Applying Agreed-Upon Procedures: Federal Unemployment Taxes	 
(03-NOV-06, GAO-07-130R).					 
                                                                 
We performed the procedures which we agreed to perform and with  
which the Department of Labor (DOL) concurred soley to assist the
DOL in ascertaining whether the net federal unemployment tax	 
(FUTA) revenue distributed to the Unemployment Trust Fund (UTF)  
for the fiscal year ended September 30, 2006, is supported by the
underlying records. The procedures we agreed to perform relate to
(1) transactions that represent underlying basis of amounts	 
distributed to the UTF and (2) key reconciliations of the	 
Internal Revenue Service records to the Department of the	 
Treasury Records.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-130R					        
    ACCNO:   A62924						        
  TITLE:     Applying Agreed-Upon Procedures: Federal Unemployment    
Taxes								 
     DATE:   11/03/2006 
  SUBJECT:   Federal taxes					 
	     Funds management					 
	     Auditing procedures				 
	     Financial records					 
	     Financial statement audits 			 
	     Trust funds					 
	     Policies and procedures				 
	     Treasury Unemployment Trust Fund			 

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GAO-07-130R

     

     * 130 enclosure.pdf
          * IV. Other procedures performed as part of the fiscal year 20
     * end of correspond & Test.pdf
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November 3, 2006

The Honorable Gordon S. Heddell

Inspector General

Department of Labor

Subject: Applying Agreed-Upon Procedures: Federal Unemployment Taxes

Dear Mr. Heddell:

We have performed the procedures contained in the enclosure to this
report, which we agreed to perform and with which you concurred, solely to
assist your office in ascertaining whether the net federal unemployment
tax (FUTA) revenue distributed to the Unemployment Trust Fund (UTF) for
the fiscal year ended September 30, 2006, is supported by the underlying
records. As agreed with your office, we evaluated fiscal year 2006
activity affecting distributions to the UTF.

In performing the agreed-upon procedures, we conducted our work in
accordance with U.S. generally accepted government auditing standards,
which incorporate financial audit and attestation standards established by
the American Institute of Certified Public Accountants. These standards
also provide guidance for performing and reporting the results of
agreed-upon procedures.

The adequacy of the procedures to meet your objectives is your
responsibility, and we make no representation in that respect. The
procedures we agreed to perform relate to (1) transactions that represent
the underlying basis of amounts distributed to the UTF and (2) key
reconciliations of the Internal Revenue Service records to the Department
of the Treasury records. The enclosure contains the agreed-upon procedures
and our findings from performing each of the procedures.

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

October 26, 2006.

We provided a draft of this report to IRS for review and comment. IRS
agreed with the results and findings presented in this report.

This report is intended solely for the use of the Office of Inspector
General of the Department of Labor and should not be used by those who
have not agreed to the procedures and have not taken responsibility for
the sufficiency of the procedures for their purposes. However, this report
is a matter of public record, and its distribution is not limited. Copies
are available to others upon request. This report is also available at no
charge on GAO's Web site at http://www.gao.gov. If you have any questions,
please call me at (202) 512-3406. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report.

Sincerely yours,

Steven J. Sebastian

Director

Financial Management and Assurance

Enclosure

                Federal Unemployment Tax Procedures and Results

I. Procedures on detailed transactions

A. Obtain from the Internal Revenue Service (IRS) total Federal
Unemployment Tax (FUTA) collections and refunds reflecting the first 8
months of fiscal year 2006 posted to the master file.1 Compare FUTA
collections and refund data per the master file to determine if they agree
in all material respects2 to IRS's general ledger.

Description of findings and results

Total FUTA collections and refunds for the first 8 months of fiscal year
2006 per IRS's master file materially agreed with IRS's general ledger.

           B. Use dollar unit sampling (DUS) to select a sample of combined
           FUTA collection and refund transactions from the master file for
           the first 8 months of fiscal year 2006, using a confidence level
           of 80 percent, a test materiality of $465 million, and an expected
           aggregate error amount of $140 million.

Description of findings and results

Use of DUS with a confidence level of 80 percent, a test materiality of
$465 million, and an expected aggregate error amount of $140 million
resulted in a sample of 38 transactions for the first 8 months of fiscal
year 2006. All of the 38 transactions represented FUTA collections.3

C. For each sampled FUTA tax collection transaction:

           1. Trace collection transaction amounts from IRS's master files to
           supporting documents (e.g., federal tax deposit coupons) to
           determine whether collection amounts are accurately recorded.

           Description of findings and results

           Based on supporting documentation, collection amounts were
           accurately recorded for all 38 sampled FUTA collection
           transactions.

           2. Compare the date in the master file with the date on source
           documents to determine whether amounts were recorded to the
           appropriate period.

           Description of findings and results

           Based on supporting documentation, collection amounts were
           recorded to the appropriate period for all 38 sampled FUTA
           collection transactions.

           3. Inspect source documentation maintained in IRS's files (e.g.,
           tax returns) to determine whether the transactions were properly
           classified as FUTA receipts.

           Description of findings and results

           Based on supporting documentation, collection amounts were
           recorded in the correct tax class4 for all 38 sampled FUTA
           collection transactions.

           4. Confirm FUTA transactions paid via the Electronic Federal Tax
           Payment System (EFTPS)5 to determine whether the recorded
           transactions are valid and reflect the proper amounts, are applied
           to the proper tax period, and are properly classified as FUTA
           receipts.

           Description of findings and results

           Of the 38 sampled FUTA collection transactions, 32 were paid via
           EFTPS. The bank confirmation showed that all 32 transactions were
           valid and had been recorded to the proper tax period and tax class
           and for the proper amounts.

1The master file is a detailed database containing taxpayer information.

2For this procedure, "material" is defined as $465 million. This
represents 1 percent of net Unemployment Trust Fund collections for fiscal
year 2005.

3Consequently, procedures agreed to regarding refund transactions are not
applicable.

II. Analytical procedures

           A. Perform a predictive test on FUTA revenue collections and
           refunds for the final 4 months of fiscal year 2006 and determine
           whether the predicted FUTA collection and refund amounts vary
           materially6 from the actual FUTA revenue collection and refund
           amounts per IRS's records for this period.

           Description of findings and results

           The predicted FUTA revenue collection and refund data amounts for
           the final 4 months of fiscal year 2006 did not materially vary
           from the amounts for revenue collections and refunds per IRS's
           records for this period.

4IRS assigns a tax class number to specific types of taxes. FUTA taxes are
tax class 8.

5EFTPS is a Financial Management Service system maintained by two
financial agents for the government. EFTPS is used for initiating tax
payments electronically. Employers who make federal tax deposits exceeding
$200,000 must use EFTPS to pay their FUTA taxes. The $200,000 threshold
includes all federal tax deposits, such as deposits for employment tax,
excise tax, and corporate income tax. Taxpayers who are not required to
make electronic deposits may voluntarily participate in EFTPS.

6For this procedure, "material" is defined as $465 million.

III. Other FUTA procedures

A. For each of the 12 months in fiscal year 2006, obtain supporting
documentation for monthly revenue reclassification adjustments transmitted
by IRS to the Financial Management Service (FMS). Compare the supporting
documentation with the reclassification adjustments transmitted to FMS.

Description of findings and results

Documentation was consistent with the monthly FUTA reclassification
adjustment amount transmitted to FMS for all 12 months of fiscal year
2006.

           B. For each of the 12 months in fiscal year 2006, obtain
           supporting documentation for the monthly entry of FUTA refund data
           into the Government Online Accounting Link System (GOALS) to
           charge back the Unemployment Trust Fund (UTF) account for FUTA tax
           refunds issued. Compare the supporting documentation with the
           monthly entries reported on GOALS.

           Description of findings and results

           Documentation was consistent with the monthly FUTA refund amount
           entered into GOALS to charge the UTF for FUTA tax refunds issued
           for all 12 months of fiscal year 2006.

           C. Compare fiscal year 2006 net FUTA collections per IRS's draft
           statement of custodial activity and related footnote disclosures
           to (1) the Department of the Treasury's Bureau of the Public Debt
           (BPD) accounting records for the UTF and (2) drafts of the
           Department of Labor's (DOL) consolidated financial statements to
           determine whether any significant7 variances exist.

           Description of findings and results

           There were no significant variances between net FUTA collections
           per IRS's draft statement of custodial activity and BPD's
           accounting records for UTF. Similarly, there were no significant
           variances between IRS's draft statement of custodial activity and
           related footnote disclosures and drafts of DOL's fiscal year 2006
           consolidated financial statements.

7For this procedure, "significant" is defined as $465 million.

  IV. Other procedures performed as part of the fiscal year 2006 IRS financial
                                statement audit

A. From IRS's master files for the first 8 months of fiscal year 2006, use
DUS to select statistical samples of (1) total tax revenue receipts and
(2) refunds. For each sample item, compare the receipt or refund amount,
tax period, and tax class from source documentation with those recorded in
IRS's master files.

Description of findings and results

The receipt or refund amount, tax period, and tax class from source
documents for 156 revenue receipts and 53 refund sample transactions were
consistent with amounts recorded in IRS's master files.

B. Obtain selected IRS service center campuses' monthly Department of the
Treasury FMS 224 reconciliations8 and determine whether IRS-reported
revenue receipts and refunds were materially reconciled9 to Department of
the Treasury (Treasury) FMS records.

Description of findings and results

Tax revenue receipts and refunds reported by selected IRS service center
campuses through the monthly Treasury FMS 224 reconciliation process
materially reconcile to Treasury FMS records.

           C. Compare tax revenue receipt balances by tax class, including
           FUTA, and total refund balances recorded in IRS's general ledger
           with the master files and Treasury records to determine if they
           agree in all material respects.

           Description of findings and results

           Tax receipt balances for all tax classes, including FUTA, and
           total refund balances per IRS's general ledger materially agreed
           with IRS's master files and Treasury records.

(196089)

8At the end of each month, each IRS campus provides Department of the
Treasury its FMS 224 (Statement of Transactions) generated from IRS's
general ledger, reporting receipts and refunds journalized during the
month. The Department of the Treasury reconciles the amounts on the FMS
224 with its records and provides IRS a Statement of Differences for any
differences identified.

9For the purpose of this procedure and procedure IV.C, we define
"material" as $23 billion. This represents 1 percent of the estimated
gross tax revenue receipts to be collected by IRS in fiscal year 2006.

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