Federal Transit Benefit Program: DOT's Debit-Card Internal Controls Are Designed to Be Consistent with Federal Standards
Published: 2015-05-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 1992, Congress created a transportation fringe benefit that allowed public and private employers to offer employees transit benefits, excludable from gross income, to cover out-of-pocket public transportation commuting costs. Federal agencies may distribute these transit benefits directly or enter into an agreement with another agency, such as DOT, to distribute the benefits on a fee-for-service basis. In 2011, DOT's TRANServe began using debit cards to distribute transit benefits. IRS has established rules to help employers ensure their debit card programs qualify as allowable fringe benefits. Members of Congress have questioned whether the debit card restrictions prevent non-transit-related purchases and whether DOT's program complied with IRS rules.
This report describes the extent to which DOT has (1) designed internal controls to provide reasonable assurance that employees do not use the debit card to make non-transit-related purchases and (2) worked with IRS to ensure its debit card program complies with IRS's rules. GAO reviewed the design of TRANServe's internal control system for preventing non-transit purchases, but testing the system was not within the scope of the work; compared federal standards and TRANServe's practices; reviewed IRS rules on fringe benefits; and obtained TRANServe documentation of the steps taken to demonstrate that its debit card complied with the rules.
GAO is not making recommendations in this report. DOT and IRS provided technical comments that were incorporated as appropriate.
section_title: What GAO Found
paragraphs: The Department of Transportation's (DOT) Office of Transportation Services (TRANServe) has included multiple internal control activities in the design of the TRANServe debit card program. These controls are intended to prevent federal employees from using their debit card for non-transit-related purchases, and as designed, would be expected to provide reasonable assurance that non-transit-related purchases can be identified and denied. The phrase “internal control” does not refer to a single event, but rather a series of actions that occur throughout an entity's operations on an ongoing basis for safeguarding assets and preventing and detecting errors and fraud. DOT provided evidence that the design of its TRANServe debit card program aligns with each of the five internal control standards as identified in GAO's Standards for Internal Control in the Federal Government and as described below.
Control environment : DOT has established a control environment framework for the TRANServe debit card program by, among other things, setting the program's primary goal as enhancing internal controls to deter waste, fraud, and abuse of transit benefits.
Risk assessment : DOT established the position of internal controls officer, in 2007, to examine control activities and identify potential program vulnerabilities through the testing of debit card controls.
Control activities : TRANServe has established mechanisms for controlling the use of the debit card. For example, the debit card is restricted so it can only be used to purchase transit fare from transit providers that are identified by merchant category codes that have been approved by DOT. The codes are used to classify a business by type of goods or services it provides.
Monitoring : TRANServe conducts weekly data mining, which includes reviewing debit card transactions to identify potential misuse and irregularities.
Information and communication . TRANServe sends “anomaly letters” (letters detailing potential misuse of the debit card) to agencies when non-transit purchases are detected.
TRANServe worked with the Internal Revenue Service (IRS) to demonstrate that the debit card program is in compliance with IRS's rules for qualified transportation fringe benefits and that in particular, it was a transit pass and effectively prevented non-transit-related purchases. From 2011 to 2013, TRANServe staff tested the debit card with transit agencies in eight areas across the country, making dozens of purchases of both transit-related and consumer-related products. In most cases the purchase restriction succeeded in preventing the debit card from purchasing non-transit-related products. In the few cases where the restriction failed, TRANServe took steps to have additional restrictions placed on the debit cards. Once it completed the tests in each region, TRANServe sent the test results to IRS, and once IRS was satisfied with the final results, IRS officials sent DOT an e-mail confirming that the debit card qualified as a transportation fringe benefit in that area. TRANServe then completed the roll out of the debit card program by the end of fiscal year 2014.

section_title: Letter
paragraphs: The federal government’s transit benefit program was established in 1993  and was intended to expand federal employees’ use of public  transportation by providing transit vouchers and passes for public transit  as a qualified transportation fringe benefit. In fiscal year 2014,106 federal  entities entered into interagency agreements on a fee-for-service basis  with the Department of Transportation’s (DOT) Office of Transportation  Services (TRANServe) to distribute about $210 million in transit benefits  to their employees. The Internal Revenue Code (Code) allows eligible  employees to exclude qualified transportation fringe benefits from gross  income. In 2011, TRANServe began introducing the TRANServe debit  card with selected federal entities, allowing eligible federal employees to  purchase transit passes, and completed implementation in selected  locations in 2014. Since TRANServe implemented its debit-card  program, members of Congress have raised questions about whether the  debit cards could be used for consumer purchases or whether DOT has  sufficiently restricted the debit cards to prevent non-transit-related  purchases. These members of Congress also were interested in whether  DOT worked with the Internal Revenue Service (IRS) to ensure the  TRANServe debit-card program was in compliance with relevant statutes,  Treasury regulations, and IRS’s administrative rules to provide for the  exclusion from gross income of qualifying transportation fringe benefits.
You asked us to review DOT’s administration of the TRANServe debit- card program and determine if DOT worked with IRS to ensure  compliance with its rules and regulations governing the exclusion of  qualifying transportation fringe benefits from gross income. This report  describes the extent to which DOT has (1) designed internal controls to  provide reasonable assurance that federal employees do not use the  TRANServe debit card to make non-transit-related purchases and (2)  worked with IRS to ensure its debit-card program met requirements for  excludable qualified transportation fringe benefits in relevant statutes,  Treasury regulations, and IRS administrative rules.
To evaluate the extent to which DOT has designed internal controls for  TRANServe debit cards, we used criteria from GAO’s Standards for  Internal Controls in the Federal Government. Based on our scope, we  determined that each of the five internal control standards in this  document apply to our review of the TRANServe debit-card program. We  focused on aspects of the standards that were most relevant to identifying  and denying non-transit-related purchases in the design of TRANServe’s  internal controls. Table 1 describes these five internal-control standards  for designing and implementing internal control.
To identify TRANServe’s internal-control processes and practices for  identifying and denying non-transit-related purchases, we reviewed  TRANServe program guidance and methods for reviewing debit card  transactions; reporting on potential misuse of the card; and  communicating with federal entity clients. We also interviewed  TRANServe officials about the control activities for the transit debit-card  technology, their processes for monitoring federal employees’ transit debit  card purchases—including identifying ineligible purchases, and  communicating such information with client agencies. To identify any  gaps between internal control standards and the design of TRANServe’s  internal control processes, we performed a comparative analysis of the  federal internal control standards and TRANServe’s processes and  practices and determined whether there are any gaps. We also reviewed  DOT’s Agency Financial Reports for fiscal years 2011 through 2014 and  an external management review of the TRANServe program’s internal  controls.
In addition, we contacted DOT’s Office of the Inspector General  to inquire about reviews of the TRANServe program. It is important to  note that this study focused on the design of the TRANServe debit-card  program’s internal controls rather than testing the effectiveness of the  internal controls. Also, we did not conduct a comprehensive audit of  TRANServe’s administration of its program or review the activities of the  individual agencies that participate in the program and deliver the benefits  to their eligible employees.
Specifically, TRANServe worked with IRS’s Office of the Associate Chief Counsel (Tax  Exempt and Government Entities), which had jurisdiction over the portion of the Internal  Revenue Code that provides rules regarding the tax treatment of transit benefits. For the  sake of brevity, we will refer to the Chief Counsel’s office as IRS. card program with applicable statutes, Treasury regulations, or IRS’s  administrative rules.
We conducted this performance audit from July 2014 through May 2015  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: Transit Benefit Program
paragraphs: Transit fringe benefits—employer-provided benefits designed to  encourage public and private employees to use mass transit for their  home-to-work commute—date back to the early 1990s. The Energy  Policy Act of 1992 created a new category of qualified fringe benefits— the “qualified transportation fringe”—that is excludible from gross  income. Executive Order 13150, dated April 26, 2000, required the  implementation of a transportation-fringe-benefit program for qualified  federal employees, in which federal agencies offer to employees transit  benefits excludable from gross income. This benefit includes transit  vouchers and passes for public transportation, to be used exclusively to  cover actual out-of-pocket commuting expenses, not to exceed a  maximum monthly allowable dollar limit set by law, which has been  adjusted for inflation over the years and currently is $130.
Federal agencies can either distribute transit benefits directly to  employees, enter into an interagency agreement with another agency,  such as DOT, or contract with a private company for distribution. DOT’s  transit benefit program is administered by TRANServe, located within the  Office of the Assistant Secretary for Administration. In 1998, TRANServe  began offering transit benefit distribution services to other federal entities  participating in the federal government’s transit benefit program. Over  time, TRANServe has distributed transit benefits in a variety of forms.  Prior to 2011, TRANServe had distributed the benefits to participating  federal employees via paper fare media—i.e., paper vouchers and paper  transit passes (e.g., Metro transit vouchers in the District of Columbia)— and smart cards (e.g., electronic transit cards). In March 2011 and April  2012, DOT published notices for public comment of its intention to adopt  a new distribution methodology for transit benefits. Specifically, DOT  proposed implementing electronic fare media—a debit card—in place of  paper vouchers where electronic fare media is accepted by transit  authorities. In its notice, DOT indicated that the move toward debit cards  was the result of a growing number of state and local transit authorities  transitioning to electronic fare media and rising paper voucher program  costs. TRANServe indicated that electronic fare media provides a way to  tighten internal controls and support the green government movement,  which entails implementing more environmentally-friendly practices.
Since 2011, the portion of transit benefits distributed via debit cards has  increased while the portion distributed as paper vouchers has declined  (see fig. 1). In fiscal year 2014, TRANServe distributed over $210 million  dollars in cash equivalent fare media to over 202,000 transit-benefit  participants employed by 106 federal entities (referred to as client  agencies) nationwide, mostly through the TRANServe debit card.  TRANServe administers transit benefits for more federal entities than any  other program administrator in the federal sector.percent of the 202,000 TRANServe participants were using the debit  card.
section_title: Internal Controls
paragraphs: As discussed in the Standards for Internal Control in the Federal  Government, internal control comprises the plans, methods, and  procedures used by entities to meet their missions, goals, and objectives.  The phrase “internal control” does not refer to a single event, but rather a  series of actions and activities that occur throughout an entity’s  operations on an ongoing basis and that serve as the first line of defense  in safeguarding assets and preventing and detecting errors and fraud.Moreover, internal controls should be designed to provide reasonable  assurance that unauthorized acquisition, use, or disposition of an entity’s  assets will be promptly detected. Lastly, internal control systems help  government program managers achieve desired results through effective  stewardship of public resources.
In 2007, the Office of Management and Budget (OMB) provided guidance  for federal agencies to use in establishing and implementing internal  controls over their respective transit benefit programs to help managers  reduce the opportunity for fraud, waste, and abuse. its guidance was in response to our 2007 testimony that confirmed  allegations that federal employees in the National Capital Region  committed fraud by deliberately requesting benefits they were not entitled  to and then selling or using these benefits for personal gain. As a result  of our investigation and testimony, OMB required all federal agencies to  implement several internal controls in order to maintain the integrity of the  transit benefit program.
section_title: Tax-Related Requirements
paragraphs: OMB issued a memorandum, Federal Transit Benefit Program, M-07-15 (May 14, 2007),  to the executive departments and agencies requiring all agencies with transit benefit  programs to implement several internal controls designed to deter fraud, waste, and  abuse. used at merchants that have been assigned a code indicating they sell  fare media.
IRS described two other scenarios, one involving a smart card and another involving a  debit card where employees do not substantiate their transit fare expenses, scenarios that  we did not describe. the electronic media. Subsequently, IRS sent out a notice for public  comment on this revenue rule and modified it in 2014.
section_title: DOT Has Established Multiple Internal Control Activities Designed to Prevent Non-Transit-Related Purchases
paragraphs: DOT’s TRANServe debit-card program includes activities that correspond  to the five internal control standards—(1) control environment, (2) risk  assessment, (3) control activities, (4) monitoring, and (5) information and  communication. In combination, these activities would be expected to  provide reasonable assurance that non-transit-related purchases can be  identified and denied. Based on our review of the design of TRANServe’s  internal controls for the TRANServe debit-card program, we found that  those internal controls align with GAO’s Standards for Internal Control in  the Federal Government. However, certain weaknesses could exist as we  did not independently test DOT’s internal controls to determine whether  they mitigate all possible risks and are operating as intended.
subsections: section_title: Control Environment
paragraphs: TRANServe’s activities for establishing a control environment—a  disciplined work environment and ethical culture—amongst management  and staff were generally consistent with internal control standards. The  Standards for Internal Control in the Federal Government states that  management and employees should establish and maintain an  environment that sets a positive and supportive attitude toward internal  control and conscientious management. A positive control environment is  the foundation for all other standards, a foundation that provides  discipline and structure as well as the climate that influences the quality of  internal control. Several key factors affect the control environment, e.g.,  the integrity and ethical values maintained and demonstrated by  management and staff. TRANServe has established a control  environment framework for the debit-card program through the following:
A primary goal for the debit-card program: TRANServe has set a  primary goal for the debit-card program of offering enhanced internal  controls to preserve transit benefits by deterring waste, fraud, and  abuse.
Internal controls officer: TRANServe created an internal controls  officer position in April 2007, which according to officials, has been  staffed since 2007 without vacancies. According to the program’s  policy and guidance, this position heightens review of the program’s  internal controls. The internal controls officer is responsible for  maintenance and testing of internal controls, through a combination of  inquiry, inspection, and observation. Also, the internal controls officer  is responsible for designing training classes for TRANServe  employees and DOT’s transit benefit participants.
Training: DOT requires all staff who are participants in the transit  benefit program, to complete mandatory Transit Benefit Integrity  Awareness Training on an annual basis. This is a mandatory  electronic course that clarifies transit benefit requirements and  emphasizes the internal controls in place to minimize fraud and  address ramifications of noncompliance. Additionally, according to  TRANServe officials, the training is available on its website for client  agencies. Moreover, if requested, the TRANServe staff are available  to assist or conduct the training.
Online resources: Finally, TRANServe has a number of resources  available for internal and external participants and client agency  points of contacts. The TRANServe website houses information such  as, among others, best practices for internal controls, policies and  procedures, and training. This helps to improve agency-level internal  controls, thereby strengthening the combined level of internal controls.
section_title: Risk Assessment
paragraphs: TRANServe’s activities for assessing and identifying relevant risks, and  determining how those risks should be managed, were generally  consistent with internal control standards. The Standards for Internal  Control in the Federal Government states that internal control should  provide for an assessment of the risks the agency faces from both  internal and external sources. Risk assessment is the identification and  analysis of relevant risks associated with achieving agency objectives.  According to TRANserve officials, a formal risk assessment for the  TRANServe program has not been conducted; however, this standard  states that risk identification methods may include, among others,  consideration of findings from other assessments, such as the Federal  Managers Financial Integrity Act of 1982 (FMFIA) annual assessment.The following TRANServe activities are related to assessing risk.
Internal controls officer: According to the program’s policy and  guidance, the internal controls officer is responsible for examining  current internal control activities and, identifying potential program  vulnerabilities, through testing of controls related to the debit card.
Monitoring: According to TRANServe’s standard operating procedure  (SOP), monitoring debit card transactions identifies those transit  benefit participants who are possibly misusing the debit card. As  stated in the SOP, monitoring debit card transactions is performed on  a weekly basis; this frequency is necessary to maintain program  integrity and prevent the misuse of debit cards for non-acceptable  transaction activity. Monitoring activities will be discussed in greater  detail later under the monitoring standard.
FMFIA annual assessment: DOT’s annual assessment of its internal  control and financial-management systems, as required by the  FMFIA, is intended to provide reasonable assurance that objectives  are being met. Those objectives include whether (1) financial and  other resources are safeguarded from unauthorized use or  disposition; (2) transactions are executed in accordance with  authorizations; (3) records and reports are reliable; (4) applicable  laws, regulations and policies are observed; and (5) financial systems  conform to government-wide standards. For fiscal year 2014, DOT’s  Agency Financial Report stated that DOT utilized its standardized  FMFIA internal control program approach for managing internal  control and compliance activities. This approach included using the  five standards of internal controls to identify, assess, document, and  communicate key programmatic internal controls and related risks or  weaknesses. For its part, the Office of Financial Management and  Transit Benefits, which includes the TRANServe program, completes  an annual assessment of the program’s management controls and  financial-management systems. In fiscal year 2014, TRANServe  reported on a number of activities, including testing of controls related  to the debit card; reviewing all SOPs to incorporate best practices and  tighten internal controls for external and internal customers; and  providing monthly invoices with detailed reports to client agencies on  employee participation in the transit benefit program. DOT reported no  internal-control material weaknesses in the TRANServe program in its  FMFIA assessments and audited consolidated financial statements for  fiscal years 2011 through 2014.
section_title: Control Activities
paragraphs: TRANServe’s activities for managing its internal control system are  generally designed to be consistent with internal controls. The Standards  for Internal Control in the Federal Government notes that control activities  should be efficient and effective in accomplishing the agency’s control  objectives, and should occur at all levels of the agency. The standards  also note that the responsibility for good internal control rests with  managers. Management sets the objectives, puts the control mechanisms  in place, and monitors and evaluates the controls. Control activities are  policies, procedures, techniques, and mechanisms that help ensure an  agency’s objectives are met. The following describes the TRANServe  program’s control activities.
Standard operating procedures. TRANServe has established SOPs  for the following program activities. These SOPs include:
Conducting debit card transaction data mining:provides the guidelines for weekly data mining, which includes  reviews of debit card transactions to identify potential misuse or  irregular activity, such as the purchase of non-transit items.
Sending “anomaly letters” (letters detailing misuse of the debit  card) to client agencies: This SOP outlines procedures to use in  transmitting anomaly letters to an agency once notification has  been received that a potential misuse has occurred. Potential  misuse, among other things, may involve retail merchants, or  irregular transaction amounts.
Providing debit card transaction anomaly reporting to the financial  agent bank (J. P. Morgan): Specifically, the financial agent  provides debit card services to electronically deliver transit  benefits to federal employees of the client agencies serviced by  TRANServe. The SOP outlines procedures that are to be taken  once an anomaly notice is received indicating non-acceptable  transaction activity.
Internal controls officer: The internal controls officer is responsible for  (1) examining current internal-control activities, including identifying  potential program vulnerabilities; (2) developing solutions for identified  vulnerabilities; (3) having knowledge of existing rules and regulations  concerning internal controls; and (4) keeping abreast of new  developments for best practices in internal controls.
Inherent features of the debit card: According to TRANServe officials,  ensuring that transit beneficiaries do not make non-transit-related  purchases is an inherent feature in the design of the debit card  TRANServe has implemented through Treasury and J.P. Morgan. The  debit card is designed so that it can only be used to purchase transit  fare media through transit providers that are identified through a  limited list of MCCs approved by DOT. However, in situations when  a merchant with an approved MCC is found to be allowing purchases  for non-transit items on the debit cards or where a merchant  repeatedly forces a card transaction when a purchase is declined,  TRANServe has the option of working with J.P. Morgan to further  restrict the debit card. This additional restriction—called a merchant  identification (MID) block—involves blocking attempted transactions  made by TRANServe debit cardholders at a specific merchant  location. As a result, the MID block prevents all future transaction  activity at that particular merchant even though it has an approved  MCC. The MID block mechanism allows TRANServe to maintain the  integrity of the MCC while selectively blocking noncompliant points of  sale.
section_title: Monitoring
paragraphs: TRANServe’s activities for continuous monitoring and evaluating the  effectiveness of the internal control design were generally consistent with  internal control standards. The Standards for Internal Control in the  Federal Government states that internal control monitoring should assess  the quality of performance over time and assure that ongoing monitoring  occurs in the course of normal operations. The internal controls officer  manages monitoring activities, which include maintenance and testing of  internal controls.
Consistent with federal internal control standards that call for ongoing and  continual monitoring, TRANServe’s monitoring activities include debit  card transaction data mining. According to SOPs, debit card transaction  data mining includes monitoring debit card transactions on a weekly  basis. Moreover, staff identify potential misuse by reviewing debit card  transaction details for retail merchants, non-compliant MCCs, irregular  transaction amounts, rejected transactions, and purchases of consumer  items (i.e., non-transit-related items) under a compliant MCC. When  misuse of a debit card is discovered, according to TRANServe, it will send  a report and a letter to the agency of the violator notifying the agency of  the potential violation. TRANServe officials said that once the agency  receives notification of the violator, the client agency is responsible for  taking appropriate action for those found to be violating program  requirements—TRANServe has no contact with the violator. TRANServe  will also, if necessary, contact J.P. Morgan to implement an MID block or  to recoup payment. The data-mining process has three levels of review  based on SOP.
Data-Mining First Level Review: This level review of debit card  transactions involves querying the MCCs. MCCs are routinely  reviewed for compliance and any violations identified and followed up  on with agency anomaly letters and chargebacks. The process for  transmitting anomaly letters is a five-step process (see table 2).
From fiscal years 2011 through 2014, TRANServe sent a total of 237  anomaly letters to agencies notifying them of potential misuse of the debit  card (see table 3). The amounts of the questionable charges made by cardholders for this time period ranged from $1.10 to $1,557.00.According to TRANServe officials, the majority of the questionable  charges was at or below the transit benefit’s statutory limit of $130 per  month. In fiscal year 2014, J. P. Morgan processed over 1.5 million total  purchase transactions for all TRANServe debit cards. In the same year,  three charges exceeded the statutory limit. Table 3 shows the number of  anomaly letters sent to agencies and the number of purchase  transactions for fiscal years 2011 through 2014.
Data Mining Second Level Review: This level of review involves  querying the merchant name. This review involves performing key  word searches. According to SOP, the key words in merchant names  that will trigger an alert are parking, news, deli, cash, liquor, and  coffee, among others.
Data Mining Third Level Review: This level of review involves  querying the transaction amount for irregular transaction, including  those exceeding the statutory limit are identified, and contacting the  merchant to determine the type of good or service purchased. When  applicable, violations identified result in agency anomaly letters, MID  blocks, and chargebacks.
TRANServe provided several examples of its data mining of purchase  transaction documentation that identified potential misuse of debit cards.  For example, one debit card transaction was processed using a non- approved MCC. The participant used the debit card to make a purchase  of $53 at a drugstore in April 2014. The internal controls officer notified  the client agency of this potential misuse of the debit card and  subsequently received confirmation of misuse from the client agency.  TRANServe officials said that the internal controls officer typically notifies  the client agencies of possible misuse within 5 to 10 days of receiving and  completing the review of the data mining information. Additionally, for this  transaction, TRANServe requested that J. P. Morgan reimburse the  program for this amount, given that the merchant forced this transaction.
section_title: Information and Communication
paragraphs: TRANServe activities for collecting reliable information and providing  timely communications to client agencies for relevant events were  generally consistent with internal control standards. The Standards for  Internal Control in the Federal Government states that for an entity to run  and control its operations, it must have relevant, reliable, and timely  communications relating to internal as well as external events.  Information is needed throughout the agency to achieve all of its  objectives. Information should be recorded and communicated to  management and others within the entity who need the information and in  a form and within a time frame that enables them to carry out their  internal control and other responsibilities. Additionally, according to these  federal internal-control standards, management should ensure there are  adequate means of communicating with, and obtaining information from,  external stakeholders since such information may have a significant  impact on the agency achieving its goals. The following TRANServe  activities align with the standard for information and communication:
Transit benefit program partnership agreement: This agreement,  which TRANServe has with its client agencies, states that TRANServe  will maintain a database that will identify, among other things, the  following: (1) all participants in the program that are currently deemed  eligible by the client agency; (2) the original effective date of program  participation; and (3) the value of fare media provided and the  effective date of termination, as appropriate. The agreement also  states that TRANServe will make other reports from its program  database available upon agency request. However, as part of the  partnership agreement, TRANServe states that it does not assume  responsibility for ensuring client agencies’ internal controls over the  program nor recipient integrity with regard to the program. It is the  responsibility of the client agency to ensure that its employees are  fully aware of their responsibilities for participation in the program.
Sending anomaly letters: As previously described, TRANServe has  established a process for sending debit-card anomaly letters to client  agencies when consumer purchases are detected through the data  mining process. Depending on the type of anomaly identified, an  email with anomaly letter attached is sent to the agency for further  agency action.
The TRANServe program website: The website includes information  about what client agencies need to do to prevent non-transit-related  purchases, such as internal control best practices, as well as  warnings to users about using debit cards for non-transit-related  purchases. Additionally, TRANServe debit cards have a warning  indicating that participants are legally bound to abide by the terms of  the Transit Benefit Program and that use of the debit cards is personal  certification that they will be used by cardholders as the transit benefit  for their regular home-to-work transportation (see fig. 3).
FMFIA annual assessments: DOT communicates its compliance with  the FMFIA through the annual letters it sends to client agencies  reporting that DOT’s system fully complies with federal and agency  guidance. FMFIA requires agency managers to establish internal  control systems that provide reasonable assurance regarding the  agency’s proper use of funds and resources, compliance with statutes  and regulations, and preparation of reliable financial reports.
section_title: TRANServe Collaborated with IRS to Demonstrate That Its Debit Card Met Requirements for Qualifying as a Fringe Benefit
paragraphs: TRANServe worked with IRS to demonstrate that its debit-card program  was in compliance with relevant statutes, Treasury regulations, and IRS  administrative rules—specifically that the debit card qualified as a “transit  pass” as defined in section 132(f)—for the purposes of qualifying as a  transportation fringe benefit and being excludable from gross income.  According to IRS, TRANServe demonstrated that the debit card was a  “transit pass” because the card restrictions effectively permit recipients of  the cards to use them only to purchase fare media on mass transit   In May 2011, TRANServe first tested the use of a debit card  systems. in the New York metropolitan area and based on the information from its  preliminary testing, obtained a letter from IRS concluding that for the New  York metropolitan area the TRANServe debit card, subject to any  changes, was a “transit pass” for purposes of section 132(f) of the Code  and as such was a qualified transportation fringe benefit. IRS’s conclusion  was based on the fact that TRANServe had demonstrated that the debit  card restrictions as tested (i.e., specifically the MCC restriction with MID  blocking capability) effectively permit cardholders to use the debit cards to  only purchase fare media on mass transit systems. In addition, IRS took  into consideration TRANServe’s assurance that it would complete  monthly reviews of employees’ TRANServe debit card accounts (i.e.,  anomaly monitoring) in order to identify transactions that might involve  non-transit-related purchases and other anomalies. IRS further concluded  that the debit card also would constitute a bona fide cash reimbursement  program (with respect to systems or areas where no transit pass is readily  available) for purposes of section 132(f) because the program contained  the features described in Revenue Ruling 2006-57 (e.g., initial payment  of transit fare with after-tax amounts for at least the first month, annual  employee recertification that the debit card was used only to purchase  transit fare media, among other things).
Based on its experience in the New York metropolitan area, TRANServe  then developed a plan to field test the debit cards in the eight service  areas—geographic divisions that contain proximate states—where  TRANServe had previously distributed transit paper vouchers. From 2011  to 2013, TRANServe implemented its field test, which included:  researching the transit usage in the region,  identifying target areas where the transit authorities are located,  selecting point-of-sale locations where transit media are sold and as  well as non-transit-related sales locations, distributing debit cards that already contained the MCC restrictions to  testers,  sending testers to the predetermined sales locations to purchase  either transit fare media or non-transit-related items, assigning some testers to make debit-card purchases on-line or via  telephone depending on the number of ways transit media were sold,  and  contacting J. P. Morgan to obtain transaction records during the field  testing phase.
Figure 4 shows how TRANServe implemented its field tests of the debit  cards in each of the eight service areas.
According to TRANServe officials, TRANServe staff reviewed the test  results for each service area to determine whether the debit card  restrictions were effective. The testers compiled information about their  purchases and obtained transaction reports from J. P. Morgan.  TRANServe reviewed this information in order to verify that the debit card  restriction held and that the card was used only for authorized purchases.  In some instances, TRANServe subsequently worked with J. P. Morgan  to implement MID blocks. In other situations, TRANServe worked with the  respective transit authorities to ensure proper usage of the debit card.  Following each of the field tests, TRANServe shared the results with IRS  and obtained IRS’s comments or questions about the tests and results.  Once IRS was satisfied with the final results in a service area, IRS sent  TRANServe an email correspondence to confirm its understanding of the  test results and that based on such test results, the debit card constitutes  a transit pass and qualifies as a transportation fringe benefit. TRANServe  substantially completed the roll out of the debit-card program by the end  of fiscal year 2014.
In each service area, TRANServe completed a number of debit card  transactions, to test whether the debit card was sufficiently restricted.
Service area 1: TRANServe began field tests in the area between July  and September 2011. Testers completed 103 point-of-sale tests, of  which 87 of the transactions passed (i.e., the card restrictions held so  that it could only be used to purchase transit media), 10 failed, and 6  were not completed for reasons such as the merchant did not have  the item in stock. Seven of the 10 failed transactions resulted from  one merchant’s overriding declined payments, and the remaining 3  purchases were at parking garages that used an accepted MCC.  According to TRANServe officials, TRANServe worked with its  financial agent to stop this merchant from overriding transactions and  planned to use anomaly testing to further detect parking garage  transactions. In November 2011, based on the test results, IRS  officials confirmed to TRANServe that based on the test results the  debit card constitutes a transit pass in the Norfolk and Baltimore  metropolitan regions. In the National Capital Region, the debit card  satisfied the requirements for a bona fide cash reimbursement  program for purposes of transit systems that do not accept the local  smart card (i.e., Washington Metropolitan Area Transit Authority  SmarTrip® card), which is a transit pass.
Service area 2: TRANServe began field tests in the area between July  and September 2011. Testers completed 130 point-of-sale tests, of  which 122 of the transactions passed and 8 transactions failed. The  failed transactions resulted from merchants’ overriding declined  payments and approving transactions at certain parking garages.  TRANServe indicated it would work with its financial agent to stop the  merchants from overriding transactions and it would continue to  monitor the parking garage activities through anomaly testing. In  January 2012, IRS officials confirmed that, based on the test results,  the debit card constitutes a transit pass in the service area.
Service area 3: TRANServe began field tests in the area between  January and March 2012, but excluded one potential target area,  Milwaukee, because research on transit in the city indicated too few  locations to purchase fare media with credit or debit cards. Testers  completed 175 point-of-sale tests, of which 174 of the transactions  passed and one transaction failed. This transaction involved the  tester’s making a purchase of a non-transit-related item at a transit  store location that offered consumer merchandise. According to  TRANServe, it worked with the transit authority to change its  procedures so that only transit fare media can be purchased with the  debit card. In March 2012, IRS officials confirmed that, based on the  test results, the debit card constitutes a transit pass in the service  area.
Service area 4: TRANServe began field tests in the area between July  and September 2012. Testers completed 80 point-of-sale tests, of  which all of the transactions passed. In May 2013, IRS officials  confirmed that, based on the test results, the debit card constitutes a  transit pass in certain parts of the service area (specifically, in  Portland and in Seattle—although the pass is limited to use at national  van pool companies in Seattle).
Service area 5: TRANServe began field tests in the area between  April and June 2012. Testers completed 52 point-of-sale tests, of  which all of the transactions passed. In December 2012, IRS officials  confirmed that, based on the test results, the debit card constitutes a  transit pass in certain parts of the service area (specifically, Boston  and Newark). At that time, IRS was still evaluating TRANServe  information provided for Buffalo, Philadelphia, and Pittsburgh.  TRANServe subsequently completed additional tests in these  locations. The tests demonstrated the effectiveness of the card  restrictions, and IRS officials agreed later in December 2012 and  March 2013 that, based on the test results, the debit card qualified as  a transit pass in these locations.
Service area 6: TRANServe began field tests in the area between  January and March 2012. Testers completed 151 point-of-sale tests,  of which 149 transactions passed and 2 failed. These transactions  involved the purchase of parking passes through a transit authority.  TRANServe did not roll out the debit card in this segment of the  service area because it could not resolve the co-mingling of transit  and parking purchases. In August 2012, IRS officials confirmed that,  based on the test results, the debit card constitutes a transit pass in  certain parts of the service area (specifically, Los Angeles, El  Segundo, San Jose, San Diego, San Francisco, and Oakland).
Service area 7: TRANServe began field tests in the area between  April and June 2012. Testers completed 84 point-of-sale tests, of  which 82 transactions passed and 2 failed because the tester was  able to purchase non-transit-related items at a transit authority store  and bike rental shop. TRANServe worked with J.P. Morgan to block  purchases at those locations. In December 2012, IRS officials  confirmed that, based on the test results, the debit card constituted a  transit pass in certain parts of the service area (specifically, Salt Lake  City, Ogden, Albuquerque, Denver, and Phoenix). At that time, IRS  was still evaluating DOT’s information provided for Honolulu.  Following additional points of sale tests by TRANServe, IRS  confirmed that, based on the test results, the debit card constituted a  transit pass in Honolulu for van pool and bus service.
Service area 8: TRANServe began field tests in the area between  April and June 2012. Testers completed 79 point-of-sale tests, of  which all of the transactions passed. In May 2013, IRS officials  confirmed that, based on the test results, the debit card constitutes a  transit pass in certain part of the service area, specifically Dallas,  Houston, San Antonio, St. Louis, and Kansas City.
section_title: Agency Comments
paragraphs: We provided a draft of this report to the Department of Transportation and  Internal Revenue Service for review and comment. DOT and IRS  provided technical comments, which we incorporated, as appropriate.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to interested  congressional committees and the Secretary of the Department of  Transportation and the Commissioner of the Internal Revenue Service. In  addition, this report will be available at no charge on GAO’s website at  http://www.gao.gov.
If you or your staff have any questions or would like to discuss this work,  please contact me at (202) 512-2834 or wised@gao.gov. Contact points  for our Offices of Congressional Relations and Public Affairs may be  found on the last page of this report. Individuals making key contributions  to this report are listed in appendix I.
section_title: Appendix I: GAO Contact and Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Vashun Cole (Assistant Director);  Darryl Chang; Dwayne Curry; Paul Kinney; Gail Marnik; SaraAnn  Moessbauer; Susan E. Murphy; Cheryl Peterson; Neil A. Pinney; and  Amy Rosewarne made key contributions to this report.