taxes

Auditing Fundamentals

Chapter 4 – Entrance Conference

Introduction

The entrance conference is a meeting between the auditor and the taxpayer or taxpayer's designated representative, prior to beginning the examination of the taxpayer's books and records. This is generally the first face-to-face meeting between the taxpayer or representative and the auditor.

The entrance conference is the foundation of a good audit and generally sets the tone of the auditor's dealings with the taxpayer. The taxpayer should be left with the impression that the auditor will be honest and fair, flexible and interested in serving the taxpayer, and willing to educate and assist the taxpayer.

During the entrance conference the auditor should make the taxpayer aware of the purpose of the audit and what is expected of the taxpayer, as well as what the taxpayer may expect of the auditor.

Topics to Discuss at Entrance Conference

Upon arrival at the taxpayer's place of business, the auditor should properly introduce himself or herself, present Agency business card and when appropriate, the proper identification. Then the auditor should hold a preliminary discussion with the taxpayer and/or his representative(s) about the business and the audit, including the following policies:

  • The purpose of the audit - to insure compliance with the state tax laws and reporting procedures
  • Taxes to be audited
  • Audit periods involved — obtain statute waiver, if applicable

    Note: It is Audit Division's policy to protect the established audit period once the audit is in progress while allowing for audit processing and billing time (AD 17)
  • Discuss the taxpayer's business operations, business activities, and organization of the corporation
  • Types of customers
  • Discuss the taxpayer's accounting system and reporting activity
  • Personnel who prepare the returns and any changes in personnel
  • Discuss the taxpayer's return preparation and records used to prepare the returns
  • Discuss internal control checks used to determine if returns are prepared accurately
  • Determine availability and location of records
  • Determine availability and location of resale, exemption, and direct payment exemption certificates
  • If some records are unavailable, determine the reason and document in the audit plan
  • Document all requests for records in the audit plan
  • If there are any problems in obtaining necessary records, a written request for those records should be sent to the taxpayer - follow the instructions in AP 70
  • What audit procedures may be used - detail, sample, Computer Audit Menu System (CAMS), etc.
  • Verify historical information with the taxpayer and perform necessary file maintenance - TCRs, applications, etc.
  • Update information obtained through pre-audit research
  • Explain that any collection or file action will continue even though an audit is in progress - the auditor should always have the taxpayer file any returns that are delinquent
  • Tour the facilities to understand the taxpayer's business, products, possible manufacturing exemptions, and assets maintained

Questions that were not covered during the telephone contact should be discussed during the entrance conference (See Telephone Contact).

Agreement to Extend Period of Limitation

The 67th Legislature established a four-year statute of limitation for all taxes. The Legislature also allowed for an extension of the statute of limitation up to two years. An Agreement to Extend Period of Limitation form is the most frequent method of extending the statute. The form, once it is signed by the auditor and authorized taxpayer representative, then constitutes a legal document. It establishes a new expiration date for specific reporting periods to allow for the completion of an audit.

General Information

  • The Agreement to Extend Period of Limitation is located in Comprehensive Audit Tax System (CATS) at:

    'Assignment List\Assignment Detail' and clicking on 'Extend Statute'

    A series of prompts will appear to aid the auditor in completing the form
  • The auditor should print two copies of the agreement,
    1) One for the audit package as an Exhibit, and
    2) One, for the taxpayer's records, given at the time the agreement is signed by the taxpayer or the authorized representative
  • An original signature should be entered on both forms
  • If there are mutltiple waivers, each is considered as one exhibit and each should be arranged in date order with the most current appearing first
  • Any minor changes made to the agreement before the audit is processed should be initialed and dated by both the auditor and the person signing as taxpayer - the term 'minor changes' includes line deletions, erasures, etc.
  • Any major changes to the agreement, such as adding new periods to extend, would require a new agreement
  • This agreement must be executed BEFORE:
    (a) The original statute expiration date of the period(s), OR
    (b) The extended expiration date(s) on the previously executed agreement(s).

Example:

The audit period for a monthly filer is August 1, 2002, through July 31, 2006. An agreement was previously agreed and signed on September 15, 2006 to extend report periods 0208 through 0301 until March 20, 2007. Statute of Limitations for report period 0302 will expire before the audit can be submitted. A new agreement must be signed extending report period 0302 on or before March 20, 2007. In addition, the audit periods previously extended must now be included in the new agreement and also extended to the new date.

  • ALL AGREEMENTS MUST BE INCLUDED IN THE AUDIT PACKAGE

The periods(s) extended should only be the period(s) in danger of expiring before the audit is processed. The taxpayer will continue to be entitled to credits or refunds on periods extended by the agreement. However, the statute expiration for a vendor's refund assignment is not affected by the taxpayer's statute extension.

A new waiver may be necessary if the extended expiration date is nearing and the auditor will require more time to complete the audit. This new waiver form should include those periods previously extended as well as the additional periods.

Signatures

The person who signs a statute extension agreement on behalf of a taxpayer must have clearly established authority to enter into a binding contract. An owner or partner would have such authority in an audit of a sole proprietor or partnership. An officer or director would have such authority in an audit of a corporation.

The Audit Questionnaire can provide sufficient written authorization if signed by the owner, partner, officer, or director. When an employee or third party representative claims apparent authority to extend the statute, the auditor should obtain written authorization from the owner, partner, officer, or director. This is especially important when there has been an ownership change or when a corporate reorganization has occurred. If a questionnaire was not returned, one needs to be obtained at the entrance conference. The questionnaire is attached to the Audit Plan and becomes part of the audit package.

  • The auditor should sign and date the agreement as a representative of the Comptroller
  • The authorized representative of the taxpayer should sign and date the agreement on behalf of the taxpayer/entity

    NOTE: The person signing as 'Taxpayer' must be authorized to sign the document per the Audit Questionnaire.

Form Completion

CATS adds the following information to the form based on the taxpayer information section of Assignment Detail:

  • Taxpayer Name
  • Address
  • Taxpayer Number
  • Type of Tax
  • Reason(s) to Extend

IMPORTANT: The reasons listed in CATS are the only reasons authorized by the statute for extending the assessment date:

  • More time needed
  • Circumstances
  • Pending laws
  • Revenue loss

DO NOT ADD ANY OTHER REASONS by amending the form in Word.
DO NOT ALTER ANY OF THE LISTED REASONS.

  • REPORT PERIOD(S): Enter the beginning and ending dates of the report period(s) being extended based on the taxpayer's reporting methods applicable for the tax type:
    • Monthly filers - enter the first day, last day, and year of the report period, i.e., for the 0703 report period enter '03/01/2007 through 03/31/2007.' The system will then change the dates to 'March 1, 2007, through March 31, 2007.'
    • Quarterly filers - enter the date which begins the period and the date which ends the period, i.e., for 071 use '01/01/2007 through 03/31/2007.' The system will then change the dates to 'January 1, 2007, through March 31, 2007.
    • Yearly filers - enter the first and last dates of the year, i.e., for 2007 use '01/31/2007 through 12/31/2007.' The system will then change the dates to 'January 1, 2007, through December 31, 2007.'
    • Franchise reports - enter the report year and the due date, i.e., '2007 Report due March 15, 2007' or for a first year report use 'First Year Report due (month, day, year).'

      NOTE: Only ONE report should be entered per line. If more than one report period is being extended, each period should be separately stated.
  • EXTENDED TO: Enter the date to which the assessment date for the period is to be extended:
    • The MAXIMUM time extension for any report period PER AGREEMENT IS 24 MONTHS from the statute expiration date (original or extended) of the report period.

      NOTE: Using the Agreement to Extend Period of Limitation, an audit can be extended to more than 24 months from the 'original' due date of a period. The maximum time extension per the Agreement is 24 months from the original due date OR the previously extended due date.
  • All periods extended on the statute waiver should be extended to the same date and include all periods which will expire through the date extended. See the Statute Waiver example.
  • Processing time of six weeks should be allowed for the date the periods are extended.

NOTE: The Agreement to Extend Period of Limitation is to be used when legitimate scheduling problems on the part of the taxpayer causes the audit field work to be delayed. Extensions may also be necessary when unforeseen audit problems arise and cause delays. Extensions are not tools for overcoming poor audit inventory management. (Interoffice Memo AD 17)

Agreement to Extend Period of Limitation - Exhibit

This is an example of an Agreement to Extend Period of Limitation (Statute Waiver)

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(Revised 10/2021)