2005 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 relate to (1) transactions that represent
the underlying basis of amounts distributed to the HTF, (2) the Internal
Revenue Service's (IRS) quarterly HTF certifications, (3) the Department
of the Treasury's Financial Management Service adjustments to the HTF
during fiscal year 2005, (4) IRS's precertification1 of receipts for each
quarter of fiscal year 2005, (5) certain procedures of the Department of
the Treasury's Office of Tax Analysis's (OTA) process for estimating
amounts to be distributed to the HTF for the fourth quarter of fiscal year
2005, and other procedures related to (6) the net amount of fiscal year
2005 excise taxes distributed to the HTF, (7) transactions that represent
total IRS tax revenue receipts and refunds, and (8) reconciliations of IRS
records to Treasury records. The enclosure contains the agreed-upon
procedures and our findings and results from performing each of the
procedures.

1To accommodate the Department of Transportation's accelerated reporting
date for fiscal year 2005, IRS performed precertifications of excise tax
collections. The data are for information purposes only and the
precertification does not constitute an official certification.

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 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 that would have been reported to you.2 We
completed the agreed-upon procedures on October 27, 2005.

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, 2005. 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, 2005.

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. 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

2In our report on the results of our audit of IRS's fiscal year 2004
financial statements, we noted a material weakness in IRS's financial
reporting process; see GAO, Financial Audit: IRS's Fiscal Years 2004 and
2003 Financial Statements, GAO-05-103 (Washington, D.C.: Nov. 10, 2004). A
component of this weakness includes IRS's inability 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.

              Highway Trust Fund Excise Tax Procedures and Results

           I. Procedures on detailed transactions that represent the
           underlying basis of amounts distributed to the Highway Trust Fund
           (HTF) in fiscal year 2005

                        A. Nonrepresentative selection of tax returns from
                        the quarters ended

                        June 30, 2004, and September 30, 20043

                                     1. For each of the quarters ending June
                                     30, 2004, and September 30, 2004, 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 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, 2004, was approximately $8.4
                                     billion, or 64 percent of the total
                                     excise tax liability amount of $13.1
                                     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, 2004, was approximately
                                     $9.0 billion, or 65 percent of the total
                                     excise tax liability amount of $13.8
                                     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.

                                     2. For each of the 42 returns related
                                     primarily to the HTF from the quarters
                                     ended June 30, 2004, and September 30,
                                     2004, we performed the following
                                     procedures, which encompassed
                                     approximately $13 billion in prorated
                                     collections6 affecting fiscal year 2005
                                     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) Inspect taxpayers' calculations
                                        on the tax return for the selected
                                        abstracts to determine whether they
                                        are mathematically correct.

  Description of findings and results

                                        The taxpayers' calculations on all 42
                                        returns were mathematically correct.

                                        (c) Calculate 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 files.8

  Description of findings and results

                                        The independently calculated prorated
                                        collection amounts for the three
                                        selected abstracts agreed with
                                        amounts in IRS's Collection
                                        Certification System for all 42
                                        returns.

                        B. Dollar unit sample (DUS) of transactions from the
                        quarters ended

                        December 31, 2004, and March 31, 2005

                                     1. Sampling

                                        (a) Obtain excise tax collection data
                                        from the master file for the first
                                        two quarters of fiscal year 2005.
                                        Compare excise tax collection data
                                        from the master file with data from
                                        IRS's general ledger to determine if
                                        they materially agree.9 Compare total
                                        excise tax collections from the
                                        master file with total excise tax
                                        collections from the Collection
                                        Certification System audit files to
                                        determine if they materially agree.

  Description of findings and results

                                        Excise tax collections for the first
                                        two quarters of fiscal year 2005 from
                                        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 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) Sum the prorated collections for
                                        selected abstracts11 from the audit
                                        files and compare these amounts to
                                        amounts in the Report of Excise Tax
                                        Collection12 to determine if the
                                        Collection Certification System
                                        properly summarized the prorated
                                        collections.

        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 using a confidence level
                                        of 80 percent, a test materiality of
                                        $347 million, and an expected
                                        aggregate error amount of $104.1
                                        million.

  Description of findings and results

                                        Use of DUS with a confidence level of
                                        80 percent, a test materiality of
                                        $347 million, and an expected
                                        aggregate error amount of $104.1
                                        million resulted in a sample of 10113
                                        prorated collections for the HTF for
                                        the first two quarters of fiscal year
                                        2005.

                                        (e) Select samples of prorated excise
                                        tax collections from the two non-HTF
                                        populations. Use DUS to select a
                                        sample of prorated excise tax

                                        collections from the AATF population
                                        using a confidence level of 80
                                        percent, a test materiality of $92
                                        million, and an expected aggregate
                                        error amount of $27.6 million. Select
                                        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.

  Description of findings and results

                                        Use of DUS with a confidence level of
                                        80 percent, a test materiality of $92
                                        million, and an expected aggregate
                                        error amount of $27.6 million
                                        resulted in a sample of 8014 prorated
                                        collections for the AATF for the
                                        first two quarters of fiscal year
                                        2005.

                                        A random attribute sample of 45 items
                                        was selected from the population of
                                        prorated tax collections related to
                                        all excise taxes other than the HTF
                                        and the AATF.15

                                     2. Detailed transactions

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

                                        o  Compare the assessment amount on
                                        the tax return for the sampled
                                        abstract with the amount recorded in
                                        the master file.

    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  Inspect the taxpayers'
                                        calculations on the tax returns for
                                        the related abstract to determine
                                        whether they are mathematically
                                        correct.

                                        Description of findings and results

                                        The taxpayers' calculations were
                                        mathematically correct on the tax
                                        return for 100 of the 101 sampled
                                        items. On one return, the taxpayer
                                        miscalculated the assessment amount
                                        for the sampled abstract by $2
                                        million. As a result, the prorated
                                        collection amount for the sampled
                                        item was understated by $2 million.

                                        o  Calculate 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
                                        files.16

    Description of findings and results

                                        The independently calculated prorated
                                        collection, based on information from
                                        the master file, agreed with the
                                        amounts for all of the sampled items
                                        selected from the Collection
                                        Certification System audit files.

                                        (b) Inspect the tax returns and
                                        master file information for 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).

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, 2004, and September 30, 2004, were completed in December
2004 and March 2005, respectively, and thus affected distributions to the
HTF during fiscal year 2005.

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 work shows that these taxpayers generally pay their
excise taxes in full each quarter.

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

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 taxpayers' excise
tax returns and made up over 79 percent of the total amount certified to
the HTF and over 91 percent of the total amount certified to the AATF for
the quarters ended June 30, 2004, and September 30, 2004.

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 total
certified amount for each abstract.

9For the purpose of this procedure, "material" is defined as 1 percent of
the Form 720-related excise tax collections for the quarters ended
December 31, 2004, and March 31, 2005. For fiscal year 2005, the
materiality amount was $220 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.

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). As of
January 1, 2005, abstract 59 was eliminated as a result of the American
Jobs Creation Act of 2004, Pub. L. No. 108-357, S: 301(c)(7), (d)(1), 118
Stat. 1418, 1461, 1463 (Oct. 22, 2004). Abstract 59, along with all other
gasohol taxes, was reported under abstract 62 as gasoline for the quarter
ended March 31, 2005. The tax amounts for the three HTF-related abstracts
made up over 81 percent of the total amount certified to the HTF for the
quarter ended December 31, 2004, and over 88 percent for abstracts 60 and
62 for the quarter ended March 31, 2005. The tax amounts for the four
AATF-related abstracts made up over 87 percent of the total amount
certified to the AATF for the quarters ended December 31, 2004, and March
31, 2005.

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 147 items. DUS selects dollars
instead of specific transaction items by dividing the population by dollar
intervals. The dollar interval for the HTF was $126 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 $252 million would
cover 2 dollar intervals, but represent one sample item. Due to
large-dollar items covering more than one interval, the 101 unique sampled
transactions selected represent 147 dollar intervals.

14The planned sample size using DUS was 151 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 $34 million. Because large-dollar items cover more than one
interval, the 80 unique sampled transactions selected represent 151 dollar
intervals.

15For this sample, if no errors are found in 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

For the first 6 months of fiscal year 2005, the net most likely error is
($2 million) with an upper error limit of $197 million at the 80 percent
confidence level.

           II. Procedures on IRS's quarterly HTF receipt certifications

           Perform the following procedures on IRS's HTF receipt
           certification for the quarters ended September 30, 2004, December
           31, 2004, and March 31, 2005:

                        A. Inspect the certification letters17 for
                        authorizing signatures.

        Description of findings and results

16The purpose of this procedure is to determine whether the Collection
Certification System prorates correctly. This procedure is not intended to
determine whether amounts provided to the system are correct.

The certification letters for all three quarters had authorizing
signatures.

           B. Inspect the certification letters and supporting worksheets to
           determine if evidence exists that they were reviewed by the
           supervisor or another analyst.

        Description of findings and results

There was evidence that the supervisor or another analyst reviewed the
certification letters and supporting worksheets for all three quarters.

           C. Calculate 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.

           D. 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 Treasury 90 Report.20

        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 the quarters
           ended September 30, 2004, and December 31, 2004, and for abstracts
           60 and 62 for the quarter ended March 31, 2005.

           E. Compare the distribution rates used by IRS for diesel fuel tax
           (abstract 60), gasoline tax (abstract 62), and tax on 10 percent
           gasohol (abstract 59) with the applicable laws.21

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 82 percent of the
total amount certified to the HTF for the quarters ended September 30,
2004, and December 31, 2004, and over 91 percent for abstracts 60, 62, and
the heavy vehicle use tax for the quarter ended March 31, 2005. Since
abstract 59 was eliminated as a result of the American Jobs Creation Act
of 2004, Pub. L. No. 108-357, S: 301(c)(7), (d)(1), 118 Stat. 1418, 1461,
1463 (Oct. 22, 2004), we did not perform procedures on abstract 59 for the
quarter ended March 31, 2005.

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
posted to IRS's master file during the processing interval covered by the
report. The second of the two reports used may contain collections related
to prior quarters that IRS certifies as part of the current quarter's
collections because the related return was not posted to the master file
until the processing interval covered by this report.

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

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 quarters ended
September 30, 2004, and December 31, 2004, and for abstracts 60 and 62
agreed with the applicable laws in effect during the quarter ended March
31, 2005.

           F. Inspect 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.

           G. Trace heavy vehicle use tax amounts from the Highway Account
           certification letters to the master file. These taxes, which go to
           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.

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 procedure, "significant" is defined as $175 million, which
represents approximately 2 percent of the quarterly total certified to
HTF.

           III. Procedures on Financial Management Service adjustments

           Perform the following procedures on Financial Management Service
           (FMS) adjustments to HTF excise tax distributions for the quarters
           ended September 30, 2004, December 31, 2004, and March 31, 2005:

                        A. Compare the FMS adjustments made to the HTF with
                        original Office of Tax Analysis (OTA) estimates and
                        IRS-certified amounts to determine if they agree with
                        the supporting schedules.23

        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. Calculate the differences between the OTA estimates and
           IRS-certified amounts to determine if the amounts agree with the
           differences computed by FMS.

        Description of findings and results

           The independently calculated differences between the OTA estimates
           and the IRS-certified amounts for the Highway Account agreed with
           the differences computed by FMS for all three quarters. These
           amounts were24

                        o  $279,061,000 for the quarter ended September 30,
                        2004,
                        o  ($592,317,000) for the quarter ended December 31,
                        2004, and
                        o  ($135,718,000) for the quarter ended March 31,
                        2005.

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

                        o  ($22,284,000) for the quarter ended September 30,
                        2004,
                        o  ($32,504,000) for the quarter ended December 31,
                        2004, and
                        o  ($54,408,000) for the quarter ended March 31,
                        2005.

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
affected by IRS's ability to certify receipts in the appropriate quarter.

           IV. Procedures on IRS's HTF precertification for the quarters
           ended September 30, 2004, December 31, 2004, March 31, 2005, and
           June 30, 200525

                        A. Compare the precertified amount to the actual
                        certified amount to the HTF for the quarters ended
                        September 30, 2004, December 31, 2004, and March 31,
                        2005. If there is a significant variance,26 request
                        from the IRS their data on any large returns omitted
                        from the precertification.

Description of findings and results

There were no significant variances between the precertified amounts and
the actual certified amounts for the quarters ended September 30, 2004,
and December 31, 2004. For the quarter ended March 31, 2005, there was a
significant variance of $541 million. $505 million of this was
attributable to IRS's identification of two large tax returns that were
omitted from the precertification for the quarter ended March 31, 2005.

           B. Perform the following procedures on IRS's HTF precertification
           for the quarter ended June 30, 2005:

                        1. Inspect the precertification results and
                        supporting worksheets to determine if evidence exists
                        that they were reviewed by the supervisor or another
                        analyst.

                        Description of findings and results

           There was evidence that the supervisor or another analyst reviewed
           the results and supporting worksheets.

                        2. Calculate the totals on the precertification
                        letters to determine if they are mathematically
                        correct.

                        Description of findings and results

                        The totals on the precertification letters were
                        mathematically correct.

                        3. Trace the amounts for diesel fuel tax (abstract
                        60) and gasoline tax (abstract 62)27 from the
                        precertification letters 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) and
                        gasoline tax (abstract 62) from the precertification
                        letters agreed with the related Report of Excise Tax
                        Collection and the Treasury 90 Report for the quarter
                        ended June 30, 2005.

                        4. Compare the distribution rates used by IRS for
                        diesel fuel tax (abstract 60) and gasoline tax
                        (abstract 62) with the applicable laws.

                        Description of findings and results

                        The distribution rates used by IRS for diesel fuel
                        tax (abstract 60) and gasoline tax (abstract 62)
                        agreed with the applicable laws in effect during the
                        quarter.

                        5. Inspect the Report of Excise Tax Collection used
                        in the precertification to determine if it contains
                        significant28 collections from prior quarters.

        Description of findings and results

                        The Report of Excise Tax Collection supporting the
                        precertification did not contain significant
                        collections from prior quarters.

                        6. Inspect the Collection Certification System
                        information to determine whether IRS omitted any
                        significant29 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 HTF-related
                        excise taxes from these taxpayers' returns that were
                        included in IRS's certification for the quarter ended
                        June 30, 2004.

                        Description of findings and results

                        IRS did not omit any significant returns from the
                        precertification.

                        7. Trace the heavy vehicle use tax amount from the
                        Highway Account precertification letter to the master
                        file.

                        Description of findings and results

                        The heavy vehicle use tax amount from the Highway
                        Account precertification letter agreed with the
                        master file.

25In order to accommodate the Department of Transportation's November 15
reporting date for fiscal year 2005, IRS performed precertifications. The
data in the precertification are for information purposes only and do not
represent an official certification.

26Significant is defined as 5 percent of the actual certified amount for
the quarter.

27The certified amounts for diesel fuel tax (abstract 60) and gasoline tax
(abstract 62) made up over 89 percent of the precertified total to the
HTF.

28For this procedure, "significant" is defined as $175 million. This
represents approximately 2 percent of the precertified amount to the HTF
for the quarter ended June 30, 2004.

29For this procedure, "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 HTF.

           V. Procedures performed on excise tax distributions to the HTF for
           the quarter ended September 30, 2005

                        A. Determine if OTA's process for identifying and
                        incorporating the effect of new legislation on excise
                        tax receipts into its trust fund estimates30 was in
                        place during the quarter ended September 30, 2005.

                        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, 2005. OTA
                        prepares a tax rate table31 to capture information
                        relating to legislation that affects tax rates, tax
                        basis, accounts, and deposit rules in effect during
                        the quarter.

                        B. Inspect transfer forms and supporting schedules to
                        determine if there is evidence of review.

           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, 2005.

                        C. Calculate 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, 2005, were mathematically correct.

                        D. Trace the transfer amounts for diesel fuel tax
                        (abstract 60), gasoline tax (abstract 62), and heavy
                        vehicle use tax32 from the transfer forms through the
                        supporting schedules and back to the related source
                        documents.33

                        Description of findings and results

                        The transfer amounts for diesel fuel tax (abstract
                        60), gasoline tax (abstract 62), and heavy vehicle
                        use tax from the transfer forms agreed with the
                        supporting schedules and source documents for the
                        semimonthly transfers affecting distributions to the
                        HTF for the quarter ended September 30, 2005.

           VI. Other procedures

                        A. Using IRS's quarterly certifications, OTA's
                        estimated distributions, and any adjustments, compile
                        and report excise taxes distributed to the HTF in
                        fiscal year 2005.

        Description of findings and results

                        Based on a compilation of IRS's quarterly
                        certifications, OTA's estimations, and adjustments,
                        the net amount of excise taxes distributed to the HTF
                        in fiscal year 2005 was $37,632,909,000.

                        B. Procedures performed as part of the fiscal year
                        2005 IRS financial statement audit:

                                     1. 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
                                     collection or refund amount, tax period,
                                     and tax class34 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
                                     documents for 158 revenue receipts and
                                     48 refund sample transactions were
                                     consistent with amounts recorded in
                                     IRS's master files.

                                     2. Obtain selected IRS service center
                                     campuses' monthly Treasury FMS 224
                                     reconciliations35 and determine whether
                                     IRS-reported revenue receipts were
                                     properly classified and materially
                                     reconciled36 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.

                                     3. Compare tax revenue receipt balances
                                     by tax class, including excise taxes,
                                     recorded in IRS's general ledger with
                                     the 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 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.

30OTA makes semimonthly estimates of excise tax collections for transfer
to trust funds. There are five semimonthly estimates for the quarter ended
September 30, 2005, which affect fiscal year 2005 distributions to the
HTF.

31OTA communicates this information to interested parties at Treasury and
the Department of Transportation. IRS uses the tax and distribution rates
from this table in its subsequent certification of collections to trust
funds.

32The transfer amounts for diesel fuel tax (abstract 60), gasoline tax
(abstract 62), and heavy vehicle use tax made up over 92 percent of the
total amount transferred to the HTF for the fourth quarter of fiscal year
2005.

33The 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.

34IRS assigns a tax class number to specific types of taxes. Excise taxes
are tax class 4.

35At 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.

36For 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 to be collected by IRS in fiscal year 2005.

(196033)

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