Excise Taxes:

Internal Control Weaknesses Affect Accuracy of Distributions to the Trust Funds

AIMD-99-17: Published: Nov 9, 1998. Publicly Released: Nov 9, 1998.

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Pursuant to a legislative requirement, GAO conducted a follow-up review of the Internal Revenue Service's (IRS) controls over its process for certifying excise taxes for distribution to the federal trust funds.

GAO noted that: (1) IRS does not have adequate controls over its process for certifying excise taxes for distribution to the federal government trust funds; (2) the lack of fundamental internal controls resulted in errors in the certifications going undetected; (3) these errors ultimately affected the amounts distributed to the trust funds during fiscal year 1997; (4) IRS' ineffective controls over the certification process resulted in undetected: (a) mistakes by taxpayers in preparing excise tax returns; (b) input errors by IRS when entering excise tax return information in its master files; and (c) errors by IRS in preparing the excise tax certifications; (5) as a result of these errors, trust funds did not receive the appropriate amount of excise tax revenue; (6) these errors are particularly important to the Highway Trust Fund, which receives over half of the excise taxes that are accounted for by IRS; (7) these weaknesses were a contributing factor in the Department of Transportation's (DOT) Inspectors General's: (a) qualified opinion on the Highway Trust Fund financial statements; (b) disclaimer of opinion on the Federal Aviation Administration's financial statements; and (c) disclaimer of opinion on DOT's consolidated financial statements; (8) the errors GAO found relating to taxpayer mistakes, IRS data input, and certification preparation could have been detected or prevented by effective IRS procedures; and (9) IRS has taken some actions to improve certain controls over the excise tax certification process.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: IRS implemented post-input controls to review all returns with assessments of $1 million and over, and all returns reporting coal tax assessments of $100,000 or more. Per IRS, these cover over 92 percent of total excise tax assessments.

    Recommendation: To strengthen internal controls over IRS' process of inputting tax return information into the master file, IRS should determine if it would be cost effective to develop and implement procedures requiring either key verification of the assessment amount by excise tax type before final processing or to implement other post-input controls to verify the accuracy of assessment amounts by excise tax type on the master file. In making this determination, IRS should consider establishing a dollar threshold that would ensure coverage of 90 percent of total excise tax assessments from the tax returns.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: GAO confirmed that the Form 720 and Schedule C were revised effective October 2001. The revisions should (1) result in a better matching of certain adjustments to the related tax periods, and (2) through the use of credit reference numbers tied to the specific abstracts, alleviate the concerns GAO had with related credits and adjustments not being placed by the abstract on the front of the form.

    Recommendation: To strengthen internal controls over IRS' process of inputting tax return information into the master file, IRS should revise the Form 720 tax return to reflect a separate column adjacent to the column for entering the tax assessment, by abstract number, for the taxpayer to report on pages 1 and 2 of the tax return claims and adjustments, by abstract number, based on the information the taxpayer reports on Schedule C.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: In fiscal year 2000, IRS prepared and implemented written procedures for their excise tax certification process. However, GAO continued to find issues with the implementation of these procedures, such as inadequate reviews that resulted in undetected errors in the data used for certification. GAO will continue to evaluate the effectiveness of IRS's efforts in its fiscal year 2002 audit.

    Recommendation: To strengthen internal controls over IRS' process of certifying excise tax distributions to the general fund and federal trust funds, IRS should develop, document, and implement review procedures over the adjustment and summarization of assessment data used in the certifications. Specifically, IRS should require detailed supervisory review be performed and documented to ensure that adjustments are reasonable and adequately supported, calculations are appropriately performed, and the certification letter agrees with the supporting schedules. IRS recently changed its procedures to certify excise taxes based on estimated collections. Despite this change, review procedures are still necessary.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Closed - Implemented

    Comments: IRS' legal counsel verified OTA's rate charts for each of the trust fund agencies.

    Recommendation: To strengthen internal controls over IRS' process of certifying excise tax distributions to the general fund and federal trust funds, IRS should establish and implement specific procedures requiring that IRS personnel review the distribution rates provided by the Office of Tax Analysis prior to those rates being used in the certification of Highway Trust Fund distributions and document evidence of these reviews.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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