Internal service funds are operated to provide goods and services on a cost reimbursable basis to agencies within a State. Such funds are required to operate on a break-even basis by charging users for allowable costs as established under Office of Management and Budget Circular A-87. A prior audit resulted in the State returning $10.3 million to the Federal Government for a surplus accumulated in an internal service fund. Our current audit, covering the period July 1984 through June 1991, showed the State owed the Federal Government an estimated $12.2 million for accumulated surpluses in internal service funds. We recommended that the State refund this amount and adjust billing rates to eliminate surpluses or deficits. Regional officials of the Division of Cost Allocation generally agreed with our findings and recommendations.