taxes

Cigar & Tobacco Products Tax Manual

Chapter 2 – Pre-Audit Research

Audit Generation

Cigars and other tobacco 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. Comprehensive Audit Tax System (CATS) and Agency Work Manager (AWM) ensure inventory control to avoid duplicate audits and to track the progression of assignments.

Selected accounts include:

  • Top cigar and other tobacco taxpayers in the audit area
  • 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.

  1. Check CATS/Agency Work Manager
    1. Read assignment comments.
    2. Identify any special instructions.
  2. Verify that the Notice of Routine Audit and Audit Questionnaire were sent to the taxpayer.
  3. Examine the Audit Questionnaire completed by the taxpayer to determine:
    1. Person to contact and location of records
    2. Description of the business activity
    3. Availability of computer records
    4. Special instructions
    5. Person who has authority to sign the Agreement to Extend the Period of Limitation
  4. Review Taxpayer History. (See the following section Audit History)
    1. Review title information.
    2. Compare with CATS/Agency Work Manager.
    3. Verify that the history is current.
    4. Review outlet information.
    5. Look for obvious inconsistencies or patterns in reported amounts.
    6. Check for and analyze any open collection records.
  5. Examine prior audits, if any for: (See the following section Prior Audits)
    1. Prior periods audited
    2. Type and size of business
    3. Location and type of records
    4. Person or persons contacted
    5. Errors noted
    6. Hearings decision, if any
  6. Examine other documents for additional information including:
    1. Audit leads, if any
    2. Correspondence with taxpayer or with others in reference to the taxpayer
    3. Any other sources such as newspaper articles, magazine stories, etc.
  7. Review applicable portions of:
    1. Cigar and other tobacco products tax statute and rules
    2. Audit procedures manual
    3. Memos
  8. Select and evaluate a six month sample for internal control testing purposes when possible
    1. Use monthly tax due for all classes to build population
    2. Complete manufacturers reconciliation for selected months
  9. Contact taxpayer via telephone.
    1. Inform the taxpayer of the audit period.
    2. Inform the taxpayer of other taxes to be audited.
    3. Set an appointment to begin fieldwork (auditor should allow time to complete pre-audit in-office reconciliations).
    4. Request vendor list with annual purchase totals (when possible)
    5. Request copies of the following for the six month sample months selected and evaluated:
      1. Texas Distributor Monthly Report of Cigar and Tobacco Products
      2. Class W worksheets
      3. Distributor Receiving Record of Cigar and Tobacco Products
      4. Distributor Report of Interstate Sales
      5. Certificates of Tax Exempt Sales

Audit History

The history is a computer-generated summary of all transactions relating to a particular tax account. Taxpayers file Form 69-133 Texas Distributor Monthly Report of Cigar and Tobacco Products effective 09/01/2009. Supplemental reports include the Form 69-134 Texas Distributor Monthly Report of Cigar and Tobacco Products Class W worksheet effective 09/01/2009, Form 69-135 Distributor Report of Interstate Sales of Cigar and Tobacco Products effective 09/01/2009, Form 69-136 Distributor Receiving Record of Cigar and Tobacco Products effective 09/01/2009, and Form 69-315 Certificate of Tax Exempt Sales effective 09/01/2009 Only the information on Form 69-133 is entered into CICS. The other forms may be viewed through Filenet imaging.

Prior to 09/01/2009, reporting and classification of Other Tobacco Products was based on a percentage of the manufacturer's list price for Class A tobacco. Reporting forms changed at 09/01/2009.

To order an Audit History, follow these steps:

  • From CICS in the application Bluezone, enter XIRPTS.
  • Press PF3 to forward to the last page, then back one page by pressing PF2 to locate "Audit History."
  • Put an X beside "Audit History" press Enter.
  • Enter the taxpayer #, tax type 88, sub-type 18, and a beginning and ending audit period, and "Y" for yes to print a hardcopy (downloading to Excel is not available).
  • Enter the 4 digit office ID number and press enter to auto-enter office printer ID or
  • Enter the office's high speed printer ID.
  • Press PF10 to 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 cigar and tobacco 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 History

  • Audit Type: Describes the type of audit: Original, Amended, Refund
  • Period: Periods covered by the audit
  • Final Tax adjustment
  • Error Code: Type of error(s) noted in the audit period
  • Tax Reported: May be used to determine if prior audit had a gross reporting error

Active Outlets during Audit Period

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

Report Information

  • Periods covered by this report
  • Lists estimated, non-filer, and late returns

Reported Data by Outlet

  • Outlet Number: The outlet covered by this report
  • Detail listing of period return filed data, purchases, deductions, and authorized credits

Summary of Reported Data

  • Summarizes all outlet data by period as reported by the taxpayer

Taxable Amount/Tax Due Summary

  • Summarizes taxable amount and total tax due by period for all outlets

Payment Information

  • Postmark date
  • Amounts paid
  • Amounts transferred – payments by taxpayer for previous or subsequent periods

Important: The auditor should examine all reported amounts for any fluctuation which appear to be unusual. The auditor should examine ending inventories of a report period to the beginning inventory for the subsequent report period. These amounts should equal each other. 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.
  • 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.

Manufacturer's Comparative Reconciliation

Perform reconciliation during the pre-audit phase of all cigar and other tobacco products tax audits using the six month sample selected and evaluated. A manufacturer's comparative reconciliation is the process of comparing sales data supplied by the various cigar and other tobacco manufacturers to the purchase data reported by a distributor. All six sample months should be reviewed. A short test should not be considered to determine volume of errors.

The cigar and other tobacco distributor's report of the largest four manufacturers shipments can no longer be ordered on CICS. Contact Audit Headquarters for reported manufacturer data and procedures for obtaining distributor purchases.

Collecting sales information on manufacturers will be cumbersome. Allow time for this task in the pre-audit phase.

Cigar and Other Tobacco Products Purchases

  • 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 Audit Headquarters to determine whether data can be retrieved.
  • Distributors are furnished with a monthly report, receiving record and Class W worksheet forms. These are generally filed together. The monthly reports and receiving records and Class W worksheets are currently imaged. If the monthly reports, receiving reports and Class W worksheets are available on CICS, or the six month sample reports are provided by the taxpayer, the auditor should use pre-audit time to compare the manufacturer's sales to the distributor's reported purchases. A schedule of exceptions should be prepared prior to the entrance conference listing discrepancies between the manufacturer and distributor reports to be reviewed during fieldwork. This prior review will minimize the time spent looking for problems at the taxpayer's location.

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(Revised 07/2012)