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Applying Agreed-Upon Procedures: Federal Unemployment Taxes	 
(23-JAN-03, GAO-03-362R).					 
                                                                 
We evaluated fiscal year 2002 activity affecting distributions to
the Unemployment Trust Fund (UTF).				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-362R					        
    ACCNO:   A05943						        
  TITLE:     Applying Agreed-Upon Procedures: Federal Unemployment    
Taxes								 
     DATE:   01/23/2003 
  SUBJECT:   Federal taxes					 
	     Trust funds					 
	     Financial records					 
	     Treasury Unemployment Trust Fund			 

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GAO-03-362R

GAO- 03- 362R Unemployment Trust Fund Procedures

United States General Accounting Office Washington, DC 20548

January 23, 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, 2002, is supported by the underlying
records. As agreed with your office, we evaluated fiscal year 2002
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 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 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 January 10, 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.

GAO- 03- 362R Unemployment Trust Fund Procedures Page 2 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 GAO- 03- 362R Unemployment Trust Fund Procedures Page 3

Unemployment Trust Fund Procedures and Results I. Detailed tests of
transactions

A. Obtain from IRS total FUTA collections and refunds reflecting the first
8 months of fiscal year 2002 posted to 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 8 months of fiscal year 2002

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 2002, using a confidence level of 80 percent, a test
materiality of $341 million, and an expected aggregate error amount of
$102.3 million.

Description of findings and results Use of DUS with a confidence level of
80 percent, a test materiality of $341 million, and an expected aggregate
error amount of $102.3 million resulted in a sample of 44 transactions for
the first 8 months of fiscal year 2002. Of this total, 43 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 43 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 $341 million. This
represents 1 percent of the UTF collections made by federal and state
government agencies for fiscal year 2001.

Enclosure GAO- 03- 362R Unemployment Trust Fund Procedures Page 4
Description of findings and results Based on supporting documentation,
collection amounts were recorded to

the appropriate period for all 43 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 class 3 for all 43
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- six of the 43 sampled FUTA
receipt transactions were paid via EFTPS. The bank confirmation showed
that all 36 transactions were valid and had been recorded to the proper
tax period and tax class and for the proper amounts.

5. Recalculate each tax return to check mathematical accuracy. Description
of findings and results The two applicable FUTA tax returns 5 were
mathematically correct. 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. Employers who make federal tax deposits exceeding $200,
000 must use 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 EFTPS. 5 Of the 43
sampled FUTA receipt transactions, only 2 included remittances with tax
returns. The remaining 41 transactions were paid via EFTPS or federal tax
deposits.

Enclosure GAO- 03- 362R Unemployment Trust Fund Procedures Page 5
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. Recalculate each tax return to verify mathematical accuracy.
Description of findings and results The tax return for the sampled FUTA
refund transaction was

mathematically correct. 3. 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.

4. For manual refunds, 6 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 2002 revenue collections and refunds
appear reasonable.

Description of findings and results We performed a predictive test on the
final 4 months of fiscal year 2002 FUTA revenue collection and refund
data. The predicted FUTA revenue collection and refund data amounts for
the final 4 months of fiscal year 2002

6 A manual refund is a refund manually processed by an IRS employee rather
than through IRS*s normal automated process.

Enclosure GAO- 03- 362R Unemployment Trust Fund Procedures Page 6 did not
materially vary from the actual amount of revenue collections and

refunds per IRS*s records for this period.

III. Other FUTA procedures

A. For each of the 12 months in fiscal year 2002, 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 2002. B. For each of the 12 months in fiscal
year 2002, obtain and review supporting

documentation for the monthly entry of FUTA refund data into 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 in GOALS to charge the UTF for FUTA tax refunds
issued for all 12 months of fiscal year 2002.

C. Compare fiscal year 2002 net FUTA collections per IRS*s statement of
custodial activity and related footnote disclosures to (1) the Treasury*s
Bureau of Public Debt (BPD) accounting records for the UTF and (2) drafts
of the Department of Labor's (DOL) fiscal year 2002 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 the 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 2002 consolidated
financial statements.

Enclosure GAO- 03- 362R Unemployment Trust Fund Procedures Page 7

IV. Other procedures performed as part of the fiscal year 2002 IRS
financial statement audit A. From IRS*s master files for the first 8
months of fiscal year 2002, 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 from source documentation agree with the
information recorded in the IRS*s master files. Description of findings
and results Detailed testing of 153 revenue receipts and 50 refund sample
transactions

showed that the collection or refund amount, tax period, and tax class
from source documents agreed with the information 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) materially 7 reconciled to
Treasury FMS records. 8 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. Also, compare FUTA refunds per the master file to the general
ledger.

7 For the purpose of this procedure and procedure IV. C, we define
material as $20 billion. This represents 1 percent of the total tax
revenue receipts collected by IRS in fiscal year 2002. 8 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
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 GAO- 03- 362R Unemployment Trust Fund Procedures Page 8
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.

(191028)
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