Management Report:

Improvements Needed in Controls over IRS's Excise Tax Certification Process

GAO-03-687R: Published: Jul 23, 2003. Publicly Released: Jul 23, 2003.

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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. The agreed-upon procedures, along with our audit of IRS's fiscal year 2002 financial statements, 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.

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. We identified several issues. 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 system-generated 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. 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.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To enable IRS to accelerate its excise tax receipt certification process, the Commissioner of Internal Revenue should 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 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.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: IRS implemented procedures in March 2003 to track and monitor the Top 100-plus list of excise taxpayers and to call them for tax return(s) when necessary prior to certification cut off. The Top 100-plus list is composed of taxpayers with the largest Excise Tax liability. These procedures have been validated by inclusion of all top 100-plus taxpayer returns in fiscal year 2004 certifications. GAO verified that IRS has implemented procedures to track the status of tax return filings for the largest excise taxpayers and to contact these taxpayers for their returns when necessary prior to certification cut-off.

    Recommendation: To enable IRS to accelerate its excise tax receipt certification process, the Commissioner of Internal Revenue should 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.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: IRS has identified Employer Identification Numbers (EINs) of the largest excise tax liabilities beginning with tax period September 2002. IRS identified the largest excise tax filers to both Cincinnati Submission Processing and Compliance Campuses in August 2003. The EINs will be updated annually using the September tax periods. GAO verified that IRS has implemented procedures to identify taxpayers with the largest excise tax liabilities affecting the Highway Trust Fund and the Airport and Airway Trust Fund.

    Recommendation: The Commissioner of Internal Revenue should 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.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: Closed. We verified that the Treasury Excise Tax Working Group signed a resolution to establish a process for documenting issues related to IRS's trust fund certifications. Our review showed that the Treasury Excise Tax Working Group had established a process of recording and distributing minutes of the Working Group meetings to document issues related to trust fund certification procedures/processes including procedural or legislative changes impacting trust fund investments.

    Recommendation: The Commissioner of Internal Revenue should direct IRS management to develop and implement an action plan to improve the certification review process.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: IRS reviewed existing written procedures for the certification process and determined that the procedures, if properly followed, were adequate. To ensure that the procedures were properly implemented, a new section chief was appointed. Also, in October 2003 IRS reiterated to management the importance of reviewing and understanding the certification process. IRS's actions have resulted in improvements to the excise tax certification review process. In the past 2 years, GAO found no significant errors related to IRS's certification process that were not detected by IRS's review procedures.

    Recommendation: The Commissioner of Internal Revenue should direct IRS management to investigate why certification errors continue to go undetected through IRS's review procedures.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: IRS reviewed existing written procedures for the certification process and determined that the procedures, if properly followed, were adequate. To ensure that the procedures were properly implemented, a new section chief was appointed. Also, in October 2003 IRS reiterated to management the importance of reviewing and understanding the certification process. IRS's actions have resulted in improvements to the excise tax certification review process. In the past 2 years, GAO found no significant errors related to IRS's certification process that were not detected by IRS's review procedures.

    Recommendation: The Commissioner of Internal Revenue should 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 post-input verification of excise tax credit information.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: In July 2003 IRS implemented Program Analysis System reviews on Form 8849 claims. In August 2003, IRS implemented and increased the responsibility for managers to review all work, including fuel claims, as part of their performance review for employees. In December 2003 excise tax fuel claims were included in IRS's Embedded Quality Review System expansion rollout. The Embedded Quality Review System is performed by the employee's manager and is part of the employee's performance rating. During its testing of sample items over the past 2 years, GAO found no significant data entry errors relating to excise tax credits. GAO also verified during its fiscal year 2004 audit that fuel claim reviews were being performed as part of the Embedded Quality Review System.

    Recommendation: To enable IRS to accelerate its excise tax receipt certification process, the Commissioner of Internal Revenue should 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 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.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: IRS's Submission Processing and Compliance Campuses entered into a Service Level Agreement to jointly monitor receipts and processing of excise tax returns in November 2003. In addition, IRS's Internal Revenue Manual was modified to require that all excise tax returns be processed on a six-day cycle. The six-day cycle begins after the returns are batched, which is normally within a week. GAO verified during its fiscal year 2004 audit that IRS had implemented procedures to monitor excise tax returns to ensure that it meets this requirement.

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