Applying Agreed-Upon Procedures: Airport and Airway Trust Fund	 
Excise Taxes (04-NOV-05, GAO-06-199R).				 
                                                                 
We assisted the Department of Transportation in ascertaining	 
whether the net excise tax revenue distributed to the Airport and
Airway Trust Fund (AATF) for the fiscal year ended September 30, 
2004, is supported by the underlying records. 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. The	 
procedures we agreed to perform were (1) transactions that	 
represent the underlying basis of amounts distributed to the	 
AATF, (2) the Internal Revenue Service's (IRS) quarterly AATF	 
certifications, (3) the Department of the Treasury's Financial	 
Management Service adjustments to the AATF for fiscal year 2005, 
(4) IRS's precertification of receipts for the second and third  
quarters of fiscal year 2005, (5) certain procedures of the	 
Department of the Treasury's Office of Tax Analysis' (OTA)	 
estimation procedures affecting excise tax distributions to the  
AATF for the fourth quarter of fiscal year 2005, and other	 
procedures including (6) the net amount of fiscal year 2005	 
excise taxes distributed to the AATF, (7) transactions that	 
represent total IRS tax revenue receipts and refunds, and (8) key
reconciliations of IRS records to Treasury records.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-199R					        
    ACCNO:   A41042						        
  TITLE:     Applying Agreed-Upon Procedures: Airport and Airway Trust
Fund Excise Taxes						 
     DATE:   11/04/2005 
  SUBJECT:   Allocation (Government accounting) 		 
	     Auditing procedures				 
	     Auditing standards 				 
	     Excise taxes					 
	     Fund audits					 
	     Trust funds					 
	     Airport and Airway Trust Fund			 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-06-199R

     

     * LOS_ANGELES-#65915-v1-AATF_AGREED-UPON_PROCEDURES_REPORT_FY_2005.pdf
          * Airport and Airway Trust Fund Excise Tax Procedures and Resu
               * Description of findings and results
                    * Description of findings and results
                    * Description of findings and results

November 4, 2005

The Honorable Kenneth M. Mead

Inspector General

Department of Transportation

Subject: Applying Agreed-Upon Procedures: Airport and Airway 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 Airport and Airway Trust Fund (AATF) 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 AATF.

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 AATF, (2) the Internal
Revenue Service's (IRS) quarterly AATF certifications, (3) the Department
of the Treasury's Financial Management Service adjustments to the AATF
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 AATF 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 AATF, (7) transactions that
represent total IRS tax revenue receipts and refunds, and (8) key
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 AATF. 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.

        Airport and Airway Trust Fund Excise Tax Procedures and Results

           I. Procedures on detailed transactions that represent the
           underlying basis of amounts distributed to the Airport and Airway
           Trust Fund (AATF) in fiscal year 2005

                        A. Nonrepresentative selection of tax returns from
                        the quarters ended

                        June 30, 2004, and September 30, 20043

                                     1. For the quarters ending June 30,
                                     2004, and September 30, 2004, select the
                                     30 largest excise tax returns containing
                                     excise taxes related primarily to the
                                     AATF and the Highway Trust Fund (HTF) 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 AATF
                                     and the HTF from each of the two
                                     quarters for testing. The selection was
                                     based on the total tax liability amount
                                     owed for each return from the 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, 9
                                     contained primarily AATF-related taxes
                                     and 21 contained primarily HTF taxes.

                                     The total tax liability amount related
                                     to the 30 returns from the quarter ended
                                     September 30, 2004, was approximately $9
                                     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, 9
                                     contained primarily AATF-related taxes
                                     and 21 contained primarily HTF taxes.

                                     2. For each of the 18 returns related
                                     primarily to the AATF from the quarters
                                     ended June 30, 2004, and September 30,
                                     2004, we performed the following
                                     procedures, which encompassed
                                     approximately $3.5 billion in prorated
                                     collections6 affecting fiscal year 2005
                                     distributions to the AATF:

                                        (a) Trace the liability amount for
                                        abstracts7 26, 27, and 28 from the
                                        tax return to IRS's master file.

        Description of findings and results

                                        The liability amount for abstracts
                                        26, 27, and 28 on the tax return
                                        agreed with the master file for all
                                        18 returns.

                                        (b) Inspect the 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 18
                                        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 18
                                        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) AATF, (2) HTF, and
                                        (3) other excise tax abstracts. 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.

        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 8013 prorated
                                        collections for the AATF for the
                                        first two quarters of fiscal year
                                        2005.

                                        (e) Select samples of prorated excise
                                        tax collections from the two non-AATF
                                        populations. 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.
                                        Select a random attribute sample of
                                        45 items from the population of
                                        prorated tax collections related to
                                        all excise taxes other than the AATF
                                        and the HTF.

                                        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 10114
                                        prorated collections for the HTF 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 AATF
                                        and the HTF.15

                                     2. Detailed transactions

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

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

                                        Description of findings and results

                                        The assessment amount on the tax
                                        return agreed with the amount
                                        recorded in the master file for 79 of
                                        the 80 sampled items. For one case,
                                        the taxpayer submitted an amended
                                        return to reduce the assessment
                                        amount. However, IRS did not process
                                        the amended return. As a result, the
                                        prorated amount for the sampled item
                                        was understated by $2,772.

                                        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 all of the sampled items.

                                        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 on the two
                                        samples of prorated collections from
                                        the non-AATF populations to determine
                                        if they contain any AATF excise tax
                                        collections.

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
AATF 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 the Form 720, Quarterly Federal Excise Tax Return, and are used by the
taxpayer to report excise tax assessments. If the return was related to
the 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). 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). 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 91 percent of the total
amount certified to the AATF and over 79 percent of the total amount
certified to the HTF 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 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 transportation of persons by air
(abstract 26), (2) tax on the use of international air facilities
(abstract 27), (3) tax on transportation of property by air (abstract 28),
(4) tax on aviation fuel for commercial use (abstract 77), (5) tax on 10
percent gasohol (abstract 59), (6) diesel fuel tax (abstract 60), and (7)
gasoline tax (abstract 62). 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. 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. 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, were reported under abstract 62 as gasoline
for the quarter ended 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 151 items. DUS selects dollars
instead of specific transaction items by dividing the population by dollar
intervals. The dollar interval for the AATF was $34 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 $68 million would
cover 2 dollar intervals, but represent one sample item. Due to large
dollar items covering more than one interval, the 80 unique sampled
transactions selected represent 151 dollar intervals.

14The planned sample size using DUS was 147 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
HTF was $126 million. Because large dollar items cover more than one
interval, the 101 unique sampled transactions selected represent 147
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

The two samples of prorated collections from the non-AATF populations did
not contain any AATF excise tax collections.

           (c) Evaluate the results of conducting steps (a) and (b).

        Description of findings and results

For the first 6 months of fiscal year 2005, the net most likely error is
($32 thousand) with an upper error limit of $54 million at the 80 percent
confidence level.

           II. Procedures on IRS's quarterly AATF receipt certifications

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

A. Inspect the certification letters for authorizing signatures.

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.

        Description of findings and results

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 tax on transportation of persons by air
(abstract 26), tax on the use of international air facilities (abstract
27), tax on transportation of property by air (abstract 28), and tax on
aviation fuel for commercial use (abstract 77)17 from the certification
letters back to the Report of Excise Tax Collection18 and the Treasury 90
Report.19

        Description of findings and results

The certified amounts for tax on transportation of persons by air
(abstract 26), tax on the use of international air facilities (abstract
27), tax on transportation of property by air (abstract 28), and tax on
aviation fuel for commercial use (abstract 77) from the certification
letters agreed with the related Report of Excise Tax Collection and the
Treasury 90 Report for all three quarters.

17The certified amounts for tax on transportation of persons by air
(abstract 26), tax on the use of international air facilities (abstract
27), tax on transportation of property by air (abstract 28), and tax on
aviation fuel for commercial use (abstract 77) made up over 87 percent of
the total amount certified to AATF for the quarters ended September 30,
2004, December 31, 2004, and March 31, 2005.

18IRS 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.

19The 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.

E. Compare the distribution rates used by IRS for tax on transportation of
persons by air (abstract 26), tax on the use of international air
facilities (abstract 27), tax on transportation of property by air
(abstract 28), and tax on aviation fuel for commercial use (abstract 77)
with the applicable laws.

Description of findings and results

The distribution rates used by IRS for tax on transportation of persons by
air (abstract 26), tax on the use of international air facilities
(abstract 27), tax on transportation of property by air (abstract 28), and
tax on aviation fuel for commercial use (abstract 77) agreed with the
applicable laws in effect during all three quarters.

           F. Inspect the Report of Excise Tax Collection used in the
           certification to determine if it contains significant20
           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.

           III. Financial Management Service adjustments

           Perform the following procedures on Financial Management Service
           (FMS) adjustments to the AATF 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 AATF with
                        original Office of Tax Analysis (OTA) estimates and
                        IRS-certified amounts to determine if they agree with
                        the supporting schedules.21

                        Description of findings and results

                        For the FMS adjustments made to the AATF, 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
                        AATF agreed with the differences computed by FMS for
                        all three quarters. These amounts were22

                                     o  $96,007,000 for the quarter ended
                                     September 30, 2004,
                                     o  ($20,189,000) for the quarter ended
                                     December 31, 2004, and
                                     o  $94,044,000 for the quarter ended
                                     March 31, 2005.

           IV. Procedures on IRS's AATF precertification for the quarters
           ended

        September 30, 2004, December 31, 2004, March 31, 2005, and

        June 30, 200523

                        A. Compare the precertified amount to the actual
                        certified amount to the AATF for the quarters ended
                        September 30, 2004, December 31, 2004, and March 31,
                        2005. If there is a significant variance,24 request
                        from the IRS their data on any large returns omitted
                        from the precertification.

20For this procedure, "significant" is defined as $45 million. This
represents approximately 2 percent of the quarterly total certified to the
AATF.

21An FMS accountant compiles this schedule, called the "Subsidiary
Quarterly Account of Estimates and Actual Related Taxes Appropriated to
Airport and Airway 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 AATF. The schedule, along with
OTA transfer forms and IRS certifications, supports the FMS adjustment.

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 $222 million. $176 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.

22A 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.

23In 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.

24Significant is defined as 5 percent of the actual certified amount for
the quarter.

           B. Perform the following procedures on IRS's AATF 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 total on the precertification letter
                        to determine if it is mathematically correct.

                        Description of findings and results

                        The total on the precertification letter was
                        mathematically correct.

                        3. Trace the amounts for tax on transportation of
                        persons by air (abstract 26), tax on the use of
                        international air facilities (abstract 27), tax on
                        transportation of property by air (abstract 28), and
                        tax on aviation fuel for commercial use (abstract
                        77)25 from the precertification letter back to the
                        Report of Excise Tax Collection and the Treasury 90
                        Report.

                        Description of findings and results

                        The amounts for tax on transportation of persons by
                        air (abstract 26), tax on the use of international
                        air facilities (abstract 27), tax on transportation
                        of property by air (abstract 28), and tax on aviation
                        fuel for commercial use (abstract 77)  from the
                        precertification letter agreed with the related
                        Report of Excise Tax Collection and the Treasury 90
                        Report.

                        4. Compare the distribution rates used by IRS for tax
                        on transportation of persons by air (abstract 26),
                        tax on the use of international air facilities
                        (abstract 27), tax on transportation of property by
                        air (abstract 28), and tax on aviation fuel for
                        commercial use (abstract 77) with the applicable
                        laws.

                        Description of findings and results

                        The distribution rates used by IRS for tax on
                        transportation of persons by air (abstract 26), tax
                        on the use of international air facilities (abstract
                        27), tax on transportation of property by air
                        (abstract 28), and tax on aviation fuel for
                        commercial use (abstract 77) 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
                        significant26 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
                        significant27 returns from the precertification. If
                        so, report (1) the average amount of AATF-related
                        excise taxes from these taxpayers' returns that were
                        included in IRS's certification from the four
                        previous quarters and (2) the amount of AATF-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.

25 The certified amounts for tax on transportation of persons by air
(abstract 26), tax on the use of international air facilities (abstract
27), tax on transportation of property by air (abstract 28), and tax on
aviation fuel for commercial use (abstract 77) made up over 88 percent of
the precertified total to the AATF.

           V. Procedures performed on excise tax distributions to the AATF
           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 estimates28 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 table29 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 AATF 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 AATF for the quarter ended
                        September 30, 2005, were mathematically correct.

                        D. Trace the transfer amounts for tax on
                        transportation of persons by air (abstract 26), tax
                        on the use of international air facilities (abstract
                        27), tax on transportation of property by air
                        (abstract 28), and tax on aviation fuel for
                        commercial use (abstract 77)30 from the transfer
                        forms through the supporting schedules and back to
                        the related source documents.31

                        Description of findings and results

                        The transfer amounts for tax on transportation of
                        persons by air (abstract 26), tax on the use of
                        international air facilities (abstract 27), tax on
                        transportation of property by air (abstract 28), and
                        tax on aviation fuel for commercial use (abstract 77)
                        from the transfer forms agreed with the supporting
                        schedules and source documents for the semimonthly
                        transfers affecting distributions to the AATF 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 AATF 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 fiscal year 2005 excise taxes
                        distributed to the AATF was $10,314,521,000.

                        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 class32 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
                                     reconciliations33 and determine whether
                                     IRS-reported revenue receipts were
                                     properly classified and materially34
                                     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 agreed with
                                     Treasury FMS records. Total refunds
                                     reported by selected IRS service center
                                     campuses through the monthly Treasury
                                     FMS 224 reconciliation process
                                     materially agreed with 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.

26For this procedure, "significant" is defined as $45 million. This
represents approximately 2 percent of the precertified total to the AATF.

27For 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
AATF with liabilities equal to or greater than $10 million have, in the
aggregate, historically accounted for over 85 percent of distributions
certified to AATF.

28OTA 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
AATF.

29OTA 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.

30The transfer amounts for tax on transportation of persons by air
(abstract 26), tax on the use of international air facilities (abstract
27), tax on transportation of property by air (abstract 28), and tax on
aviation fuel for commercial use (abstract 77) made up over 96 percent of
the total amount transferred to AATF for the fourth quarter of fiscal year
2005.

31The 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.

32IRS assigns a tax class number to specific types of taxes. Excise taxes
are tax class 4.

33At 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.

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 to be collected by IRS in fiscal year 2005.

(196034)

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

GAO's Mission

The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting its
constitutional responsibilities and to help improve the performance and
accountability of the federal government for the American people. GAO
examines the use of public funds; evaluates federal programs and policies;
and provides analyses, recommendations, and other assistance to help
Congress make informed oversight, policy, and funding decisions. GAO's
commitment to good government is reflected in its core values of
accountability, integrity, and reliability.

Obtaining Copies of GAO Reports and Testimony

The fastest and easiest way to obtain copies of GAO documents at no cost
is through GAO's Web site ( www.gao.gov ). Each weekday, GAO posts newly
released reports, testimony, and correspondence on its Web site. To have
GAO e-mail you a list of newly posted products every afternoon, go to
www.gao.gov and select "Subscribe to Updates."

Order by Mail or Phone

The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent of
Documents. GAO also accepts VISA and Mastercard. Orders for 100 or more
copies mailed to a single address are discounted 25 percent. Orders should
be sent to:

U.S. Government Accountability Office 441 G Street NW, Room LM Washington,
D.C. 20548

To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
512-6061

To Report Fraud, Waste, and Abuse in Federal Programs

Contact:

Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail: [email protected]
Automated answering system: (800) 424-5454 or (202) 512-7470

Congressional Relations

Gloria Jarmon, Managing Director, [email protected] (202) 512-4400 U.S.
Government Accountability Office, 441 G Street NW, Room 7125 Washington,
D.C. 20548

Public Affairs

Paul Anderson, Managing Director, [email protected] (202) 512-4800 U.S.
Government Accountability Office, 441 G Street NW, Room 7149 Washington,
D.C. 20548
*** End of document. ***