Page 1 GAO-03-687R IRS Excise Tax Management Report 

United States General Accounting Office 

Washington, DC 20548 

July 23, 2003 

The Honorable Mark W. Everson 

Commissioner of Internal Revenue 

Subject: Management Report: Improvements Needed in Controls over IRS’s 

Excise Tax Certification Process 

Dear Mr. Everson: 

The Internal Revenue Service (IRS), along with other components of the Department 

of the Treasury, collects and distributes excise tax receipts to government trust 

funds. As the nation’s tax collector, IRS plays a critical role in this process. 

Consequently, trust funds and their administrators depend on IRS to have sound 

procedures and controls over this process to ensure that excise taxes are 

appropriately distributed. 

This report is a follow-up to two reports we recently issued discussing procedures we 

performed to assist the Department of Transportation’s Office of Inspector General 

(Transportation IG) in ascertaining whether the net excise tax collections and excise 

tax certifications reported by IRS for the fiscal year ended September 30, 2002, were 

supported by underlying records.1 The agreed-upon procedures, along with our audit 

of IRS’s fiscal year 2002 financial statements,2

provided a sufficient basis to assist the 

Transportation IG in forming an opinion on the departmentwide financial statements 

and the financial statements of the trust funds administered by the department, 

including the Highway Trust Fund and the Airport and Airway Trust Fund.3

In our reports discussing the results of the agreed-upon procedures we performed in 

fiscal year 2002, we described errors we identified in the certification and distribution 

process. However, we did not discuss the underlying internal control weaknesses 

 

1

U.S. General Accounting Office, Applying Agreed-Upon Procedures: Highway Trust Fund Excise 

Taxes, GAO-03-360R (Washington D.C.: Jan. 23, 2003) and Applying Agreed-Upon Procedures: Airport 

and Airway Trust Fund Excise Taxes, GAO-03-361R (Washington D.C.: Jan. 23, 2003). 2

U.S. General Accounting Office, Financial Audit: IRS’s Fiscal Years 2002 and 2001 Financial 

Statements, GAO-03-243 (Washington D.C.: Nov. 15, 2002). 3

Because GAO is responsible for auditing IRS’s financial statements, we performed agreed-upon 

procedures to assist the Transportation IG in assessing whether the net excise tax revenues 

distributed to the two trust funds for fiscal year 2002 were supported by underlying records. These 

agreed-upon procedures, in conjunction with additional testing by the Transportation IG, provided 

Transportation’s IG sufficient basis to opine on the department’s financial statements. 
Page 2 GAO-03-687R IRS Excise Tax Management Report 

that allowed these errors to go undetected, nor did we discuss actions needed to 

address these weaknesses.4

 This report discusses these weaknesses and presents our 

recommendations for corrective action. 

Results in Brief 

IRS’s internal controls over its process for certifying excise taxes for distribution to 

federal government trust funds are not fully effective in ensuring that the appropriate 

amounts are distributed to the trust funds. Our work identified several internal 

control issues that affected the amounts distributed to trust funds quarterly and that 

could have affected total fiscal year distributions if IRS had not corrected errors 

resulting from these control issues after we brought them to its attention. The issues 

we identified include the following: 

• IRS lacked effective procedures to timely detect errors made by employees when 

entering excise tax return information into its information systems. IRS did not 

detect such errors until months after they occurred. As a result, IRS understated 

certified collections to the Highway Trust Fund for the quarters ended December 

31, 2001, and March 31, 2002. Although IRS subsequently identified and corrected 

the errors, it would not have had adequate time to correct them if these errors had 

occurred later in the fiscal year. Had that been the case, the amount of excise 

taxes distributed to the Highway Trust Fund would have been less than it should 

have been for fiscal year 2002. 

• IRS lacked effective supervisory review to timely detect errors made in the 

preparation of excise tax certifications. As a result, amounts certified to trust 

funds were misstated for certain quarters during both fiscal years 2002 and 2001. 

IRS corrected the errors in the certifications after we brought them to its 

attention. Had we not identified the errors during our review and notified IRS, the 

amounts distributed to the Highway Trust Fund would have been approximately 

$81 million less than they should have been during fiscal year 2002 and 

approximately $1 million less than they should have been during fiscal year 2001. 

• IRS did not effectively coordinate with other components of Treasury involved in 

the excise tax distribution process when it implemented changes to its method for 

recording excise tax credits in fiscal year 2002. As a result, IRS’s systemgenerated certification data were not in a format usable by the Financial 

Management Service (FMS) or the Bureau of the Public Debt (BPD) to facilitate 

the recording of adjustments to trust funds. To make the data usable to FMS and 

BPD, IRS had to add steps to its certification process to generate the information 

in the previous reporting format. These added steps made IRS’s already complex 

certification process even more cumbersome, increasing both the likelihood that 

errors could be made and that they could go undetected by supervisory review. 

 

4

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

standards established by the American Institute of Certified Public Accountants. These standards 

stipulate that reporting on such engagements be in the form of procedures and findings only. 
Page 3 GAO-03-687R IRS Excise Tax Management Report 

In addition to these issues, we continued to find that IRS did not promptly certify 

excise tax collections to the trust funds. Under IRS’s current certification process, 

excise tax receipts for the fourth quarter of the fiscal year, which ends September 30, 

are not certified until the following March. Because the Department of 

Transportation’s financial statements are currently required to be issued by 

February 1 of the following year,5

 adjustments to initial distributions of excise tax 

receipts for the last quarter of the fiscal year, based on IRS’s certification, are not 

recorded in time to be reflected in the trust funds’ financial statements. However, 

this lag time in making final adjustments will become more of an issue this year. 

Beginning with its fiscal year 2004 accountability report, the Department of 

Transportation, along with the other CFO Act agencies, will be required to issue its 

report, including its audited financial statements, by November 15, 2004.6

 

To help the transition to this earlier reporting date, the department is planning to 

accelerate the issuance of its fiscal year 2003 accountability report to December 2003. 

If the Department of Transportation accelerates its reporting date to December 2003 

or earlier, certifications for the third and fourth quarters of the fiscal year would be 

completed too late for any adjustment to distributions resulting from the 

certifications to be made and reflected on the trust funds’ financial statements under 

IRS’s existing process. As a result, the amount of annual excise tax revenue 

distributed to the trust funds may not reflect the true amount that should have been 

distributed, potentially resulting in significantly inaccurate distributions and, in the 

case of the Highway Trust Fund, incorrect allocations of revenues to states.7

 

IRS has taken some actions to improve controls over the excise tax certification 

process, but additional action is needed to address the internal control issues we 

identified. We are making recommendations to further strengthen IRS’s verification 

and review procedures to help ensure that trust funds receive the appropriate 

allocation of revenue in a timely manner and to assist IRS in considering changes to 

its procedures to accelerate the timing of its excise tax certifications. 

In its comments, IRS generally agreed with our recommendations and described 

actions it was taking or planned to take to address the internal control issues 

described in this report. At the end of our discussion on each of these issues, we 

have summarized IRS’s related comments and provided our evaluation. 

 

5

The Chief Financial Officers Act of 1990 (CFO Act), as expanded by the Government Management 

Reform Act of 1994, requires the Department of Transportation to annually submit audited financial 

statements to the Office of Management and Budget (OMB). OMB requires agencies to submit 

financial statements for fiscal year 2003 no later than February 1, 2004. 

6

Office of Management and Budget, Memorandum for Chief Financial Officers and Inspectors General 

(Washington D.C.: Oct. 18, 2002). 

7

The Transportation Equity Act for the 21st Century, Pub. L. No. 105-178, 112 Stat. 107 (1998), requires 

highway program funds to be distributed to states on the basis of annual Highway Account receipts 

information. 
Page 4 GAO-03-687R IRS Excise Tax Management Report 

Background 

The federal government levies excise taxes on entities and individuals for the 

purpose of financing general federal activities and specific government programs. 

Several bureaus and offices within Treasury collected a total of about $69 billion in 

excise taxes in fiscal year 2002. IRS accounted for the majority, collecting about $52 

billion in excise taxes on the purchase, use, or inventory of various types of goods 

and services, such as gasoline and airline tickets. The processing of excise tax 

returns is centralized at IRS’s Cincinnati Campus. The various excise taxes 

accounted for by IRS are deposited into the general fund8

 of the Treasury and 

subsequently into seven different trust funds, which are administered by six federal 

agencies or entities. The largest of these trust funds are the Highway Trust Fund and 

the Airport and Airway Trust Fund, both of which are administered by the 

Department of Transportation. For fiscal year 2002, the Highway Trust Fund 

received about $32.2 billion in excise tax revenues and the Airport and Airway Trust 

Fund received about $8.9 billion. 

Because it collects federal tax revenue and then distributes it to these government 

trust funds, Treasury is considered a servicing organization by trust fund 

administrators as well as by the auditors of these agencies. Consequently, the trust 

fund administrators and their auditors need to rely on Treasury, through its various 

bureaus and offices, including IRS, to properly account for and distribute amounts 

transferred from the government’s general fund to their trust funds. 

Payers of excise taxes generally are required to make semimonthly deposits to cover 

their quarterly tax liability. The excise taxes are deposited into the general fund as 

they are received. Taxpayers are not required to provide information at the time they 

make their excise tax payments that would allow Treasury to immediately apply the 

payments to the appropriate trust fund based on amount owed and paid. The 

information that ultimately determines how these receipts are distributed is generally 

submitted by taxpayers on Form 720, Quarterly Federal Excise Tax Return.9 Because 

data are not available to allocate excise taxes to the appropriate trust funds when 

taxpayers make their excise tax deposits, Treasury uses a process to estimate the 

initial distribution of excise taxes. 

Treasury’s Office of Tax Analysis (OTA) prepares semimonthly estimates based on 

historical IRS certification data and actual total current excise tax revenue 

collections. FMS uses these estimates to prepare entries for the initial distributions 

to the trust funds, which are recorded by BPD in the books and records of the trust 

funds maintained by Treasury. Subsequent to this initial distribution, IRS certifies 

 

8

The general fund accounts for receipts that are not earmarked by law for specific purposes, the 

proceeds of general borrowing, and the expenditure of these moneys for the general support of federal 

government activities. 

9

Taxpayers file the quarterly excise tax return to report their excise tax liability. Form 720 is generally 

due 30 days following the end of the quarter. 
Page 5 GAO-03-687R IRS Excise Tax Management Report 

quarterly the amounts that should have been distributed to the excise tax−related 

trust funds based on the tax returns. FMS then uses these certifications to prepare 

adjustments to the initial trust fund distributions for each quarter, and BPD records 

the amounts on the trust fund books and records. Figure 1 provides an overview of 

the entire process of collecting, distributing, and certifying excise tax revenue 

reported to trust funds. 

Figure 1: Overview of the Process for Distribution of Excise Tax Revenue to Trust Funds 

IRS

Collection/accounting

Certification

General fund

FMS

Distribution/

adjustments

OTA

Estimation

BPD

Recordation/

accounting

 

Investments in

special issue

Treasury securities

Taxpayer

Payment/filing

Tax payments FMS

Quarterly tax 

return - Form 

720

Source: GAO.

Semimonthly

calculation of 

estimates

Record entries 

into trust fund 

records

Trust funds 

1. Highway

2. Airport and Airway

3. Aquatic Resources

4. Leaking Underground 

 Storage Tanks

5. Black Lung

6. Vaccine Injury

 Compensation

7. Inland Waterways

Record excise 

tax payments 

in master file

Record excise 

tax liability in 

master file

Calculations and 

certification of 

actual amounts

Prepare journal 

entries - record 

estimates

Prepare journal 

entries - adjust 

estimates to 

actuals

IRS currently certifies collections for each quarter approximately 5 and one-half 

months after the end of the quarter. IRS relies on a combination of manual and 

automated procedures to prepare its certification of excise taxes to be distributed to 

the trust funds. This process is complex and cumbersome. IRS calculates the trust 

fund distributions based on assessment, credit,10 and payment information in the 

master file.11 When taxpayers make their excise tax deposits, IRS enters payment 

information into the taxpayers’ master file accounts. As quarterly excise tax returns 

are received, IRS enters the liability amounts by type of excise tax, such as gasoline 

tax, into taxpayers’ master file accounts. The tax types are identified by certain 

 

10An assessment represents the taxes owed by a taxpayer for a given period for a given tax. Typically, 

for excise taxes, this is the amount reported by the taxpayer on the Form 720 excise tax return. 

Taxpayers are allowed to claim excise tax credits for certain situations. For example, due to IRS’s 

method for taxing fuel, there are situations when fuel could be taxed more than one time. Taxpayers 

are allowed to claim a credit for the second time the fuel is taxed. 

11The master file is a detailed database of taxpayer accounts. 
Page 6 GAO-03-687R IRS Excise Tax Management Report 

numbers preprinted on the Form 720. IRS uses one set of numbers for tax 

assessments, referred to as abstracts, and another set for tax credits, referred to as 

credit reference numbers. For example, abstract 62 represents gasoline tax, and 

credit reference number 362 represents a credit claimed on gasoline tax. IRS uses 

these numbers to identify excise tax type information in its master file, and it is these 

numbers that ultimately determine how amounts are distributed to the appropriate 

trust funds. 

IRS electronically transmits excise tax information from the master file to its 

Collection Certification System. The Collection Certification System uses the 

information to prorate12 collections among the different excise taxes. The system 

then summarizes the amount of prorated collections, by tax type, on the Report of 

Excise Tax Collection. IRS uses the information from these reports as the basis for 

calculating the gross certified amount13 for each type of tax. IRS analysts enter the 

information from the Reports of Excise Tax Collection onto a series of 

interconnected electronic spreadsheets, which further combine prorated collection 

data and then allocate the gross prorated amount, for each type of tax, among the 

general fund, trust funds, and trust fund accounts.14 Analysts then record the 

allocated amount for each tax onto excise tax distribution certification letters. 

IRS submits the certification letter to FMS, which uses it to prepare adjustments to 

the initial distributions to bring them in line with the IRS-certified amounts.15 FMS 

sends these adjustments to BPD, which records the entries in the books and records 

of the trust funds maintained by Treasury. Figure 2 shows IRS’s process for 

certifying trust fund distributions. 

 

12IRS certifies to trust funds the amount of excise taxes actually collected. Because there are 

occasions on which taxpayers have not paid their full tax liability at the time of IRS’s certification, 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 among all 

taxes reported owed on the tax return. For example, if a Form 720 indicates that the taxpayer owes $4 

million for gasoline tax, $2 million for diesel fuel tax, and $1 million for gasohol tax, but the taxpayer 

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. 

13This is the total amount of certified collections for each tax (e.g., gasoline) prior to distribution 

between the general fund and trust fund.

14The tax amounts for certain taxes, such as some motor fuel taxes, are allocated among the general 

fund, the Highway Account of the Highway Trust Fund, and the Mass Transit Account of the Highway 

Trust Fund. 

15This adjustment is determined by taking the IRS-certified amount and subtracting from it the initial 

distribution amount derived from the OTA estimate. If the resulting amount is positive, it is 

transferred from the general fund to the trust fund. If the resulting amount is negative, it is transferred 

out of the trust fund to the general fund. 
Page 7 GAO-03-687R IRS Excise Tax Management Report 

Figure 2: Overview of IRS Process for Certifying Excise Tax Collections 

Taxpayer

IRS tax return

processing units

Office of

Revenue

Systems

IRS Centralized

Excise Tax Section

(Cincinnati Campus)

Martinsburg

Computer

Center

Master

file

Quarterly downloads to Collection Certification System

(Cincinnati Campus-Submission Processing)

(All 10 IRS Campuses)

Report of

Excise Tax

Collection 

FMS

Source: GAO.

Tax return 

Form 720

Input assessment 

data from Form 720 

into master file 

Compare information on 

Form 720 returns over 

$1 million with data in 

master file 

Research apparent 

errors and correct as 

necessary

Review master 

file information 

and advise 

Cincinnati of 

potential errors

Payments 

(EFTPS, FTDs, 

etc.)

Input payment data 

from payment 

documents or 

electronic sources 

into master file

Collection 

Certification 

System

Calculation of 

certification 

amounts using 

electronic 

spreadsheets

Certification 

letters

In addition to its certification of excise tax receipts to trust funds, IRS performs a 

quarterly reclassification of excise tax refunds and credits. As part of its normal 

processing procedures, IRS initially records some excise tax refunds and credits as 

personal or corporate refunds and credits. These are refund and credit claims made 

by corporations or individuals who do not normally file excise tax returns but are 

entitled to claim excise tax−related credits on their corporate or personal income tax 

returns.16 IRS must subsequently reclassify these credit claims to properly reflect 

them as excise tax credits. IRS refers to these reclassifications as the excise tax 

refund/credit certification. IRS compiles the certification based on information from 

submission processing campus17 systems. IRS submits refund/credit certification 

letters to BPD, which uses them to prepare adjustments to reduce distributions to 

trust funds. 

 

16Petroleum producers, who usually are assessed fuel excise taxes and pay them to IRS, pass on these 

taxes to consumers in the form of higher prices. Consumers who use the fuel for a tax-exempt 

purpose, such as farming, can claim a credit for the excise taxes on their personal or corporate income 

tax return. 

17IRS has 10 submission processing campuses, which receive and process tax returns. 
Page 8 GAO-03-687R IRS Excise Tax Management Report 

Objectives, Scope, and Methodology 

The objective of the agreed-upon procedures work was to assist the Transportation 

IG in ascertaining whether the net excise tax collections and excise tax certifications 

reported by IRS for the fiscal year ended September 30, 2002, were supported by the 

underlying records. The objectives of this report are to (1) discuss the underlying 

internal control issues that allowed errors identified in the agreed-upon procedures 

work to occur, (2) discuss timing issues that have the potential to affect the accuracy 

of excise tax distributions, and (3) provide recommendations for effectively 

addressing these issues. 

We conducted our work primarily from March 2002 through January 2003, with some 

follow-up work through April 2003, in accordance with U.S. generally accepted 

government auditing standards. We requested comments on a draft of this report 

from the Commissioner of IRS. We received written comments from the Deputy 

Commissioner for Operations Support and have reprinted the comments in enclosure 

I of this report. Further details on our scope and methodology are contained in 

enclosure II of this report. 

Data Entry Errors Continue to Go Undetected 

In conducting the agreed-upon procedures review for fiscal year 2002, we found that 

IRS made data entry errors affecting the accuracy of taxpayer account information in 

IRS’s master file, and that these errors were not detected by existing review 

procedures. The lack of effective review procedures over the entry of excise tax data 

increases the risk that erroneous information will be used to prepare the quarterly 

excise tax certifications, resulting in incorrect distributions to trust funds. 

GAO’s Standards for Internal Control in the Federal Government requires agencies 

to implement internal control procedures to ensure the accurate and timely recording 

of transactions and events.18 It also states that internal controls should be designed to 

ensure that ongoing monitoring occurs in the course of normal operations. 

In a previous review,19 we reported weaknesses in IRS’s procedures for detecting data 

entry errors related to information reported on Form 720 excise tax returns. We 

recommended that IRS establish review procedures to ensure the accuracy of excise 

tax information entered into the master file. In response, IRS established post-input 

review procedures for excise tax returns that report a tax liability of $1 million or

more to verify that information on the returns matches data entered into the master 

file. However, IRS does not have comparable procedures for reviewing excise tax 

 

18U.S. General Accounting Office, Standards for Internal Control in the Federal Government, 

GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999). 

19U.S. General Accounting Office, Excise Taxes: Internal Control Weaknesses Affect Accuracy of 

Distributions to the Trust Funds, GAO/AIMD-99-17 (Washington D.C.: Nov. 9, 1998). 
Page 9 GAO-03-687R IRS Excise Tax Management Report 

data entered using another excise tax−related form, Form 8849, Claim for Refund of 

Excise Taxes.20

On January 1, 2002, IRS implemented new procedures for recording excise tax 

refunds and credits claimed by taxpayers. As part of this change, IRS established a 

new set of credit reference numbers to identify the type of excise tax refund or credit 

within a taxpayer’s master file account. For example, a claim for a $200,000 refund 

on gasoline tax would be recorded as $200,000 to credit reference number 362. 

Under IRS’s prior procedures, it would have recorded this refund as a negative 

$200,000 under the abstract number 62. This new procedure affected how IRS 

recorded and summarized credit information necessary for excise tax certifications, 

but did not change how the credits should affect the taxpayer’s ultimate excise tax 

liability. 

However, in testing a statistical sample of excise tax collections from the first 6 

months of fiscal year 2002, we identified 17 instances in which IRS personnel entered 

the credit information into the taxpayer’s master file account using both the old and 

new method, which resulted in IRS counting these credits twice in the certification 

process. We estimate that the net most likely error associated with counting credits 

twice is an understatement of $14.1 million, but the understatement could be as high 

as $198.2 million. Although we projected the effect of these errors on the population 

of items tested, we are not able to project the effect on the certification results 

because of the additional procedures IRS performs on the data to derive certified 

amounts. However, the effect of double-counting credits resulted in distributing 

smaller amounts to the Highway Trust Fund than should have been distributed for the 

quarters ended December 31, 2001, and March 31, 2002. 

Although IRS ultimately detected and corrected these errors, they were detected 

months later by personnel at IRS headquarters and not by reviewers at IRS’s 

Cincinnati Compliance Campus. According to IRS, the errors were attributable to 

one individual in the Cincinnati Compliance Campus’s Excise Tax Unit who did not 

fully comprehend the new procedures. We found that IRS did not have effective 

controls in its Cincinnati Excise Tax Unit to timely detect and correct such data entry 

errors. Some of these errors went uncorrected for 5 months or longer, and the 

corrections were not fully reflected until IRS completed its certification to the 

Highway Trust Fund for the quarter ending June 30, 2002. Thus, for the quarters 

ended December 31, 2001, and March 31, 2002, these errors resulted in amounts IRS 

certified to the Highway Trust Fund being understated. Because IRS made these 

corrections in time for their inclusion on the final certification reflected in the trust 

fund’s fiscal year-end financial statements, there was no net effect on distributions to 

the Highway Trust Fund for fiscal year 2002. Had these errors occurred later in the 

year, IRS would not have had the time to make corrections, and the amount of excise 

taxes distributed to the Highway Trust Fund would have been less than they should 

have been for fiscal year 2002. 

 

20Taxpayers use the Form 8849 to claim certain fuel-related refunds, such as nontaxable uses or tax 

paid on the resale of fuel previously taxed. 
Page 10 GAO-03-687R IRS Excise Tax Management Report 

Having effective procedures to timely detect and correct data entry errors is essential 

to maintaining accurate excise tax information in IRS’s master file. Since the excise 

tax data from IRS’s master file serve as the basis for its certification of receipts to 

trust funds, the lack of these procedures could lead to erroneous excise tax data in 

IRS’s master file, resulting in inaccurate certifications and distributions to trust funds. 

Recommendation

We recommend that you direct IRS management to develop and implement post-input 

review procedures to verify the accuracy of excise tax credit information in the 

master file. In establishing these procedures, IRS could consider establishing a dollar 

threshold, similar to the threshold it established for its reviews of excise tax 

assessment information on the Form 720 excise tax returns, that would trigger postinput verification of excise tax credit information. 

IRS’s Comments and Our Evaluation

IRS agreed with our recommendation. In its response, IRS stated that it was working 

with the Cincinnati Compliance Campus to develop and implement post-input review 

procedures to verify the accuracy of excise tax credit information posted to the 

master file. We will evaluate the effectiveness of IRS’s efforts in conjunction with our 

fiscal year 2003 agreed-upon procedures review. 

Excise Tax Certification Errors Continue to Go Undetected 

In conducting the agreed-upon procedures review for fiscal year 2002, we identified 

errors on IRS’s excise tax certifications that were not detected by supervisory review. 

The lack of effective supervisory review increases the risk that errors will be made in 

the preparation of excise tax certifications and that such errors will not be detected 

on a timely basis, resulting in incorrect excise tax distributions to the trust funds. 

GAO’s Standards for Internal Control in the Federal Government requires agencies 

to implement internal control procedures to ensure the accurate and timely recording 

of transactions and events. In addition, Standards for Internal Control in the 

Federal Government requires that qualified and continual supervision be provided to 

ensure that internal control objectives are achieved. 

As discussed previously, IRS relies on a combination of manual and automated 

procedures to prepare its excise tax certifications. This process is very complex, 

cumbersome, and prone to error. In prior reviews,21 we reported weaknesses in IRS’s 

controls over its certification process. At that time, we recommended that IRS (1) 

develop, document, and implement detailed written procedures for summarizing data 

used to prepare trust fund certifications, (2) establish procedures requiring IRS 

personnel to review distribution rates provided by OTA before those rates are used in 

the certification, and (3) implement review procedures over its process for 

 

21GAO/AIMD-99-17 and U.S. General Accounting Office, Internal Revenue Service: Recommendations 

to Improve Financial and Operational Management, GA0-01-42 (Washington D.C.: Nov. 17, 2000). 
Page 11 GAO-03-687R IRS Excise Tax Management Report 

summarizing data used in its certifications. In response to our prior 

recommendations, IRS created a checklist to guide reviewers and document the 

review of the certification results. In addition, IRS finalized written procedures for its 

certification process in November 2002. 

Although the checklist assists IRS reviewers in identifying simple mathematical 

errors, we continued to find logical and analytical errors in fiscal year 2002 that were 

not detected by supervisory review. For example, a report used by an IRS analyst to 

prepare the refund certification for the quarter ended December 31, 2001, contained 

erroneous amounts for gasohol and bus diesel fuel tax refunds. As a result, IRS 

overstated its refund certification for the Highway Trust Fund for the quarter by 

approximately $81 million. We readily identified the error because the reported 

amounts for one of these taxes varied significantly from previous quarters. 

Nevertheless, IRS did not detect the error even though the certification results passed 

through multiple levels of review. Had IRS not made a correction after we brought 

the matter to its attention, distributions to the Highway Trust Fund would have been 

approximately $81 million less than they should have been in fiscal year 2002. 

In another instance, we discovered that IRS reported refund amounts as credits and 

credit amounts as refunds on its refund/credit certification letters for both the 

Highway Trust Fund and the Airport and Airway Trust Fund for the quarter ended 

September 30, 2002. Generally, IRS-certified refunds for the Highway Trust Fund are 

one and a half times as large as the certified credits for the fund. To have a situation 

where the opposite occurred should have alerted the reviewer to a potential error. 

Although we readily identified the errors during our review of the schedule 

accompanying the certification letter, IRS did not detect the errors through its review 

process. These errors did not affect the accuracy of the distributions to the Highway 

Trust Fund or the Airport and Airway Trust Fund in fiscal year 2002 because BPD 

adjusts trust fund distributions using the combined amount of refunds and credits. 

However, this is an example of a logical error that was not detected by IRS reviews. 

We had identified similar problems in our fiscal year 2001 review. Specifically, IRS 

also reported refunds as credits and credits as refunds on its refund/credit 

certification for the quarter ended March 31, 2001. Also, in our fiscal year 2001 

review, we found that IRS used the wrong excise tax and distribution rates for 10 

percent gasohol on its Highway Trust Fund receipt certification for the quarter ended 

March 31, 2001. The IRS analyst used the excise tax and distribution rate table that 

was in effect on December 22, 2000, rather than the rate table that became effective 

on January 1, 2001. Consequently, IRS misstated certified collections to both the 

Highway Account and the Mass Transit Account of the Highway Trust Fund, resulting 

in about $1 million less being distributed to the Highway Trust Fund. 

In response to our finding that it had reversed reported refund and credit amounts in 

2002, IRS added another step to the review checklist to prevent this error. However, 

while the checklist can assist reviewers in verifying certification results, it cannot 

substitute for an in-depth understanding of the certification process. For example, 

although the checklist contains a specific procedure to verify that the analyst used 

the correct tax and distribution rate for each type of taxable good or service (e.g., for 
Page 12 GAO-03-687R IRS Excise Tax Management Report 

gasohol), it does not assist a reviewer in determining whether the analyst used the 

correct rate table (e.g., for the correct time period). Adding another step to the 

checklist each time a new problem surfaces will not ensure that proper reviews of the 

certification results are conducted. 

While we do not specifically know why IRS’s supervisory review procedures failed to 

detect these errors, we did note a lack of consistency in the supervisory review 

responsibility. Specifically, during fiscal year 2002, four different officials were 

responsible for reviewing the certifications. A comprehensive understanding of IRS’s 

certification process is essential to detecting logical and analytical errors made by 

analysts. Absent this understanding, officials responsible for reviewing excise tax 

certifications may continue to lack the ability to perform an effective review of the 

certifications. Given the errors we continue to find in our review of IRS’s 

certification process and their potential to significantly affect the accuracy of the 

associated distributions to trust funds, more needs to be done to ensure that 

supervisory reviews over the certifications are effective. 

Recommendations

We recommend that you direct IRS management to 

• investigate why certification errors continue to go undetected through IRS’s 

review procedures and 

• develop and implement an action plan to improve the certification review process. 

IRS’s Comments and Our Evaluation

IRS agreed with our recommendations. In its response, IRS stated that it has a new 

management team in place to review the current excise tax certification process and 

to develop an action plan for improving the certification reviews. We will evaluate 

the effectiveness of IRS’s efforts in conjunction with our fiscal year 2003 agreed-upon 

procedures review. 

Changes to Certification Process Were Not Effectively Coordinated 

As discussed earlier, the collection, distribution, and certification of excise tax 

revenues to trust funds are performed by four component entities within Treasury–--

OTA, FMS, BPD, and IRS. Coordination among these entities is essential to ensure 

the proper distribution of excise tax revenue to trust funds. In a prior review, we 

reported a deficiency in IRS’s procedures for using OTA information in its 

certification process. Specifically, we reported that IRS used tax and distribution 

rates from OTA without first verifying their accuracy.22 In response, IRS established 

an informal working group within Treasury specifically to discuss and coordinate 

issues related to trust fund tax revenue distributions. However, in conducting our 

 

22GAO/AIMD-99-17. 
Page 13 GAO-03-687R IRS Excise Tax Management Report 

agreed-upon procedures review for fiscal year 2002, we noted that effective 

coordination was not always achieved. 

As we previously discussed, IRS, as part of its receipt certification process in prior 

years, deducted credits claimed by taxpayers from their excise tax liability before 

applying their payments to the liability amount. Thus, IRS-certified excise tax 

receipts were reduced by credit claims. However, IRS believed that the information 

would be more useful, both internally and to the Department of Transportation, if it 

summarized and reported these credits separately rather then applying them against 

the tax liability amount. Therefore, in fiscal year 2002, IRS developed changes to the 

way it records credit information in its computer systems, as well as to the way it 

accounts for and reports this information in its certifications. 

On January 1, 2002, IRS implemented these procedural and system changes to its 

method for recording and summarizing excise tax credits, including changes to its 

procedures for recording taxpayer refund claims submitted on Form 8849. Although 

IRS officials told us that they had notified the Treasury working group of the planned 

changes, this notification was not documented in the form of a letter, memorandum, 

or minutes to the Treasury working group meeting. Further, IRS did not obtain 

written affirmation from FMS or BPD that these entities understood the effect these 

changes would have on the information reported to them. In fact, FMS and BPD were 

unable to use the revised form of certification information to make necessary 

adjustments to the trust fund distributions. Consequently, IRS had to add steps to its 

certification process to revert to its previous reporting format in order to make its 

certification data usable to these entities. As a result, IRS further complicated its 

already complex certification process. Although we did not identify any certification 

errors directly attributable to the changes in procedure, the added complexity 

increases the likelihood that errors could be made and go undetected by IRS’s current 

review procedures. 

Recommendation

We recommend that you direct IRS management to communicate in writing any 

potential changes in IRS’s certification process to other Treasury entities that use the 

certification information, and to obtain concurrence from these entities prior to 

implementing such changes. 

IRS’s Comments and Our Evaluation

IRS agreed with our recommendation. In its response, IRS stated that it plans to 

provide documented recommendations to the excise tax working group for potential 

changes to the certification process. We will evaluate the effectiveness of IRS’s 

actions in conjunction with our fiscal year 2003 agreed-upon procedures review. 
Page 14 GAO-03-687R IRS Excise Tax Management Report 

Certification Time Frame Will Not Accommodate Accelerated Reporting 

As discussed previously, under IRS’s current certification process, IRS certifies 

collections for each quarter about 5 and one-half months after the quarter ends. As a 

result of this delay, excise tax receipts for the fourth quarter of fiscal year 2002, 

which ended September 30, 2002, were not certified until March 2003. Consequently, 

adjustments to initial distributions of excise tax receipts for the fourth quarter that 

were based on IRS’s certification were not recorded in time to be reflected in the 

trust funds’ financial statements for fiscal year 2002, which OMB required to be 

issued by February 1, 2003. 

Beginning with agencies’ fiscal year 2004 performance and accountability reports, 

OMB will require the issuance of these reports, including the agencies’ audited 

financial statements, by November 15. To prepare for this, the Department of 

Transportation is planning to accelerate its fiscal year 2003 reporting date to 

December 2003. This accelerated reporting date will exacerbate the effects of the lag 

between the collection of excise tax receipts and their subsequent certification by 

IRS. As a result, under the current certification time frame, IRS’s certification for the 

third quarter, historically completed in December, would not be completed in time 

for any adjustments to the initial distribution to the trust funds to be made and 

reflected on the trust funds’ financial statements for fiscal year 2003. Because the 

certification of fourth quarter excise tax receipts also would not be completed prior 

to the issuance of the financial statements, this means that 6 months of excise tax 

distributions reported in the trust funds’ financial statements would not have been 

certified by IRS, increasing the potential for significantly inaccurate distributions. 

We believe the opportunity exists for IRS to accelerate the timing of its excise tax 

receipt certifications. IRS has indicated that it needs the 5 and one-half month period 

between the end of a quarter and completion of the certification to allow for 

submission and processing of returns and for recording, reviewing, and analyzing 

payment and tax return data. However, our review of IRS’s certification data for 4 

quarters23 shows IRS has historically received and recorded at least 90 percent of the 

Form 720 excise tax returns related to the Highway Trust Fund and the Airport and 

Airway Trust Fund 2 months prior to its cutoff for initiating the certification. Our 

analysis further shows that fewer than 100 of the largest payers of excise taxes—

those with liabilities of $10 million or more per quarter—account for over 91 percent 

of certified receipts to the Highway Trust Fund and over 85 percent of certified 

receipts to the Airport and Airway Trust Fund. 

The combination of (1) excise taxes reported in tax returns with liability amounts 

below $10 million that are received and recorded by IRS 2 months prior to its 

certification cutoff and (2) excise taxes reported in tax returns with liability amounts 

 

23We reviewed data from IRS’s Collection Certification System and master file from the quarters ended 

June 30, 2001, September 30, 2001, December 31, 2001, and March 31, 2002. IRS had made these data 

available to us for our fiscal years 2002 and 2001 agreed-upon procedures reviews and IRS financial 

statement audits. 
Page 15 GAO-03-687R IRS Excise Tax Management Report 

of $10 million or more accounts for more than 96 percent of the taxes IRS certified to 

both the Highway Trust Fund and the Airport and Airway Trust Fund for those 

quarters. Therefore, IRS could accelerate the timing of its certifications of excise tax 

receipts to the Highway Trust Fund and the Airport and Airway Trust Fund by at least 

2 months by implementing procedures to ensure that it has timely received and 

recorded tax returns from the largest payers of excise taxes. 

In each of the 4 quarters we reviewed, IRS data indicate that it has generally received 

over 70 percent of the large returns 2 weeks after the return due date. By taking a 

more proactive approach—tracking the status of these taxpayers’ returns, following 

up with those who have not filed timely to encourage filing, and ensuring prompt 

processing of large returns—we believe IRS should be able to accelerate completion 

of its certification of excise tax receipts without significantly increasing the potential 

for large amounts of quarterly receipts to go uncertified. 

Unless IRS establishes procedures to allow it to significantly accelerate its 

certification of excise tax revenues to trust funds, the amount of annual excise tax 

revenues reported by the Department of Transportation for the Highway Trust Fund 

and the Airport and Airway Trust Fund for fiscal year 2003 and beyond will include 6 

months of excise tax revenue distributions based on estimates. To the extent these 

estimates differ significantly from the actual amounts that should have been 

distributed to the trust funds, the result could be both significantly inaccurate 

distributions and, in the case of the Highway Trust Fund, incorrect allocations of 

revenues to states.24

 

Recommendations

To enable IRS to accelerate its excise tax receipt certification process, we 

recommend that you direct IRS management to implement procedures to proactively 

ensure the timely receipt and recording of the largest excise tax returns. Specifically, 

IRS management should develop and implement procedures at the Cincinnati 

Campus to 

• annually identify excise taxpayers with the largest excise tax liabilities affecting 

the Highway Trust Fund and the Airport and Airway Trust Fund. In identifying 

these taxpayers, IRS should consider the potential effect on trust fund 

distributions if one or more of these taxpayers’ returns were omitted from its 

certification; 

• track the status of tax return filings for the largest payers of excise taxes and 

contact these taxpayers if the submission processing campus has not received 

their tax returns by 2 weeks after the due date; and 

 

24The Transportation Equity Act for the 21st Century, Pub. L. No. 105-178, 112 Stat. 107 (1998) enhanced 

the link between the amount of funds received by states and the amount of tax receipts credited to the 

Highway Trust Fund by requiring that highway program funds be distributed to states on the basis of 

annual highway account receipts. 
Page 16 GAO-03-687R IRS Excise Tax Management Report 

• monitor the receipt and processing status of these large returns to ensure that 

they are promptly recorded in IRS’s master file prior to certifying excise tax 

distributions. 

IRS’s Comments and Our Evaluation

IRS agreed with this issue and indicated that it is taking action to address our 

findings. In its response, IRS stated that it would identify and provide a list of the top 

100 excise taxpayers to the Cincinnati Submission Processing and Compliance 

Campuses for the identification and expedited processing of these taxpayers’ returns. 

Additionally, IRS stated it was working with the Cincinnati Compliance Campus to 

implement additional monitoring of the top 100 excise taxpayers to ensure timely 

receipt of excise tax returns and will conduct an analysis of these taxpayers’ receipt 

pattern to support modifying IRS’s current timeline for contacting the taxpayers for 

submission of their returns. 

While IRS does not plan to accelerate its certification of excise tax receipts to trust 

funds for the third quarter of fiscal year 2003, it stated that it would conduct “mock” 

nonpublished certifications to determine the impact of an accelerated 4-month 

certification on all trust funds. In our discussions with IRS officials, they have stated 

that IRS plans to share this information with the Department of Transportation’s 

auditors so that they can determine the extent to which adjustments may be required 

to reported excise tax revenues on the trust funds’ fiscal year 2003 financial 

statements. We will evaluate IRS’s actions in conjunction with our fiscal year 2003 

agreed-upon procedures review. 

- - - - - 

This report contains recommendations to you. The head of a federal agency is 

required by 31 U.S.C. 720 to submit a written statement on actions taken on these 

recommendations. You should send your statement to the Senate Committee on 

Governmental Affairs and the House Committee on Government Reform within 60 

days after the date of this report. A written statement also must be sent to the House 

and Senate Committees on Appropriations with the agency’s first request for 

appropriations made over 60 days after the date of this report. 

This report is intended for use by the management of IRS. We are sending copies to 

the Chairmen and Ranking Minority Members of the Senate Committee on 

Appropriations; Senate Committee on Finance; Senate Committee on Governmental 

Affairs; Senate Committee on the Budget; Subcommittee on Transportation, Treasury 

and General Government, Senate Committee on Appropriations; Subcommittee on 

Taxation and IRS Oversight, Senate Committee on Finance; and the Subcommittee on 

Oversight of Government Management, the Federal Workforce, and the District of 

Columbia, Senate Committee on Government Affairs. We are also sending copies to 

the Chairmen and Ranking Minority Members of the House Committee on 

Appropriations; House Committee on Ways and Means; House Committee on 

Government Reform; House Committee on the Budget; Subcommittee on 

Transportation, Treasury, and Independent Agencies, House Committee on 
Page 17 GAO-03-687R IRS Excise Tax Management Report 

Appropriations; Subcommittee on Government Efficiency and Financial Management, 

House Committee on Government Reform; and the Subcommittee on Oversight, 

House Committee on Ways and Means. In addition, we are sending copies of this 

report to the Chairman and Vice Chairman of the Joint Committee on Taxation, the 

Director of the Office of Management and Budget, the Secretary of the Treasury, the 

Secretary of Transportation, and the Inspector General of the Department of 

Transportation. Copies will be made available to others upon request. The report is 

also available at no charge on GAO’s Internet site, at http://www.gao.gov. 

We acknowledge and appreciate the cooperation and assistance provided by IRS 

officials and staff during our fiscal year 2002 review. If you have any questions or 

need assistance in addressing these matters, please contact Charles Payton, Assistant 

Director, at (213) 830-1084. 

Sincerely yours, 

Steven J. Sebastian 

Director 

Financial Management and Assurance 
Page 18 GAO-03-687R IRS Excise Tax Management Report 

Enclosure I 

Comments from the Internal Revenue Service 
Page 19 GAO-03-687R IRS Excise Tax Management Report 
Page 20 GAO-03-687R IRS Excise Tax Management Report 
Page 21 GAO-03-687R IRS Excise Tax Management Report 

Enclosure II 

Objectives, Scope, and Methodology 

The objective of the agreed-upon procedures work was to assist the Inspector 

General of the Department of Transportation in ascertaining whether the net excise 

tax collections and excise tax certifications reported by IRS for the fiscal year ended 

September 30, 2002, were supported by the underlying records. We did not perform 

work on excise taxes collected by other Treasury bureaus, such as the Customs 

Service and the Bureau of Alcohol, Tobacco, and Firearms. 

In performing the agreed-upon procedures, we gained an understanding of the 

internal controls over the excise tax collection and certification process. The 

objectives of this report were to (1) discuss the underlying internal control issues that 

allowed errors identified in the agreed-upon procedures work to occur, (2) discuss 

timing issues that have the potential to affect the accuracy of excise tax distributions, 

and (3) provide recommendations for effectively addressing these issues. 

To accomplish our objectives, we examined, on a test basis, evidence supporting the 

net excise tax collection amounts related to the Highway Trust Fund and the Airport 

and Airway Trust Fund reported in the Collection Certification System. 

We used dollar unit sampling to select a sample of 94 prorated Highway Trust 

Fund−related excise tax collections from the audit files25 for the first 6 months of 

fiscal year 2002, using a confidence level of 80 percent, a test materiality of $315 

million, and an expected error amount of $94.5 million. 

We selected a sample of 62 prorated Airport and Airway Trust Fund−related excise 

tax collections from the audit files for the first 6 months of fiscal year 2002, using a 

confidence level of 80 percent, a test materiality of $91 million, and an expected error 

amount of $27.3 million. 

For each prorated excise tax collection sampled, we 

• checked to see that the assessment amount on the tax return for the sampled 

abstract agreed with the amount recorded in IRS’s master file,

• checked the mathematical accuracy of the taxpayers’ calculations on the tax 

returns for the related abstract, and 

• recomputed the prorated collection amount based on information from the master 

file and compared this amount to the sample items selected from the Collection 

Certification System audit file. 

We also performed detailed testing on the population of collections not designated as 

related to the Highway Trust Fund or the Airport and Airway Trust Fund to determine 

 

25The 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. 
Page 22 GAO-03-687R IRS Excise Tax Management Report 

if they contained any Highway Trust Fund or Airport and Airway Trust Fund excise 

tax collections. 

Further, we performed the following procedures on IRS’s certifications: 

• We verified the mathematical accuracy of the totals on the certification letters for 

the Highway Trust Fund and Airport and Airway Trust Fund. 

• We traced certified amounts for selected excise taxes from the certification letters 

through summary schedules to the supporting reports. 

To determine the percentages of amounts certified to the Highway Trust Fund and 

Airport and Airway Trust Fund that are accounted for by excise tax returns with 

liabilities of $10 million or more and the amounts from other excise tax returns 

received and recorded in IRS’s master file 2 months earlier than the certification 

cutoff, we analyzed IRS’s Collection Certification System and master file data. IRS 

made these sources available to us for our fiscal years 2002 and 2001 agreed-upon 

procedures reviews and fiscal years 2002 and 2001 IRS financial statements audits. 

These included the audit support files from the quarters ended June 30, 2001, 

September 30, 2001, December 31, 2001, and March 31, 2002. Using these data, we 

• identified excise tax returns by tax period and categorized excise taxes for the tax 

returns identified that related to the Highway Trust Fund and the Airport and 

Airway Trust Fund using data from IRS’s audit support file, and 

• summed the amounts related to the Highway Trust Fund and the Airport and 

Airway Trust Fund for all tax returns with tax liabilities of $10 million or more and 

amounts related to tax returns with liabilities below $10 million that had been 

recorded in IRS’s master file 2 months earlier than the certification date. 

We conducted our work primarily from March 2002 through January 2003, with some 

follow-up work through April 2003, in accordance with U.S. generally accepted 

government auditing standards. 

We requested comments on a draft of this report from the Commissioner of IRS. We 

received written comments from the Deputy Commissioner for Operations Support. 
Page 23 GAO-03-687R IRS Excise Tax Management Report 

Enclosure III 

GAO Contacts and Staff Acknowledgments 

GAO Contacts

Charles E. Payton, (213) 830-1084 

Ted Hu, (213) 830-1108 

Acknowledgments

Staff making key contributions to this report were David Elder, Gail Luna, Esther 

Tepper, Julia Matta, and Sharon Byrd. 

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