taxes

Audit Procedures for Cigarette Tax

Chapter 6 – Audit Write-Up

Audit Package

Place the audit documents in the audit folder in the following order:

  • AWM Comments — Notes to Reviewer
  • Comments about bankruptcy
  • Valid open collection records
  • Penalty and Interest Waiver Worksheet
  • Audit Cover Letter
  • Audit Report
  • Audit Adjustment Report
  • Index to Working Papers
  • Audit Exams Exhibits
  • Other documentary evidence (Cigarette and Stamp inventory verification )
  • Record of Audit Planning, Activities, and Audit Results

No Tax Change Audit

When an audit examination results in no adjustments, a No Tax Change audit is submitted. (Refer to the Auditing Fundamentals manual.) Include the Inventory Verification Form and the Cigarette Transaction Summary schedules in the audit plan. Examples of these forms are located in the Appendix.

Non-Refundable Credit Audit

When an audit examination results in a non-refundable credit, the audit is prepared as if a credit is due and includes all schedules supporting the credit. Include a statement in the cover letter to indicate that the credit is non-refundable. Designate the audit as a "No Tax Change" in Agency Work Manager. Also, include a Note to the Reviewer indicating the credit is non-refundable.

Request for a Close-Out Audit (Final Audit)

When a permitted distributor discontinues stamping cigarettes for the State, a close-out may be necessary. While these audits are not priority assignments, they do need to be worked as quickly as possible because the permit holder may be due a refund on fees, stamps returned, and any dollars in the Cigarette Tax Recovery Trust Fund. By law, the Comptroller' office is required to issue a refund at the end of the following quarter in which they opted out of the fund.

Helpful Hints

Audit Exams

Adjustments on Cigarette Tax audits are scheduled on EXCEL spreadsheets. They are titled as exams, not schedules. Make sure all columns total correctly (use the SUM function). If using multiple exams, compile the results in a Summary Exam. Use footnotes to help the taxpayer follow the flow of the exams. Exams should be properly labeled. If the exam contains multiple pages, make sure the taxpayer name, number and exam name appears at the top of every page.

Audit Plan

Confirm that the taxpayer name, number and tax code appears at the top of every page.

Exhibits

Include any exhibits necessary to support the audit. Label exhibits as you would for sales tax. Include a properly completed Notification of Sampling for State Tax Audit when necessary. If the audit is estimated, use the Notification of Estimation for State Tax Audit. Address notifications to the person with the proper level of authority as indicated on the questionnaire. Extend statute waivers to the natural reporting date. Make sure the waiver is signed by the authorized person as indicated on the questionnaire.

Index to Working Papers

List the Audit Adjustment Report and all exams, exhibits, etc. included in the audit. Make sure all exams have a distinctive name.

Audit Adjustment Report

Complete an Audit Adjustment Report. All audit adjustments are listed in the last period of the audit. The Audit Adjustment Report is the first item listed on the Index to Working Papers.

Penalty and Interest Worksheet

Complete the P & I worksheet as you would a sales tax audit. Follow the guidelines in Rule 3.5 Waiver of Penalty or Interest. If penalty is over $10,000, e-mail a copy to headquarters for approval. In the section titled "Late Returns", list the actual late periods (i.e. 9804, 9805) not the number of late returns.

Cover Letter

Complete a cover letter using the same form as in a sales tax audit. Complete the letter just as you would a sales tax audit. For sole proprietors, do not complete the name and title fields. Instead, use the taxpayer name as the entity name. The person listed in the exit conference paragraph should match the person listed in the exit conference section of the audit plan. Likewise, the agreed, disagreed or non-committal paragraph should match the exit conference section of the audit plan.

Audit Report

Complete the audit report as you would for other taxes.

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(Revised 09/2010)