taxes

Audit Procedures for Cigarette Tax

Chapter 2 – Pre-Audit Research

Audit Generation

Cigarette tax audits, like all other tax audits, may be generated by audit select in headquarters, in the field office, or as a special division request. CATS and Agency Work Manager ensure inventory control to avoid duplicate audits and to track the assignments and progression of the audits. Numerous factors are involved in the selection process.

Selected accounts include:

  • Top cigarette taxpayers in the audit area
  • Re-audit of entities where the prior audit was productive
  • Computerized randomly selected accounts

In addition, audits can be generated as:

  • Spin-offs of related companies being audited
  • Leads obtained while performing audits of other taxpayers
  • Leads from newspaper articles
  • A result of bankruptcy action

Pre-Audit Checklist

Use the following checklist to perform pre-audit research. Document your findings in the Record of Audit Planning, Activities, and Audit Results.

  • Check CATS/Agency Work Manager
    • Read assignment comments.
    • Identify any special instructions.
  • Verify that the Notice of Routine Audit and Audit Questionnaire were sent to the taxpayer.
  • Examine the Audit Questionnaire completed by the taxpayer to determine:
    • Person to contact and location of records
    • Description of the business activity
    • Availability of computer records
    • Special instructions
    • Person who has authority to sign the Agreement to Extend the Period of Limitation
  • Review the Taxpayer History. (See the following section Audit History)
    • Review title information.
    • Compare with CATS/Agency Work Manager.
    • Verify that the history is current.
    • Review outlet information.
    • Schedule and review reported data on an EXCEL spreadsheet for easy reference and make note of any extraordinary items and changes.
    • Look for obvious inconsistencies or patterns in reported amounts.
    • Check for and analyze any open collection records.
  • Examine prior audits, if any, for: (See the following section Prior Audits)
    • Prior periods audited
    • Type and size of business
    • Location and type of records
    • Person or persons contacted
    • Errors noted
    • Hearings decision, if any
  • Examine the other documents for additional information including:
    • Audit leads, if any
    • Correspondence with taxpayer or with others in reference to the taxpayer
    • Any other sources such as newspaper articles, magazine stories, etc.
  • Review applicable portions of:
    • Cigarette Tax statute and rules
    • Audit procedures manual
    • Memos
  • Set an appointment via telephone.
    • Inform the taxpayer of the audit period.
    • Inform the taxpayer of other taxes to be audited.

Audit History

The history is a computer-generated summary of all transactions relating to a particular tax account. Taxpayers file Form 69-100 Texas Distributor Monthly Report of Cigarettes and Stamps. Supplemental reports include the Distributor Receiving Record of Cigarettes (Form 69-108), Distributor Receiving Record of Cigarette Tax Stamps (Form 69-109), Distributor Report of Interstate Sales of Tobacco (Form 69-110), and Certificate of Tax Exempt Sales — Unstamped Cigarettes, Untaxed Cigars and/or Untaxed Tobacco Products (Form 69-302) — prior to 09/01/2009, Certificate of Tax Exempt Sale (Form 69-315) — effective 09/01/2009. Only the information on Form 69-100 is entered into CICS. The other forms may be viewed through Mid-Client imaging.

To order an Audit History, follow these steps:

  • From CICS, enter XIRPTS.
  • Page forward using the PF1 key.
  • Go to page 8 to find the audit choices.
  • Put an X beside "audit history".
  • Enter the taxpayer #, tax type 88, sub-type 31, and a beginning and ending audit period.
  • Enter the 4-digit office ID number.
  • Enter the office's high speed printer ID.
  • Submit the request.

The auditor should be certain the history is current in order to have the latest updated information. If the history in the file does not cover all audit periods, the XIDATA inquiry can be used to update the history. The following information relates to a cigarette taxpayer history:

Summary Page.

  • History date - The date the history was generated.
  • Taxpayer History From XXXX to XXXX - The period covered by the history.
  • Taxpayer information – Verify that the taxpayer name and address matches XISUMM.
  • Last Report Filed – The last report filed by the taxpayer – may indicate XIDATA should be run. If the history is old and updated by XIDATA inquiry, then run XICOLL to ensure there are no open collection records. Address open collection records during the audit.
  • If in management halt, determine the reason before proceeding with the audit.
  • Prior audit information.

Active Outlets During Audit Period:

  • Lists all the active outlets during the audit period for which the taxpayer files reports.

Report Data By Outlet — Cigarettes:

  • Outlet Number: The outlet covered by this report
  • Detail listing of period return filed data, beginning inventory, purchases, deductions, ending inventory, and the tax on cigarettes

Report Data By Outlet — Stamps:

  • Outlet Number: The outlet covered by this report
  • A detail listing of reported data by period including beginning inventory, purchases, deductions, ending inventory, and the value of stamps affixed

Summary of Reported Data — Cigarette — Stamps:

  • Summaries of outlet data by period as reported by the taxpayer

Important: The auditor should examine all reported amounts for any fluctuation which appear to be unusual. These fluctuations may indicate a change in personnel, accounting procedures, or internal controls. Fluctuations must be considered when choosing periods for preliminary testing or sampling.

Prior Audit

While reviewing the prior audit, the auditor should:

  • Verify taxpayer identification and location information.
  • Review the prior auditor's work papers.
  • Post ending inventories from the prior audit as the beginning inventories of the current audit (Unstamped cigarette & stamps).
  • Identify audit adjustments and problem areas within the prior audit.
  • Investigate problem areas noted by headquarters.
  • Compare the contact information on the prior audit to the current contact information.
  • Determine the location of records and accounting methods used by the distributor.

Comparison Schedules

Prepare a schedule of the reported purchases, deductions, stamps affixed and the monthly ending inventories. Compute the difference between the cigarettes stamped and stamps affixed. Periods with significant out of balance amounts should be analyzed and isolated for in-depth review during the audit fieldwork. It is recommended that the auditor enter the history information on worksheets similar to the "Summary of Reported Amounts of Cigarette & Stamps Affixed" worksheet. (See Appendix for example.)

Manufacturer's Comparative Reconciliation

A manufacturer's comparative reconciliation is the process of comparing sales data supplied by the various cigarette manufacturers to the purchase data reported by a distributor. Perform the reconciliation in the pre-audit phase of all cigarette tax audits.

The cigarette distributor's report of manufacturer shipments can be ordered on CICS.

  • Enter XIRPTS.
  • Page forward using the PF1 key to page 5.
  • Under the heading Cigarette/Tobacco, place an X by Distributor Reports of Manufacturer Shipments.

This report will contain the reported shipments of cigarettes by the five largest manufacturers. Other manufacturers may be obtained using MTIGDI and the manufacturer taxpayer number. Collecting sales information on these manufacturers will be cumbersome.

Unstamped Cigarette Purchases — Pre-audit

  • Review the manufacturer's comparative statements and take note of missing periods, sales fluctuations, incomplete manufacturer's data, etc. If the manufacturer's data appears incomplete, contact Accounts Maintenance, Tobacco Section, to determine whether data can be retrieved from the reported data of the cigarette manufacturers.
  • Distributors are furnished with receiving record forms. These are generally filed with the monthly report. The reports and receiving records are currently imaged. If the receiving reports are available, the auditor should use pre-audit time to compare the manufacturer's sales to the distributor's reported purchases and prepare a schedule of exceptions prior to the entrance conference. This prior review should minimize the time spent looking for problems at the taxpayer's location. Make a list of exceptions to review invoices of shipment problems during fieldwork.

Stamp Reconciliation

Like the manufacturer's reconciliation, the stamp reconciliation is part of the pre-audit phase of a cigarette tax audit. The reconciliation compares the stamps purchased from the Comptroller to the stamps reported by the taxpayer.

Stamp purchases can be viewed on-line under CPA Production, ITS, Cigarette Stamping. Once this is found, select a "Distributor Activity Report" by using the distributor's code and periods needed. The Distributor Activity Report breaks down each purchase of stamps requested by the taxpayer. These reports can be copied to xls.files. The distributor code can be found in the Cigarette Stamping program by entering the taxpayer number after clicking on the Search tab.

The stamps reported as purchased by the distributor can be obtained from the taxpayer history or the XIDATA inquiry by period. The reported information is summarized by month.

The auditor should prepare a stamp reconciliation schedule as part of pre-audit activities. An example of a reconciliation spreadsheet can be found in the Appendix. Prepare a schedule of the stamps sold to the distributor by stamp type and summarize the schedule by month for the audit period. Compare the Comptroller's reported stamp sales to the distributor's as shown on the Texas Distributor Monthly Report of Cigarettes and Stamps. Any discrepancies can be resolved during the fieldwork.

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(Revised 09/2010)