DRAFT DRAFT

GAO-02-381R Unemployment Trust Fund Procedures

United States General Accounting Office

Washington, DC 20548

February 15, 2002

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 letter, 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, 2001,

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

fiscal year 2001 activity affecting distributions to UTF.

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

with U.S. generally accepted government auditing standards, which incorporate

financial audit and attestation standards established by the American Institute of

Certified Public Accountants. These standards also provide guidance 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 UTF and (2) a 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 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

February 1, 2002.

We provided a draft of this letter to IRS, along with its enclosure, for review and

comment. They agreed with the results and findings presented in this letter.
Page 2 GAO-02-381R Unemployment Trust Fund Procedures

This letter 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 letter is a matter of public record and its distribution is

not limited. Consequently, copies are available to others upon request. This letter

will also be available 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

Acting Director

Financial Management and Assurance

Enclosure
Enclosure

Unemployment Trust Fund Procedures and Results

Page 3 GAO-02-381R Unemployment Trust Fund Procedures

I. Detailed Tests of Transactions

A. Obtain from IRS total FUTA collections and refunds reflecting the first 9

months of fiscal year 2001 activity recorded in the master file.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 9 months of fiscal year

2001 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 9

months of fiscal year 2001, using a confidence level of 80 percent, a test

materiality of $334 million, and an expected aggregate error amount of

$100.1 million.

Description of findings and results

Use of DUS with a confidence level of 80 percent, a test materiality of $334

million, and an expected aggregate error amount of $100.1 million resulted

in a sample of 47 transactions for the first 9 months of fiscal year 2001. Of

this total, 46 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 deposit confirmation

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

Description of findings and results

Based on supporting documentation, collection amounts were accurately

recorded for all 46 sampled FUTA collection transactions.

 1

The master file is a detailed database containing taxpayer information.

2

Except where noted for certain procedures, significant or material is defined as $334 million.

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

for fiscal year 2000.
Enclosure

Unemployment Trust Fund Procedures and Results

Page 4 GAO-02-381R Unemployment Trust Fund Procedures

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

the date on source documents.

Description of findings and results

Based on supporting documentation, collection amounts were recorded to the

appropriate period for all 46 sampled FUTA collection transactions.

3. Determine whether the transactions were properly categorized 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 46 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 categorized as FUTA receipts.

Description of findings and results

Thirty-nine of the 46 sampled FUTA receipt transactions were paid via EFTPS.

The bank confirmation showed that all 39 transactions were valid and had

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

amounts. The other seven receipts were paid by check or bank deposit, and

supporting documentation confirmed that these transactions were also valid

and properly recorded.

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.

 3

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

4

EFTPS is a system for initiating tax payments electronically. In 2001, employers were required

to use EFTPS to pay their FUTA taxes if they made federal tax deposits exceeding $200,000 in

1999 or were required to use EFTPS in 2000. The $200,000 threshold includes all federal tax

deposits, such as deposits for employment tax, excise tax, and corporate income tax. Taxpayers

who are not required to make electronic deposits may voluntarily participate in EFTPS.
Enclosure

Unemployment Trust Fund Procedures and Results

Page 5 GAO-02-381R Unemployment Trust Fund Procedures

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.

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 claimed an

exempt wage payment and provided a written explanation that met IRS

criteria.

3. For manual refunds, 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 a predictive test on FUTA revenue collection and refund data for

the final 3 months of fiscal year 2001 to determine if reported fiscal year

2001 revenue collections and refunds appear consistent and reasonable.

Project the expected fourth quarter FUTA revenue collection and refund

amounts for fiscal year 2001, based on fiscal year 2000 quarterly amounts,

and compare the projection to actual revenue collections and refunds. If a

material variance exists, discuss with IRS to obtain an explanation/support.

Description of findings and results

The predicted fourth quarter FUTA revenue collection and refund amounts for

fiscal year 2001 did not materially vary from the actual amount of revenue

collections and refunds reported during this period.

B. Perform an analytical test comparing reported FUTA net revenue

collections as of the interim test period (June 30, 2001) and as of the end of

the fiscal year (September 30, 2001) to the respective prior periods.
Enclosure

Unemployment Trust Fund Procedures and Results

Page 6 GAO-02-381R Unemployment Trust Fund Procedures

Description of findings and results

FUTA net revenue collections as of the interim test period and the fiscal year

ended September 30, 2001, increased by $129.0 million and $63.5 million

respectively. Both of these variances are less than the FUTA test materiality of

$334 million.

III. Other FUTA Procedures

A. For each of the 12 months in fiscal year 2001, 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 FMS.

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 2001.

B. For each of the 12 months in fiscal year 2001, obtain and review supporting

documentation for the monthly entry of FUTA refund data onto the

Government Online Accounting Link System (GOALS) to charge back the

UTF account for FUTA tax refunds issued. Check to see that the

supporting documentation agrees with the monthly entries reported in

GOALS.

Description of findings and results

Documentation supported the monthly FUTA refund amount entered on

GOALS to charge UTF for FUTA tax refunds issued for all 12 months of

fiscal year 2001.

C. Compare fiscal year 2001 net FUTA collections per IRS’s statement of

custodial activity and related footnote disclosures to (a) the Treasury’s

Bureau of the Public Debt (BPD) accounting records for UTF and (b)

drafts of the Department of Labor's (DOL) fiscal year 2001 consolidated

financial statements. Obtain explanations/support for material variances.

Description of findings and results

There were no significant variances between net FUTA collections per

IRS’s statement of custodial activity and BPD’s accounting records for

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

statement of custodial activity and related footnote disclosures and drafts

of DOL’s fiscal year 2001 consolidated financial statements.
Enclosure

Unemployment Trust Fund Procedures and Results

Page 7 GAO-02-381R Unemployment Trust Fund Procedures

IV.Other procedures performed as part of the fiscal year 2001 IRS

financial statement audit

A. From IRS’s master files for the first 9 months of fiscal year 2001, use DUS to select

statistical samples of total tax (1) revenue receipts and (2) refunds. For each

sample item, test that the collection or refund amount, tax period, and tax class

from source documentation agrees with amounts recorded in IRS’s master files.

Description of findings and results

Detailed testing of 188 revenue receipts and 19 refund sample transactions

showed that the collection or refund amount, tax period, and tax class

from source documents agreed with amounts recorded in the IRS master

files.

B. Review selected IRS service center 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 center campuses’ monthly Treasury SF-224 reconciliations to

determine if IRS-reported total refunds (all tax classes) materially5 reconciled to

Treasury FMS records.6

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 a proof of cash for fiscal year 2001 to determine whether tax revenue

receipt balances by tax class, including FUTA, per IRS’s general ledger, materially

agree with IRS's master files and Treasury records. For refunds, perform a

 5

For the purpose of this procedure and procedure IV.C, we define material as $22 billion. This

represents 1 percent of the estimated total tax revenue receipts to be collected by IRS for fiscal

year 2001.

6

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.
Enclosure

Unemployment Trust Fund Procedures and Results

Page 8 GAO-02-381R Unemployment Trust Fund Procedures

comparison of total refund balances between the master file, the general ledger,

and Treasury records. Also, compare FUTA refunds per the master file to the

general ledger.

Description of findings and results

Fiscal year-end 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.

Fiscal year-end refund balances per IRS’s general ledger materially agreed

with the master file and with Treasury records.

(191009)