GAO Report Criticises IRS On Excise Tax Collection Procedures

by Mike Godfrey, Tax-News.com, Washington

30 July 2003

The General Accounting Office has criticised the Internal Revenue Service in a recently completed review of the excise tax collection and distribution system, citing a lack of effective internal controls and poor detection of employee errors.

As the principle tax collector in the United States, the IRS is responsible for collecting and distributing nearly $70 billion in excise duties, and managing its transfer into the relevant government trust funds. This process is monitored by the GAO to ensure that it is completed as efficiently and in as timely a fashion as possible. However, the GAO's report identified a number of areas of concern within the IRS procedures, and observed that:

"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."

The GAO sumarized three instances where IRS procedures were particularly ineffective as follows:

"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. 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."

In conclusion, the GAO recommended that the IRS review the current procedures for its certification process, and that it communicate the new policies to other Treasury departments using the certification information. It also recommended that the Revenue should put in place procedures to speed up the receipt and recording of larger excise tax returns.

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