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entitled 'Applying Agreed-Upon Procedures: Airport and Airway Trust 
Fund Excise Taxes' which was released on November 20, 2003.

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November 21, 2003:

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, 2003, is supported by the underlying 
records. As agreed with your office, we evaluated fiscal year 2003 
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 include (1) detailed tests of 
transactions that represent the underlying basis of amounts distributed 
to the AATF, (2) review of the Internal Revenue Service's (IRS) 
quarterly AATF certifications, (3) review of the Department of the 
Treasury Financial Management Service (FMS) adjustments to the AATF for 
fiscal year 2003, (4) review of IRS's precertification[Footnote 1] of 
receipts for the third quarter of fiscal year 2003 (5) review of 
certain procedures of the Department of the Treasury Office of Tax 
Analysis' (OTA) estimation procedures affecting excise tax 
distributions to the AATF for the fourth quarter of fiscal year 2003, 
and other procedures including (6) the comparison of net excise tax 
distributions to the AATF during fiscal year 2003 and amounts reported 
in the draft financial statements prepared by the Bureau of the Public 
Debt (BPD) for the AATF and the Federal Aviation Administration's (FAA) 
draft consolidated financial statements, (7) detailed tests of 
transactions that represent total IRS tax revenue receipts and refunds, 
and (8) review of key reconciliations of IRS records to 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 
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.[Footnote 2] We completed the agreed-upon procedures on 
November 7, 2003.

We provided a draft of this report to IRS and OTA officials for review 
and comment. They agreed with the results and findings presented in 
this report. In response to our findings concerning errors in its 
estimates, OTA stated that it has instituted additional internal 
control procedures to promptly detect and correct any future errors.

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 
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 Internet 
site at http://www.gao.gov. If you have any questions, please call me 
at (202) 512-3406.

Sincerely yours,

Steven J. Sebastian:

Director:

Financial Management and Assurance:

Signed by Steven J. Sebastian:

Enclosure:

[End of section]

Airport and Airway Trust Fund Excise Tax Procedures and Results:

I. Detailed tests of transactions that represent the underlying basis 
of amounts distributed to the AATF in fiscal year 2003:

A. Nonrepresentative selection of tax returns from the quarter ended 
September 30, 2002[Footnote 3]

1. For the quarter ending September 30, 2002, 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[Footnote 4] amount, from IRS's master file.[Footnote 5]

Description of findings and results:

We selected the 30 largest excise tax returns related primarily to the 
AATF and the HTF from the quarter ended September 30, 2002, for 
testing. The selection was based on the total tax liability amount and 
type of taxes owed, for each return, from IRS's master file.

The total tax liability amount related to these 30 returns was 
approximately $8.6 billion, or 66 percent of the total excise tax 
liability amount-$13 billion-for all excise tax types for the quarter 
ended September 30, 2002.

Of these 30 returns, 8 contained primarily AATF-related taxes and 22 
contained primarily HTF taxes.

2. For each of the 8 returns related primarily to the AATF, we 
performed the following procedures, which resulted in our testing 
approximately $1.5 billion in prorated collections[Footnote 6] 
affecting fiscal year 2003 distributions to the AATF:

a. Trace the liability amount for abstracts[Footnote 7] 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 IRS's master file for 8 of the 8 returns.

b. Check the mathematical accuracy of the taxpayer's calculations on 
the tax return for the selected abstracts.

Description of findings and results:

The taxpayer's calculations on all 8 returns were mathematically 
correct.

c. Recompute 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 
file.[Footnote 8]

Description of findings and results:

The recomputed prorated collection amounts for the three selected 
abstracts agreed with amounts in IRS's Collection Certification System 
audit file for all 8 of the returns.

B. Dollar unit sample (DUS) of transactions from the quarters ended 
December 31, 2002, and March 31, 2003:

1. Sampling:

(a) Obtain excise tax assessments and collection data from IRS's 
master file for the first 6 months of fiscal year 2003. Determine if 
excise tax collections per the master file agree with IRS's general 
ledger. Reconcile total excise tax collections from the master file to 
total excise tax collections from the Collection Certification System 
audit files to determine if they materially[Footnote 9] agree.

Description of findings and results:

Excise tax collections for the first 6 months of fiscal year 2003 per 
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 
IRS's master file.[Footnote 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) To determine if the Collection Certification System properly 
summarized the prorated collections, total the prorated collections for 
selected abstracts[Footnote 11] from the audit files and compare these 
amounts to amounts in the Reports of Excise Tax Collection.[Footnote 
12]

Description of findings and results:

The Collection Certification System properly summarized the prorated 
collections for all of the selected abstracts related to the AATF and 
the HTF. Prorated collections for the above-mentioned trust funds from 
the audit files agreed with the corresponding amounts in the Reports 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.

Description of findings and results:

Use of DUS with a confidence level of 80 percent, a test materiality of 
$89 million, and an expected aggregate error amount of $26.7 million 
resulted in a sample of 67[Footnote 13] prorated collections for AATF 
for the first 6 months of fiscal year 2003.

(e) Select samples of prorated excise tax collections from the two non-
AATF populations.

Description of findings and results:

Use of DUS with a confidence level of 80 percent, a test materiality of 
$322 million, and an expected aggregate error amount of $96.6 million 
resulted in a sample of 96[Footnote 14] prorated collections for the 
first 6 months of fiscal year 2003 for the HTF.

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, was selected for testing.[Footnote 15]

2. Detailed tests of transactions:

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

Check to see that the assessment amount on the tax return, for the 
sampled abstract, agrees with the amount recorded in IRS's master file.

Description of findings and results:

The assessment amounts on the tax returns agreed with the amounts 
recorded in IRS's master file for 66 of the 67 sampled abstracts. For 
one sampled abstract, the IRS disallowed a credit but made a data entry 
error and entered the credit into the master file. As a result, IRS 
overstated prorated collections to the AATF by approximately $48,000.

Check the mathematical accuracy of the taxpayers' calculations on the 
tax returns for the related abstract.

Description of findings and results:

The taxpayers' calculations on the tax returns for the related 
abstracts were mathematically correct for all of the sampled abstracts.

Recompute 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 file.[Footnote 
16]

Description of findings and results:

The recomputed prorated collection, based on information from the 
master file, agreed with the amounts for all of the sampled items.

(b) Perform detailed testing on the two samples of prorated collections 
from the non-AATF populations to determine if they contain any AATF 
excise tax collections.

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 2003, the net most likely error 
is $282,000 with an upper error limit of $53 million at the 80 percent 
confidence level. Collections go through additional calculations to 
produce certification amounts for distribution. Consequently, the 
magnitude of the error cannot be quantified with respect to the impact 
on recorded distributions to the AATF.

II. Review of IRS's quarterly AATF certifications:

A. Receipt certifications:

Perform the following steps on IRS's AATF receipt certifications for 
the quarters ended September 30, 2002; December 31, 2002; and March 31, 
2003:

1. Inspect the certification letters for authorizing signatures.

Description of findings and results:

The certification letters for all three quarters had authorizing 
signatures.

2. Determine if evidence exists that the supervisor or another analyst 
checked the certification letters and supporting worksheets.

Description of findings and results:

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

3. Recalculate 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.

4. Trace the certified amounts for tax on transportation of persons by 
air (abstract 26), tax on 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)[Footnote 17] from the 
certification letters back to the Reports of Excise Tax 
Collection[Footnote 18]and Treasury 90 Report.[Footnote 19]

Description of findings and results:

The certified amounts for tax on transportation of persons by air 
(abstract 26), tax on 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) per the certification 
letters agreed with the related Reports of Excise Tax Collection for 
all three quarters.

However, on IRS's receipt certification for the quarter ended December 
31, 2002, the IRS analyst used excise tax credit information from the 
Treasury 90 Report for the quarter ended September 30, 2002, rather 
than the Treasury 90 Report for the quarter ended December 31, 2002. As 
a result, IRS overstated certified receipts to the AATF by 
approximately $6.4 million. IRS discovered the error after it had sent 
the certification letter to the FMS, and FMS had already recorded the 
true-up adjustment using the certification letter. IRS corrected this 
error on the receipt certification for the following quarter ended 
March 31, 2003. Therefore, this error had no net effect on fiscal year 
2003 distributions to the AATF.

5. Review the distribution rates used by IRS to determine whether the 
distribution rates for tax on transportation of persons by air 
(abstract 26), tax on 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) agree 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 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.

6. Review the Reports of Excise Tax Collection used in the certification 
to determine if they contain significant[Footnote 20] collections from 
prior quarters.

Description of findings and results:

The Reports of Excise Tax Collection supporting IRS's certification to 
AATF for the quarter ended September 30, 2002, contained approximately 
$43 million in AATF excise tax collections related to prior quarters. 
Of this amount, approximately $21 million was from the quarter ended 
June 30, 2002. IRS attributed this delay to one taxpayer who did not 
file timely and four tax returns with processing delays due to taxpayer 
or IRS errors.

The Reports of Excise Tax Collection supporting IRS's certification to 
AATF for the quarter ended December 31, 2002, contained approximately 
$66 million in AATF excise tax collections related to prior quarters. 
Of this amount, approximately $62 million was from the quarter ended 
September 30, 2002. IRS attributed this delay to two taxpayers who did 
not file timely and two tax returns with processing delays due to 
taxpayer or IRS errors.

The Reports of Excise Tax Collection supporting IRS's certification to 
the AATF for the quarter ended March 31, 2003, did not contain 
significant prior quarter collections.

B. Refund/credit reclassification[Footnote 21]

Perform the following steps on IRS's AATF refund/credit certifications 
for the quarters ended December 31, 2002; March 31, 2003; June 30, 
2003; and September 30, 2003:[Footnote 22]

1. Inspect the certification letters for authorizing signatures.

Description of findings and results:

The certification letters for all four quarters had authorizing 
signatures.

2. Determine if evidence exists that a supervisor or another analyst 
reviewed:

the certification letters and accompanying schedules.[Footnote 23]

Description of findings and results:

There was evidence that another analyst and a supervisor checked the 
certification letters and accompanying schedules for all four quarters.

3. Recalculate the totals on the certification letters and accompanying 
schedules to determine if they are mathematically correct.

Description of findings and results:

The totals on the certification letters and accompanying schedules were 
mathematically correct for all four quarters.

4. Trace the refund and credit amount for aviation gas and aviation O/T 
gas[Footnote 24] from the schedules accompanying the certification 
letters to other summary refund/credit schedules. These other refund/
credit summary schedules summarize refund and credit data obtained from 
submission processing campuses' records.

Description of findings and results:

The refund and credit amounts for aviation gas and aviation O/T gas on 
the schedules accompanying the certification letters agreed with the 
amounts on the summary schedules for all four quarters.

III. Review of FMS adjustments:

Perform the following steps on FMS adjustments to AATF excise tax 
distributions for the quarters ended September 30, 2002; December 31, 
2002; and March 31, 2003:

A. Compare the FMS adjustments made to the AATF for fiscal year 2003 
with original OTA estimates and IRS-certified amounts to see if they 
agree with the supporting schedules.[Footnote 25]

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 schedule for all 
three quarters.

B. Recompute the difference between the OTA estimates and final IRS-
certified amounts to see if the amounts agree with the differences 
computed by FMS.

Description of findings and results:

The independently recalculated differences between the OTA estimates 
and the final IRS-certified amounts for the AATF agreed with the 
differences computed by FMS for all three quarters.

These amounts were[Footnote 26]

for the quarter ended September 30, 2002, ($44,195,000);

for the quarter ended December 31, 2002, ($27,813,000); and:

for the quarter ended March 31, 2003, $(9,845,000).

IV. Review of IRS precertification for the quarter ended June 30, 
2003[Footnote 27]

A. Determine if evidence exists that the supervisor or another analyst 
checked the results and supporting worksheets.

Description of findings and results:

There was evidence that another analyst and a supervisor checked the 
results and supporting worksheets.

B. Recalculate the totals on the precertification to determine if they 
are mathematically correct.

Description of findings and results:

The totals on the precertification were mathematically correct.

C. Trace the amounts for tax on transportation of persons by air 
(abstract 26), tax on 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)[Footnote 28] from 
the precertification back to the Reports of Excise Tax Collection and 
Treasury 90 Report.

Description of findings and results:

The amounts for tax on transportation of persons by air (abstract 26), 
tax on 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) per the precertification agreed 
with the related Reports of Excise Tax Collection and Treasury 90 
Report.

D. Review the distribution rates used by IRS to determine whether the 
distribution rates for tax on transportation of persons by air 
(abstract 26), tax on 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) agree with 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 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 ended June 30, 2003.

E. Review the Reports of Excise Tax Collection used in the 
precertification to determine if they contain significant[Footnote 29] 
collections from prior quarters.

Description of findings and results:

The Reports of Excise Tax Collection supporting IRS's precertification 
for the quarter ended June 30, 2003, did not contain significant prior 
quarter collections.

F. eview the Collection Certification System information to determine 
whether IRS omitted any significant returns[Footnote 30] 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, 2002.

Description of findings and results:

IRS did not omit any returns of historically significant excise tax 
taxpayers from its precertification to AATF.

V. Procedures performed on excise tax distributions to the AATF for the 
quarter ended September 30, 2003:

A. Determine if OTA's process for identifying and incorporating into 
its trust fund estimates[Footnote 31] the effect of new legislation on 
excise tax receipts was in place during fiscal year 2003.

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 fiscal year 2003. OTA prepares a tax rate table[Footnote 
32] to capture information relating to legislation that affects tax 
rates, tax basis, accounts, and deposit rules in effect during the tax 
period.

B. Determine if there is evidence of review of the transfer forms and 
supporting schedules.

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, 2003.

C. Recalculate 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, 2003, were mathematically correct.

D. Trace the transfer amounts for tax on transportation of persons by 
air (abstract 26), tax on 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),[Footnote 33] from the 
transfer forms, through the supporting schedules, and back to the 
related source documents.[Footnote 34]

Description of findings and results:

The transfer amounts for tax on transportation of persons by air 
(abstract 26), tax on 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 
did not agree with the supporting schedules and source documents on the 
first two semimonthly estimates affecting distributions to the AATF for 
the quarter ended September 30, 2003. An error on one of OTA's 
electronic spreadsheets resulted in the collection percentages for all 
tax types being miscalculated. After we brought this to its attention, 
OTA corrected the spreadsheet error so it did not affect the remaining 
estimates for the period. However, since the effect of this error on 
the total quarterly estimate would be only a fraction of a percent, OTA 
did not correct for the effects of this error on the two affected 
semimonthly estimates. Consequently, OTA understated its estimate for 
these four taxes to the AATF by approximately $1.1 million.

VI. Other procedures:

A. Compare total fiscal year 2003 excise taxes distributed to the AATF 
with drafts of (1) FAA's fiscal year 2003 consolidated financial 
statements and (2) BPD's fiscal year 2003 financial statements for the 
AATF to determine if they agree.

Description of findings and results:

The $8.8 billion of fiscal year 2003 excise taxes distributed to the 
AATF agreed with the amount reported on the draft FAA consolidated 
financial statements but did not agree with the amount on the BPD 
fiscal year 2003 financial statements for the AATF. The BPD fiscal year 
2003 financial statements for the AATF reported excise tax 
distributions to the AATF of $8.7 billion. The difference is due to 
FMS's $105 million downward adjustment for the quarter ended June 30, 
2002, which FMS recorded in December 2002. FAA's administrators 
included this transaction as part of the fiscal year 2002 distributions 
to the AATF because it had time to record the adjustment on its fiscal 
year 2002 financial statements, which were issued in January 2003. 
However, BPD included this transaction as part of the fiscal year 2003 
distributions because it was recorded after the November 1, 2002, 
issuance date of BPD's fiscal year 2002 financial statements for the 
AATF.

B. Procedures performed as part of the fiscal year 2003 IRS financial 
statement audit:

1. From IRS's master files for the first 8 months of fiscal year 2003, 
use DUS to select statistical samples of (1) total tax revenue 
receipts and (2) refunds. For each sample item, test that the 
collection or refund amount, tax period, and tax class[Footnote 35] 
from source documentation agree with those recorded in IRS's master 
files.

Description of findings and results:

Detailed testing of 169 revenue receipts and 50 refund sample 
transactions showed that the collection or refund amount, tax period, 
and tax class from source documents agreed with those recorded in IRS's 
master files.

2. Review selected submission processing campuses' monthly Treasury 
SF-224 reconciliations to determine if IRS-reported revenue receipts 
were properly classified and reconciled to Treasury FMS records. For 
refunds, review selected IRS submission processing campuses' monthly 
Treasury SF-224 reconciliations to determine if IRS-reported total 
refunds (all tax classes) were materially[Footnote 36] reconciled to 
Treasury FMS records.[Footnote 37]

Description of findings and results:

Tax revenue receipts reported by selected IRS submission processing 
campuses through the monthly Treasury SF-224 reconciliation process 
were properly classified and materially agreed with Treasury FMS 
records.

Total refunds reported by the selected IRS submission processing 
campuses through the monthly Treasury SF-224 reconciliation process 
materially agreed with Treasury FMS records.

3. Perform procedures to determine whether tax revenue receipt 
balances by tax class, including excise tax, per IRS's general ledger, 
materially agree with IRS master files and Treasury records. For 
refunds, perform a comparison of total refund balances between the 
master file, the general ledger, and Treasury records.

Description of findings and results:

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

Refund balances per IRS's general ledger materially agreed with the 
master file and with Treasury records.

(196004):

FOOTNOTES

[1] To accommodate the Department of Transportation's accelerated 
reporting date for fiscal year 2003, IRS performed a precertification 
of excise tax collections for the quarter ended June 30, 2003. The data 
are for information purposes only and the precertification does not 
constitute an official certification.

[2] In our report on the results of our audit of IRS's fiscal year 2003 
financial statements, we noted a material weakness in IRS's financial 
reporting process (U.S. General Accounting Office, Financial Audit: 
IRS's Fiscal Years 2003 and 2002 Financial Statements, GAO-04-126, 
November 13, 2003). A component of this process includes IRS's ability 
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. 

[3] Since certifications are not completed until 6 months after the end 
of the quarter, the certification and corresponding FMS adjustment for 
the quarter ended September 30, 2002, were completed in March 2003 and 
thus affected fiscal year 2003 distributions to the AATF.

[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 review 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 there are occasions in which taxpayers have 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.

[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 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 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 generally the 
largest tax amounts reported on the taxpayer's excise tax return and 
make up over 89 percent of the total amount certified to the AATF and 
over 86 percent of the total amount certified to the HTF each quarter.

[8] The 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 certified total amounts for each abstract.

[9] For the purpose of this reconciliation, material is defined as 1 
percent of the total Form 720-related excise tax collections, related 
to the quarters ended December 31, 2002, and March 31, 2003. For fiscal 
year 2003, the materiality amount was $203 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] The selected abstracts include the following: (1) tax on 
transportation of persons by air (abstract 26), (2) tax on 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 make up over 
95 percent of the total amount certified to the AATF and the tax 
amounts for the three HTF-related abstracts make up over 86 percent of 
the total amounts certified to the HTF each quarter.

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

[13] The planned sample size using DUS was 132 items. DUS selects 
dollars versus specific transaction items by dividing the population by 
dollar intervals. The dollar interval for the AATF was $33 million. 
Accordingly, any item with a dollar value matching or exceeding the 
sampling interval would be selected, whereas items less than the 
sampling interval might not be selected. For example, an item of $66 
million would cover two dollar-intervals, but represent one sample 
item. Due to large dollar items covering more than one interval, the 67 
unique sampled transactions selected represent 132 dollar-intervals.

[14] The planned sample size using DUS was 143 items. As explained in 
footnote 13, DUS selects dollars versus specific transaction items by 
dividing the population by dollar intervals. The dollar interval for 
the HTF was $118 million. Due to large dollar items covering more than 
one interval, the 96 unique sampled transactions selected represent 143 
dollar-intervals.

[15] For this sample, if no errors are found in testing the 45 items, 
we would be 90 percent confident that the error rate in the population 
would not exceed 5 percent.

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

[17] The certified amounts for tax on transportation of persons by air 
(abstract 26), tax on 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) make up over 95 percent 
of the total amount certified to the AATF each quarter.

[18] 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 recorded in IRS's master file during the processing 
interval covered by the report. The second of the two reports used may 
contain collections related to previous quarters not classified by 
abstract until the current quarter because the related return was not 
recorded on the master file until the current quarter.

[19] During fiscal year 2002, IRS changed its process of recording and 
summarizing excise tax credits related to taxpayers' Form 720 tax 
returns. As a result, IRS now obtains this excise tax credit 
information from the applicable Treasury 90 Report. The Treasury 90 
Report summarizes excise tax credit information and is produced 
quarterly by IRS submission processing campus systems. IRS has 10 
submission processing campuses that receive and process tax returns and 
payments.

[20] For this test, "significant" is defined as $40 million, which 
represents approximately 2 percent of the quarterly total certified to 
the AATF.

[21] IRS performs a quarterly reclassification of excise tax refunds 
and credits originally entered into its master file as a personal or 
corporate refund/credit. IRS refers to these reclassifications as 
"refund/credit certifications." These amounts do not represent the 
total excise tax refund/credit activity to the trust funds. Other 
routine excise tax refunds and credits (e.g., overpayments), which are 
claimed on taxpayers' Form 720 excise tax returns, are included in 
IRS's excise tax receipt certification to trust funds.

[22] In order to meet certain reporting deadlines, IRS-certified 
refunds and credits for the fourth quarter of fiscal year 2003 as of 
September 5, 2003. 

[23] IRS attaches a separate schedule to the AATF refund/credit 
certification letter that includes the detailed excise tax amounts that 
support the total amount shown on the letter. IRS compiles the amounts 
on these schedules from submission processing campus systems and its 
Interim Revenue Accounting Control System. IRS has 10 submission 
processing campuses that process tax returns and taxpayer receipts. 

[24] Aviation gas and aviation O/T gas are the only two excise taxes on 
the AATF refund/credit certification.

[25] An FMS accountant compiles this schedule, called "Subsidiary 
Quarterly Account of Estimates and Actual Related Taxes Appropriated to 
AATF." The schedule computes the difference between IRS certified 
amounts and the OTA estimate for excise taxes, individually and in 
total, that relate to the AATF. The schedule, along with OTA transfer 
forms and IRS certifications, supports 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. Since the adjustment amount is the 
difference between OTA's estimate and IRS's certified amount, it may be 
significantly affected by IRS's ability to certify receipts in the 
appropriate quarter.

[27] To accommodate the Department of Transportation's accelerated 
reporting date for fiscal year 2003, IRS performed a precertification 
of excise tax collections for the quarter ended June 30, 2003. The data 
are for information purposes only and the precertification does not 
constitute an official certification.

[28] The certified amounts for tax on transportation of persons by air 
(abstract 26), tax on 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) make up over 95 percent 
of the precertified total to the AATF.

[29] For this test, "significant" is defined as $40 million. This 
represents approximately 2 percent of the precertified total to the 
AATF.

[30] For this test, "significant returns" are defined as those from 
taxpayers 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 AATF from taxpayers with liabilities 
equal to or greater than $10 million have, in the aggregate, 
historically accounted for over 85 percent of distributions certified 
to the AATF.

[31] OTA makes semimonthly estimates of excise tax collections for 
transfer to trust funds. There are five semimonthly estimates for the 
quarter ended September 30, 2003, which affect fiscal year 2003 
distributions to the AATF.

[32] OTA communicates this information to interested parties at 
Treasury, the Federal Highway Administration, the Federal Transit 
Administration, and the Department of Transportation. IRS uses the tax 
and distribution rates from this table in its subsequent certification 
of collections to trust funds.

[33] The transfer amounts for tax on transportation of persons by air 
(abstract 26), tax on use of international air facilities (abstract 
27), tax on transportation of property by air (abstract 28), and tax 
aviation fuel for commercial use (abstract 77) make up over 96 percent 
of the total amount transferred to the AATF during the fourth quarter 
of fiscal year 2003.

[34] 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.

[35] IRS assigns a tax class number to specific types of taxes. Excise 
taxes are tax class 4.

[36] For the purpose of this procedure and procedure VI.B.3, we define 
material as $20 billion. This represents approximately 1 percent of the 
total tax revenue receipts collected by IRS in fiscal year 2003.

[37] IRS maintains records of refund balances by tax class in its 
master file and reports this information monthly to Treasury on the SF-
224. Treasury provides IRS with a Statement of Differences (TFS-6652), 
which reports differences between total refunds reported by IRS on the 
SF-224 and the total refunds per Treasury records.