Applying Agreed-Upon Procedures: Highway Trust Fund Excise Taxes 
(03-NOV-06, GAO-07-131R).					 
                                                                 
We have performed procedures, which we agreed to perform and with
which the Department of Transportation (DOT) concurred, solely to
assist the office of the Inspector General in ascertaining	 
whether the net excise tax revenue distributed to the Highway	 
Trust Fund (HTF) for the fiscal year ended September 30, 2006, is
supported by the underlying records. As agreed with DOT, we	 
evaluated fiscal year 2006 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 DOT objectives
is DOT's responsibility, and we make no representation in that	 
respect. The procedures we agreed to perform were related to (1) 
detailed tests of transactions that represent the underlying	 
basis of amounts distributed to the HTF, (2) Internal Revenue	 
Service's (IRS) quarterly HTF certifications, (3) Department of  
the Treasury's Financial Management Service adjustments to the	 
HTF during fiscal year 2006, (4) IRS's precertification of	 
receipts for each quarter completed in fiscal year 2006, (5)	 
certain procedures of the Department of the Treasury's Office of 
Tax Analysis' (OTA) process for estimating amounts to be	 
distributed to the HTF for the fourth quarter of fiscal year	 
2006, and other procedures related to (6) the net amount of	 
fiscal year 2006 excise taxes distributed to the HTF, (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 from performing each of the procedures.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-131R					        
    ACCNO:   A62925						        
  TITLE:     Applying Agreed-Upon Procedures: Highway Trust Fund      
Excise Taxes							 
     DATE:   11/03/2006 
  SUBJECT:   Allocation (Government accounting) 		 
	     Auditing procedures				 
	     Auditing standards 				 
	     Excise taxes					 
	     Fund audits					 
	     Trust funds					 
	     Highway Trust Fund 				 

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GAO-07-131R

     

     * 131 enclosure.pdf
          * Procedures on IRS's quarterly HTF receipt certifications
          * The FMS adjustments made to the HTF accounts (Highway and Ma
               * Procedures on IRS's HTF precertification for the quarters en
                    * Other procedures
     * end of correspond & Test.pdf
          * PDF6-Ordering Information.pdf
               * Order by Mail or Phone

November 3, 2006

The Honorable Todd J. Zinser

Acting Inspector General

Department of Transportation

Subject: Applying Agreed-Upon Procedures: Highway Trust Fund Excise Taxes

Dear Mr. Zinser:

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, 2006, is supported by the underlying records. As agreed with
your office, we evaluated fiscal year 2006 activity affecting
distributions to the HTF.

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

The adequacy of the procedures to meet your objectives is your
responsibility, and we make no representation in that respect. The
procedures we agreed to perform were related to (1) detailed tests of
transactions that represent the underlying basis of amounts distributed to
the HTF, (2) Internal Revenue Service's (IRS) quarterly HTF
certifications, (3) Department of the Treasury's Financial Management
Service adjustments to the HTF during fiscal year 2006, (4) IRS's
precertification1 of receipts for each quarter completed in fiscal year
2006, (5) certain procedures of the Department of the Treasury's Office of
Tax Analysis' (OTA) process for estimating amounts to be distributed to
the HTF for the fourth quarter of fiscal year 2006, and other procedures
related to (6) the net amount of fiscal year 2006 excise taxes distributed
to the HTF, (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 from performing each of the procedures.

1 To accommodate the Department of Transportation's accelerated reporting
date for fiscal year 2006, 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 perform, and did not perform, an audit, the
objective of which would have been the expression of an opinion on the
amount of net excise taxes distributed to the HTF. Accordingly, we do not
express such an opinion. Had we performed additional procedures, other
matters might have come to our attention that would have been reported to
you.2 We completed the agreed-upon procedures on October 25, 2006.

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, 2006. 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, 2006.

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

2 In our report on the results of our audit of IRS's fiscal year 2005
financial statements, we noted a material weakness in IRS's financial
reporting process (GAO, Financial Audit: IRS's Fiscal Years 2005 and 2004
Financial Statements, GAO-06-137, [Washington, D.C.: Nov. 10, 2005]). 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 2006

                        A. Nonstatistical selection of tax returns from the
                        quarters ended June 30, 2005, and September 30, 20053

                                     1. For each of the quarters ending June
                                     30, 2005, and September 30, 2005, 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, 2005, was approximately $9.7
                                     billion, or 65 percent of the total
                                     excise tax liability amount of $15
                                     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, 2005, was approximately
                                     $9.8 billion, or 65 percent of the total
                                     excise tax liability amount of $15
                                     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, 2005, and September 30,
                                     2005, we performed the following
                                     procedures, which encompassed
                                     approximately $15 billion in prorated
                                     collections6 affecting fiscal year 2006
                                     distributions to the HTF:

                                        (a) Trace the liability amount for
                                        abstracts7 60 and 62 from the tax
                                        return to IRS's master file.

                                        Description of findings and results

                                        The liability amount for abstracts 60
                                        and 62 on the tax return agreed with
                                        the master file for 41 of the 42
                                        returns. For one tax return for the
                                        quarter ended September 30, 2005, the
                                        taxpayer reported a credit for
                                        abstract 62, but the IRS did not have
                                        the supporting documentation to
                                        substantiate the credit. As a result,
                                        the prorated collection amount in the
                                        Collection Certification System may
                                        be overstated by $363,000 for
                                        abstract 62 and $107,000 for abstract
                                        60.

                                        (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 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 two
                                        selected abstracts agreed with the
                                        amounts in IRS's Collection
                                        Certification System for all 42
                                        returns.

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

                        December 31, 2005, and March 31, 2006

                                     1. Sampling

                                        (a) Obtain excise tax collection data
                                        from the master file for the first
                                        two quarters of fiscal year 2006.
                                        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 2006 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 77 of the 78 sample items,
                                        assessments and receipts from the
                                        master file were contained in the
                                        Collection Certification System. For
                                        one sample item, the tax liability
                                        associated with the tax return was
                                        abated,11 however, the assessment
                                        amount of $18,000 for abstract 71 was
                                        not abated and, therefore, was
                                        incorrectly included in the
                                        Collection Certification System.

                                        (c) Sum the prorated collections for
                                        selected abstracts12 from the audit
                                        files and compare these amounts to
                                        amounts in the Report of Excise Tax
                                        Collection13  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
                                        $379 million, and an expected
                                        aggregate error amount of $114
                                        million.

                                        Description of findings and results

                                        Use of DUS with a confidence level of
                                        80 percent, a test materiality of
                                        $379 million, and an expected
                                        aggregate error amount of $114
                                        million resulted in a sample of 9414
                                        prorated collections for the HTF for
                                        the first

                                        two quarters of fiscal year 2006.

                                        (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 $103
                                        million, and an expected aggregate
                                        error amount of $31 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
                                        $103 million, and an expected
                                        aggregate error amount of $31 million
                                        resulted in a sample of 6615 prorated
                                        collections for the AATF for the
                                        first two quarters of fiscal year
                                        2006.

                                        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.16

                                     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
                                        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 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 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.17

                                     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).

           Description of findings and results

           For the first 6 months of fiscal year 2006, the net most likely
           error is $0 with an upper error limit of $228 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, 2005, December
           31, 2005, and March 31, 2006:

                        A. Inspect the certification letters18 for
                        authorizing signatures.

                        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 diesel fuel tax
                        (abstract 60) and gasoline tax (abstract 62)19 from
                        the certification letters back to the Report of
                        Excise Tax Collection20 and the Treasury 90 Report.21

                        Description of findings and results

                        The certified amounts for diesel fuel tax (abstract
                        60) and gasoline tax (abstract 62) from the
                        certification letters agreed with the related Report
                        of Excise Tax Collection and the Treasury 90 Report
                        for the quarters ended September 30, 2005, and
                        December 31, 2005. For the quarter ended March 31,
                        2006, the certified amounts for abstracts 60 and 62
                        from the certification letters agreed with the Report
                        of Excise Tax Collection but not with the Treasury 90
                        Report. In deriving the certified amounts for
                        abstracts 60 and 62 for that quarter, IRS deducted
                        the incorrect amount of credits from the

                        Treasury 90 Report. This resulted in a $15,398,992
                        understatement of the amount certified to the HTF for
                        the quarter ended March 31, 2006.

                        E. Compare the distribution rates used by IRS for
                        diesel fuel tax (abstract 60) and gasoline tax
                        (abstract 62) with the applicable laws.22

                        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 all
                        three quarters.

                        F. Inspect the Report of Excise Tax Collection used
                        in the certification to determine if it contains
                        significant23 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.24

                                     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.

           III. Procedures on Financial Management Service adjustments

           Perform the following steps on Financial Management Service (FMS)
           adjustments to HTF excise tax distributions for the quarters ended
           June 30, 2005, September 30, 2005, December 31, 2005, and March
           31, 2006:

                        A. Compare the FMS adjustments made to the HTF with
                        original Office of Tax Analysis (OTA) estimates and
                        IRS-certified amounts, and with the supporting
                        schedules.25

3 Since 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 (Treasury) Financial Management Service for
the quarters ended June 30, 2005, and September 30, 2005, were completed
in December 2005 and March 2006, respectively, and thus affected
distributions to the HTF during fiscal year 2006.

4 Although 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.

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

6 IRS 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 kerosene 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 kerosene tax.

7 The 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) diesel fuel tax (abstract 60) and (2) 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 travel facilities (abstract 27), and (3) tax on
transportation of property by air (abstract 28). The tax amounts related
to the selected abstracts for each trust fund are the largest tax amounts
reported on the taxpayer's excise tax return and made up over 83 percent
of the total amount certified to the HTF and over 90 percent of the total
amount certified to the AATF for the quarters ended June 30, 2005, and
September 30, 2005.

8 The Collection Certification System produces what IRS refers to as audit
files. These audit files contain individual prorated collections by
abstract and taxpayer identification number. The certified amounts to the
trust funds are calculated by subtracting credits from prorated
collections and then multiplying the difference by the applicable trust
fund distribution rates.

9 For 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, 2005, and March 31, 2006. For fiscal year 2006, the
materiality amount was $236 million for the two quarters combined.

10 For 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.

11 Abatements are reductions in the amount of taxes owed and can occur for
a variety of reasons, such as to correct errors made by IRS or taxpayers
or to provide relief from interest and penalties. 26 U.S.C. S: 6404.

12 The selected abstracts are (1) diesel fuel tax (abstract 60), (2)
gasoline tax (abstract 62), (3) tax on transportation of persons by air
(abstract 26), (4) tax on the use of international air travel facilities
(abstract 27), (5) tax on transportation of property by air (abstract 28),
and (6) tax on kerosene for use in commercial aviation (abstract 77). The
tax amounts for the two HTF-related abstracts made up over 86 percent of
the total amount certified to the HTF and the tax amounts for the four
AATF-related abstracts made up over 99 percent of the total amount
certified to the AATF for the quarters ended December 31, 2005, and March
31, 2006.

13 The Report of Excise Tax Collection contains prorated collections,
classified by abstracts, that serve as the basis for IRS's quarterly trust
fund certifications.

14 The planned sample size using DUS was 145 items. DUS selects dollars
instead of specific transaction items by dividing the population by dollar
intervals. The dollar interval for the HTF was $137 million. Accordingly,
any item with a dollar value equal to 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 $274 million would
cover two dollar intervals, but represent one sample item. Due to
large-dollar items covering more than one interval, the 94 unique sampled
transactions selected represent 145 dollar intervals.

15 The planned sample size using DUS was 136 items. As explained in
footnote 14, DUS selects dollars instead of specific transaction items by
dividing the population by dollar intervals. The dollar interval for the
AATF was $37 million. Because large-dollar items cover more than one
interval, the 66 unique sampled transactions represent 136 dollar
intervals.

16 For 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.

17 The 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.

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

19 The certified amounts for diesel fuel tax (abstract 60) and gasoline
tax (abstract 62), along with the heavy vehicle use tax (traced
separately), made up over 87 percent of the total amount certified to the
HTF for the quarters ended September 30, 2005, December 31, 2005, and
March 31, 2006.

20 IRS 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.

21 The 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.

22 IRS 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.

23 For this procedure, "significant" is defined as $175 million, which
represents approximately 2 percent of the total amount certified to the
HTF for the quarters ended September 30, 2005, December 31, 2005, and
March 31, 2006.

24 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 FMS adjustments made to the HTF accounts (Highway and Mass Transit) agreed
with the original OTA estimates and IRS-certified amounts, and with the
supporting schedules, for all four 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 four quarters. These
           amounts were26

                        o  ($162,439,000) for the quarter ended June 30,
                        2005;
                        o  $388,440,000 for the quarter ended September 30,
                        2005;
                        o  ($321,139,000) for the quarter ended December 31,
                        2005; and
                        o  $2,248,000 for the quarter ended March 31, 2006.

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

                        o  ($64,407,000) for the quarter ended June 30, 2005;
                        o  ($20,809,000) for the quarter ended September 30,
                        2005;
                        o  ($74,917,000) for the quarter ended December 31,
                        2005; and
                        o  ($10,322,000) for the quarter ended March 31,
                        2006.

25An FMS accountant compiles this schedule, called the "Subsidiary
Quarterly Account of Estimates and Actual Related Excise 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.

26 A 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.

           IV. Procedures on IRS's HTF precertification for the quarters
           ended September 30, 2005, December 31, 2005, March 31, 2006, and
           June 30, 200627

                        A. Compare the precertified amount to the actual
                        amount certified to the HTF for the quarters ended
                        September 30, 2005, December 31, 2005, and March 31,
                        2006. If there is a significant variance,28 request
                        from the IRS 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 December 31, 2005, and March
                        31, 2006. For the quarter ended September 30, 2005,
                        there was a significant variance of $755 million.
                        $702 million of this was attributable to an error IRS
                        made on the precertification related to the heavy
                        vehicle use tax, which resulted in an understatement
                        of the total HTF precertified amount. Because IRS's
                        precertification is not an actual certification that
                        results in any redistributions of excise taxes among
                        the trust funds, this error did not have an effect on
                        fiscal year 2006 distributions to the HTF.

           B. Perform the following procedures on IRS's HTF precertification
           for the quarter ended June 30, 2006:

                        1. Inspect the precertification 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 precertification letters 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)29 from the
                        precertification letters back to the Report of Excise
                        Tax Collection and the Treasury 90 Report.

27 In order to accommodate the Department of Transportation's November 15
reporting date for fiscal year 2006, IRS performed precertifications of
excise tax receipts. The data in the precertification are for information
purposes only and do not represent an official certification for use in
adjusting the excise tax distributions to the HTF.

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

Description of findings and results

The precertified amounts for gasoline tax (abstract 62) from the
precertification letters agreed with the related Report of Excise Tax
Collection and Treasury 90 Report. The precertified amounts for diesel
fuel tax (abstract 60) from the precertification letters agreed with the
related Report of Excise Tax Collection but not with the Treasury 90
Report. In deriving the precertified amounts for abstract 60, the IRS
deducted the incorrect amount of credits from the Treasury 90 Report. This
resulted in an understatement of the precertified amount to the HTF for
the quarter ended June 30, 2006, of $88,363,365. Because IRS's
precertification is not an actual certification that results in any
redistributions of excise taxes among the trust funds, this error did not
have an effect on fiscal year 2006 distributions to the HTF.

           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 significant30
           collections from prior quarters.

29 The certified amounts for diesel fuel tax (abstract 60) and gasoline
tax (abstract 62) made up over 86 percent of the precertified amount to
the HTF for the quarter ended June 30, 2006.

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

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 significant31 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, 2005.

Description of findings and results

Our procedures did not identify any missing 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.

           V. Procedures performed on excise tax distributions to the HTF for
           the quarter ended September 30, 2006

                        A. Determine if OTA's process for identifying and
                        incorporating the effect of new legislation on excise
                        tax receipts into its trust fund estimates32 was in
                        place during the quarter ended September 30, 2006.

                        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, 2006. OTA
                        prepares a tax rate table33 to capture information
                        relating to legislation that affects tax rates, tax
                        basis, accounts, and deposit rules in effect during
                        the quarter.

                        B. Inspect the 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, 2006.

                        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, 2006, were mathematically correct.

                        D. Trace the transfer amounts for diesel fuel tax
                        (abstract 60), gasoline tax (abstract 62), and heavy
                        vehicle use tax34 from the transfer forms through the
                        supporting schedules and back to the related source
                        documents.35

                        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, 2006.

           VI. Other procedures

                        A. Using IRS's quarterly certifications, OTA's
                        estimated distributions, and any adjustments, report
                        excise taxes distributed to the HTF in fiscal year
                        2006.

                        Description of findings and results

                        Based on a compilation of IRS's quarterly
                        certifications, OTA's estimated distributions, and
                        adjustments, the net amount of excise taxes
                        distributed to the HTF in fiscal year 2006 was
                        $38,754,503,680.

                        B. Procedures performed as part of the fiscal year
                        2006 IRS financial statement audit:

                                     1. 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
                                     collection or refund amount, tax period,
                                     and tax class36 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.

                                     2. Obtain selected IRS service center
                                     campuses' monthly Department of the
                                     Treasury (Treasury) FMS 224
                                     reconciliations37 and determine whether
                                     IRS-reported revenue receipts and
                                     refunds were materially reconciled38 to
                                     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.

                                     3. Compare tax revenue receipt balances
                                     by tax class, including excise taxes,
                                     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 excise taxes, and
                                     total refund balances per IRS's general
                                     ledger materially agreed with IRS's
                                     master files and Treasury records.

31 For 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.

32 OTA makes semimonthly estimates of excise tax collections for transfer
to trust funds. There are five semimonthly estimates for the quarter ended
September 30, 2006, which affect fiscal year 2006 distributions to the
HTF.

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

34 The transfer amounts for diesel fuel tax (abstract 60), gasoline tax
(abstract 62), and heavy vehicle use tax made up over 91 percent of the
total amount transferred to the HTF for the fourth quarter of fiscal year
2006.

35 The 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.

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

37 At 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.

38 For the purpose of this procedure and procedure VI.B.3, 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.

(196090)

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