GAO-04-212R Unemployment Trust Fund Procedures

United States General Accounting Office

Washington, DC 20548 

November 14, 2003 

The Honorable Gordon S. Heddell 

Inspector General 

Department of Labor 

Subject: Applying Agreed-Upon Procedures: Federal Unemployment Taxes

Dear Mr. Heddell: 

We have performed the procedures contained in the enclosure to this report, which 

we agreed to perform and with which you concurred, solely to assist your office in 

ascertaining whether the net federal unemployment tax (FUTA) revenue distributed 

to the Unemployment Trust Fund (UTF) for the fiscal year ended September 30, 2003, 

is supported by the underlying records. As agreed with your office, we evaluated 

fiscal year 2003 activity affecting distributions to the UTF. 

In performing the agreed-upon procedures, we conducted our work in accordance 

with 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 when 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 UTF and (2) review of key reconciliations of the Internal 

Revenue Service (IRS) records to the Department of the Treasury records. The 

enclosure contains the agreed-upon procedures and our findings from performing 

each of the procedures. 

We were not engaged to perform, and did not perform, an audit, the objective of 

which would have been the expression of an opinion on the net amount of FUTA 

taxes distributed to the UTF. Accordingly, we do not express such an opinion. Had 

we performed additional procedures, other matters might have come to our attention 

that would have been reported to you. We completed the agreed-upon procedures on 

October 31, 2003. 

We provided a draft of this report to IRS officials, along with its enclosure, for review 

and comment. They agreed with the results and findings presented in this report. In 

response to our finding concerning an error on monthly FUTA refund data entered 

into the Government Online Accounting Link System (GOALS), IRS stated that it has 
Page 2 GAO-04-212R Unemployment Trust Fund Procedures 

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 Labor and should not be used by those who have not agreed to the 

procedures and have not taken responsibility for the sufficiency of the procedures for 

their purposes. However, this report is a matter of public record and its distribution 

is not limited. Copies are available to others upon request. This report is also 

available at no charge on GAO’s home page 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 

Enclosure 
Enclosure 

Page 3 GAO-04-212R Unemployment Trust Fund Procedures 

Unemployment Trust Fund Procedures and Results

I. Detailed tests of transactions

A. Obtain from IRS total FUTA collections and refunds activity posted to the 

master file for the first 8 months of fiscal year 2003.1

 Determine if FUTA 

collections and refund data per the master file materially reconcile to the 

general ledger.2

Description of findings and results

Total FUTA collections and refunds for the first 8 months of fiscal year 2003 

per IRS’s master file materially reconciled to IRS’s general ledger. 

B. Use dollar unit sampling (DUS) to select a sample of combined FUTA 

collection and refund transactions from the master file for the first 8 

months of fiscal year 2003, using a confidence level of 80 percent, a test 

materiality of $333 million, and an expected aggregate error amount of 

$99.9 million. 

Description of findings and results

Use of DUS with a confidence level of 80 percent, a test materiality of 

$333 million, and an expected aggregate error amount of $99.9 million resulted 

in a sample of 45 transactions for the first 8 months of fiscal year 2003. Of this 

total, 44 transactions represented collections and 1 transaction represented 

refunds.

C. For each sampled FUTA tax collection transaction: 

1. Determine if collection amounts are accurately recorded by tracing 

collection transaction amounts from IRS’s master files to supporting 

documents (e.g., federal tax deposit coupons). 

Description of findings and results

Based on supporting documentation, collection amounts were accurately 

 recorded for all 44 sampled FUTA collection transactions. 

2. Determine if amounts were recorded to the appropriate period by 

reviewing the date on source documents. 

 

1

The master file is a detailed database containing taxpayer information. 

2

Except where noted for certain procedures, significant or material is defined as $333 million. This 

represents 1 percent of the UTF collections made by federal and state government agencies for fiscal 

year 2002. 
Enclosure 

Page 4 GAO-04-212R Unemployment Trust Fund Procedures 

Description of findings and results

Based on supporting documentation, collection amounts were recorded to 

the appropriate period for all 44 sampled FUTA collection transactions. 

3. Determine whether the transactions were properly classified as FUTA 

receipts by reviewing source documentation maintained in IRS’s files (e.g., 

tax returns). 

Description of findings and results

Based on supporting documentation, collection amounts were recorded 

in the correct tax class3

 for all 44 sampled FUTA collection transactions. 

4. Confirm FUTA transactions paid via the Electronic Federal Tax Payment 

System (EFTPS)4 to determine whether the recorded transactions are valid 

and reflect the proper amounts, are applied to the proper tax period, and 

are properly classified as FUTA receipts. 

Description of findings and results

Thirty-eight of the 44 sampled FUTA receipt transactions were paid via the 

EFTPS. The bank confirmation showed that all 44 transactions were valid 

and had been recorded to the proper tax period and tax class and for the 

proper amounts. 

D. For each sampled FUTA tax refund transaction: 

1. Confirm sampled FUTA refund transactions with Treasury’s Financial 

Management Service (FMS) by checking that the amount of the refund is 

correct and that it was recorded to the appropriate period and tax class. 

Description of findings and results

For the one sampled FUTA refund transaction, confirmation with 

Treasury’s FMS showed that the amount of the refund was correct and that 

it was recorded to the appropriate period and tax class. 

 

3

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

4

The EFTPS is a system for initiating tax payments electronically. Employers who make federal tax 

deposits exceeding $200,000 must use the EFTPS to pay their FUTA taxes. The $200,000 threshold 

includes all federal tax deposits, such as deposits for employment tax, excise tax, and corporate 

income tax. Taxpayers who are not required to make electronic deposits may voluntarily participate 

in the EFTPS. 
Enclosure 

Page 5 GAO-04-212R Unemployment Trust Fund Procedures 

2. For FUTA tax returns, determine whether the taxpayer provided a written 

explanation for exempt payments and whether the explanation meets IRS’s 

criteria for FUTA exempt wage payments. 

Description of findings and results

For the one sampled FUTA refund transaction, the taxpayer did not claim 

an exempt wage payment. 

3. For manual refunds,5

 check to see that the appropriate supporting 

documentation is attached and that individuals who approved the manual 

refunds were authorized to do so. 

Description of findings and results

 The one sampled FUTA refund transaction was not a manual refund. 

II. Analytical Procedures 

A. Perform analytical procedures on FUTA revenue collection and refund 

data for the period not subject to detailed tests of transactions to 

determine if reported fiscal year 2003 revenue collections and refunds 

appear reasonable. 

Description of findings and results

We performed a predictive test on the final 4 months of fiscal year 2003 

FUTA revenue collection and refund data. The predicted FUTA revenue 

collection and refund data amounts for the final 4 months of fiscal year 

2003 did not materially vary from the actual amount of revenue 

collections and refunds per the IRS’s records for this period.

III. Other FUTA Procedures 

A. For each of the 12 months in fiscal year 2003, obtain and review supporting 

documentation for monthly revenue reclassification adjustments transmitted by 

IRS to Treasury’s FMS. Check to see that the supporting documentation agrees 

with the reclassification adjustment transmitted to the FMS. 

 

 

5

A manual refund is a refund manually processed by an IRS employee rather than through the IRS’s 

manual automated process. 
Enclosure 

Page 6 GAO-04-212R Unemployment Trust Fund Procedures 

Description of findings and results

Documentation supported the monthly FUTA reclassification adjustment 

amount transmitted to Treasury’s FMS for all 12 months of fiscal year 2003. 

B. For each of the 12 months in fiscal year 2003, obtain and review 

supporting documentation for the monthly entry of FUTA refund data 

onto the GOALS to charge back the Unemployment Trust Fund account 

for FUTA tax refunds issued. Check to see that the supporting 

documentation agrees with the monthly entries reported in the GOALS. 

Description of findings and results

Documentation supported the monthly FUTA refund amount entered in 

GOALS to charge the UTF for FUTA tax refunds issued for 11 of the 12 

months of fiscal year 2003. For the month of May 2003, IRS incorrectly 

charged the cumulative refund amount for the year through May 2003 of 

$73 million to the UTF instead of the amount for May 2003 of $11 million. 

We brought this to the attention of the IRS and they made an adjustment 

for May 2003. The adjustment was made during September 2003. 

Therefore, there was no impact on FUTA reported amounts on the 

financial statements. 

C. Compare fiscal year 2003 net FUTA collections per the IRS’s draft 

statement of custodial activity and related footnote disclosures to (a) the 

Treasury’s Bureau of the Public Debt (BPD) accounting records for the 

UTF and (b) drafts of the Department of Labor’s (DOL) consolidated 

financial statements. Obtain explanations/support for material variances. 

Description of findings and results

There were no significant variances between net FUTA collections per the IRS’s 

draft statement of custodial activity and the BPD’s accounting records for the 

UTF. Similarly, there were no significant variances between IRS’s draft 

statement of custodial activity and related footnote disclosures and drafts of the 

DOL’s fiscal year 2003 consolidated financial statements. 

 

IV. Other procedures performed as part of the fiscal year 2003 IRS 

financial statement audit 

A. From the IRS’s master files for the first 8 months of fiscal year 2003, use DUS to 

select statistical samples of (a) total tax revenue receipts and (b) refunds. For 

each item in the samples of tax revenue receipts and refunds, test that the 

collection or refund amount and tax class from source documentation agrees 

with amounts recorded in IRS’s master files. 
Enclosure 

Page 7 GAO-04-212R Unemployment Trust Fund Procedures 

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 the IRS master files. 

B. Review selected IRS 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 service 

centers’ monthly Treasury SF-224 reconciliations to determine if IRS-reported 

total refunds (all tax classes) materially6 reconciled to Treasury FMS records.7

Description of findings and results

Tax revenue receipts reported by selected IRS service center 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 service center campuses through the 

monthly Treasury SF-224 reconciliation process materially agreed with Treasury 

FMS records. 

C. Perform procedures to determine whether revenue receipt balances by tax class 

per the general ledger materially agree with IRS’s 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 FUTA, 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. 

(196006) 

 

6

For the purpose of this procedure and procedure IV.C, we define material as $20 billion. This 

represents approximately 1 percent of the total tax revenue receipts collected by the IRS in fiscal year 

2003. 

7

The IRS maintains records of refund balances by tax class in its master file, and reports this 

information monthly to Treasury via the SF-224. Treasury provides the IRS with a Statement of 

Differences (TFS-6652), which reports differences between total refunds reported by the IRS on the 

SF-224 and the total refunds per Treasury records.