taxes

Motor Fuels Tax Audit Procedures Manual - Ch. 153

Chapter 6 - Audit Planning

Introduction

An audit plan is a detailed outline of the auditor's plans and procedures used in conducting an audit. An audit plan will include the following items:

  • A description of the business activities.
  • A schedule of planned audit procedures.
  • A summary of the evaluation of the records.
  • A description of special problems to be resolved in the audit.
  • Deviations from the plan, if any, and why the deviations were made.
  • The results of the audit.
  • Listing of events/activities occurring during the audit.

Record of Audit Planning, Activities and Results

The form, "Record of Audit Planning, Activities and Results" documents the audit plan for every audit performed. This form should be completed as the audit progresses.

For a detailed explanation of Audit Planning and Documentation see the Auditing Fundamentals Manual, Chapter 3.

Audit Checklists

The following audit checklists can be used to insure that all areas in an audit have been considered.

Every item on the checklists does not need to be mentioned in the audit plan, nor is it all-inclusive.

These should be the auditor's guides. Every item on the checklists does not need to be mentioned in the audit plan. It also should be noted that these are not all-inclusive lists. Do not include the checklist in the audit plan.

Gasoline Distributor Checklist

I. PRE-AUDIT RESEARCH
A Check Agency Workmanager
1. Assignment Comments
2. Any special instructions
B. Verify that the Taxpayer's Information Letter and Audit Questionnaire were sent to the taxpayer.
C. Examine the Audit Questionnaire completed by the taxpayer to determine:
1. 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 Period of Limitation.
D. Review the Taxpayer History:
1. Review title information
2. Compare with Agency Workmanager
3. Date of history (should be current).
4. Has there been a change in permit type?
5. Schedule reported data on computerized spreadsheet for easy reference and note any extraordinary items and changes. See Exhibit VII in Chapter 5.
6. Review Reported Data
7. Look for obvious inconsistencies or patterns in reported amounts.
8. Review history and supplement schedules to get a general understanding of taxpayer's fuel business as reported.
9. Check for and analyze any open collection records.
10. Important
a. All fuels refund claims except for credit gallons have been converted to the Universal Refund Claims System. It is essential that terminal inquiry be run and that the auditor has verified the refund information.
b. The Inquiry codes are as follows:
(1) RCDATI.TP#.86 (for gasoline)
(1) RCDATI.TP#.87 (for diesel)
E. Run Terminal Inquiry
F. Examine prior audits, if any for:
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.
G. Examine the 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, magazines stories, etc.
H. Review applicable portions of:
1. Fuels Tax Law/Rules
2. Manual procedures.
3. Memos
I. Set up appointment via telephone
1. Inform taxpayer of audit period.
2. Inform taxpayer of other taxes to be audited.
II. ENTRANCE CONFERENCE

A. List the taxpayer's representatives who attended the entrance conference.
B. Determine the taxpayer's knowledge of the law.
1. Discuss the taxpayer's interpretation of both the law and rules.
2. Is the taxpayer aware of recent changes in tax policy/law affecting the business?
C. Determine business activity.
1. What fuels are sold?
2. What are the types of customers?
3. Does the taxpayer sell via service station?
a. Owned?
b. Consigned?
4. How are fuels delivered to customers?
5. How does the taxpayer determine when to charge tax and when not to?
6. Is the taxpayer selling fuel on a net basis?
7. Is bulk storage maintained?
8. Who are the suppliers?
9. Does the taxpayer use any gasoline? How does he account for it?
10. Do any taxpayer-owned gasoline powered trucks travel interstate?
D. Discuss the taxpayer's accounting system and reporting activities.
1. Determine the taxes to be audited.
2. What types of records are needed to conduct the audit?
3. Where is the location of the records needed to conduct the audit?
4. Who are the personnel who prepare the report and have there been changes?
5. What are the step-by-step procedures used by the taxpayer to prepare the return?
6. What are the internal control checks to ensure that all taxable uses are reported?
E. Verify the data from the history with the taxpayer and complete the appropriate file maintenance.

III. INVENTORIES

A. What type of inventory facilities?
1. Location?
2. Capacity?
3. Number of tanks?
B. Are the inventories physical or book? Are the two ever reconciled?
C. Does the reported or book inventory ever exceed total capacity? (If so, this may be indicative of unaccounted for gallons.)
D. How often and when are the inventories taken?
E. Are the reported beginning inventories the same as the last month's reported ending inventories?
F. Were any tax-paid inventories acquired? (Example: Purchasing a service station with tax-paid fuel inventory.) Was proper accounting used for such inventories?
IV. PURCHASES
A. How are the purchases recorded and compiled for the report?
B. Are the purchases recorded and reported on net or gross?
C. If the purchases were reported at net, would there be any tax consequence if adjusted to gross:
1. In the bulk plant operations?
2. In the service station operations?
D. Are the exchange transactions being reported correctly?
E. Examine the procedures for reporting refined or blended products.
F. Evaluate the internal controls.
G. A test of the taxpayer's recorded and reported purchases should be made.
1. Select the test months or periods randomly.
2. Verify the purchase invoices to the records and to the reports.
3. Analyze the effect of any discrepancies considering:
a. Bulk plant operations.
b. Service station operations.
c. The statute time period.
4. If adjustments are necessary, decide whether to do a detailed audit or a projected audit per the analyses and statute periods per C and G.3 above.
5. Is the destination on tax-free imports the same as on the bill of lading?
a. Are import verification numbers obtained if necessary?
H. Verify the tax-paid purchases in detail if at all feasible.
1. Did the taxpayer actually remit the tax to his vendor?
2. Check the vendor account payable to make sure that the tax initially charged and paid was not credited or refunded at a later date.
3. Were the tax-paid gallons included in the reduction of line 25 of the return the same as on line 4 and the same as paid to the vendor?
4. Was the seller a permitted distributor? If not, further investigation may be necessary on the seller.
5. Make sure only Texas fuels tax credit is claimed.
V. SALES

A. How are sales recorded and compiled for the report?
B. Evaluate the internal controls.
C. Taxable sales in bulk.
1. How does the taxpayer compile total taxable sales from bulk?
2. Select periods or months on a random basis and trace the taxable invoices from the records to tax reports.
3. If discrepancies are found, decide how to adjust.
4. Is the taxpayer making any taxable sales at net?
(Reminder: All sales to end-users and deliveries of <5,000 gallons to resellers should be taxed at gross gallons.)
a. Does the taxpayer have the necessary Statements of Resale to cover such sales?
b. Are these sales qualified under the 5,000-gallon single delivery provisions of Rule 3.189?
c. Would any adjustments necessary for net/gross be material?
5. Does the distributor have a copy of the exemption certificate issued by the Comptroller to the transit company?
6. Is the taxpayer charging tax on all sales to interstate truckers and IFTA permit holders?
D. Service station sales.
1. Does the taxpayer own service stations or other retail fuel outlets?
2. If so, how is the taxpayer reporting those sales?
a. If the taxpayer is reporting on gross deliveries (drops), appropriate tests should be made and adjustments made if necessary. Does the taxpayer know that he has the option of reporting on actual sales (metered sales)?
b. If the taxpayer is reporting on gross or net drops, appropriate tests should be made.

Refer to Chapter 10 on Methods A, B, and C.

If differences are over 2% for a yearly period, adjustments must be made, using gross deliveries or metered sales.
E. Tax-free sales
1. Test reported sales to U.S. Government, Texas public school districts, Texas public school transportation companies and Texas non-profit electric and telephone cooperatives. Verify documentation.
2. Test reported exports. Verify documentation. Are export diversion numbers obtained when necessary?
3. Test reported sales to permitted distributors.
a. Did the customer's distributors have valid permits for the periods reported?
b. Analyze supplemental schedules and compare to vendor's reported amount using inquiry.
4. Test reported sales to aviation fuel dealers.
5. Are all sales going to the same location indicated on the bill of lading?
F. Taxable uses.
1. Does the taxpayer have gasoline powered highway vehicles?
2. How is the fuel reported?
3. Test interstate trucker and/or IFTA operations.
a. Check miles per gallon
b. Compare Texas data to reports for other states (IFTA).
c. Refer to FUELS TAX CHECKLIST INTERSTATE TRUCKERS & IFTA PERMIT HOLDERS for further detail.
VI. REFUND CLAIMS

A. Examine refund claims.
B. Verify that tax had been previously paid on all gallons claimed for refund, including sales to the U.S. Government from service stations, Texas public school districts, qualifying Texas public school transportation companies, and Texas non-profit electric and telephone cooperatives.
C. Verify that credit gallons have been properly accounted for and not duplicated on monthly reports and refund claims.
D. If the taxpayer has tax-free uses, is he properly reporting tax and then claiming refund?

VII. EXIT CONFERENCE

A. Explain to the taxpayer the audit procedures performed. The audit procedures would include a discussion of the following:
1. All records examined.
2. A detailed description of audit procedures utilized, audit adjustments and flow of audit package.
3. Minor errors for which no adjustment(s) were made.
4. Applicable law, ruling and proper reporting procedures.
5. Additional information the taxpayer may obtain to reduce the liability.
6. Taxpayer's method of correcting errors noted in the audit for future compliance. Provide copies of any printed material, which the taxpayer may use.
7. Taxpayer's disagreements with the audit should be clearly understood by the auditor and documented.
B. Other procedures, which should be discussed with the taxpayer, include:
1. The billing process.
2. Payment procedures.
3. Right to a Dispute Resolution Conference and provide brochure.
4. Redetermination procedures. Provide "What If I Don't Agree With My Tax Bill?" brochure.
5. Policies and procedures pertaining to penalty and interest.

Gasoline Jobber Checklist

I. PRE-AUDIT RESEARCH

A. Check Agency Workmanager
1. Taxpayer identification and location
2. Reason for audit request
B. Verify that the Taxpayer's Information Letter and Audit Questionnaire were sent to the taxpayer.
C. Examine the Audit Questionnaire completed by the taxpayer to determine:
1. 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 Period of Limitation.
D. Review the Taxpayer History:
1. Review title information
a. Compare information with Agency Workmanager
2. Has there been a change in permit type?
3. Check audit status.
NOTE: Reminder, Jobbers do not file reports.
E. REFUNDS
1. All fuels refund claims have been converted over to the Universal Refund Claims System.
2. Run terminal inquiry in order to verify the information listed on the history.
a. RCDATI.TP#.86 (for gasoline)
b. RCDATI.TP#.87 (for diesel)
F. Examine prior audits, if any for:
1. Prior periods audited.
2. Type and size of business.
3. Location of records.
4. Person or persons contacted.
5. Errors noted.
6. Hearings decision, if any.
G. 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.
H. Review applicable portions of:
1. Fuels Tax Law/Rules.
2. Manual procedures.
3. Memos
I. Set up appointment via telephone.
1. Inform taxpayer of audit period.
2. Inform taxpayer of other taxes to be audited.

II. ENTRANCE CONFERENCE

A. List the taxpayer's representatives who attended the entrance conference.
B. Determine the taxpayer's knowledge of the law.
C. Determine business activity.
1. What fuels are sold?
2. What are the types of customers?
3. Does the taxpayer sell via service station?
a. Owned?
b. Consigned?
4. How are fuels delivered to customers?
5. Is the taxpayer selling fuel on a net basis?
6. Is bulk storage maintained?
7. Who are the suppliers?
D. Discuss the taxpayer's accounting system and reporting activities.
1. Determine the taxes to be audited.
2. Where is the location of the records needed to conduct the audit?
3. What are the internal control checks to ensure that all fuels is being accounted for?

III. INVENTORIES

A. What type of inventory facilities?
1. Location?
2. Capacity?
3. Number of tanks?
B. How often are inventories taken?

IV. PURCHASES (All purchases must be Texas tax-paid.)

A. How are the purchases recorded?
B. Are the purchases recorded on net or gross?
C. Evaluate the internal controls.
D. A test of the taxpayer's recorded purchases should be made.
1. Select the test months or periods randomly.
2. Verify the purchase invoices to the records and to the Cash Disbursements or Check Register.
a. Did the taxpayer actually remit the tax to his vendor?
b. Was the seller a permitted distributor? If not, further investigation may be necessary on the seller.
c. Make sure all tax paid is Texas fuels tax.
3. Analyze the effect of any discrepancies considering:
a. Bulk plant operations.
b. Service station operations.
4. If adjustments are necessary, decide whether to do a detailed audit or projected audit.
E. Analyze and attempt to reconcile the purchases to vendor's reports (vendor supplemental schedules). Decide whether a further check with the sellers is necessary.

V. SALES

A. How are sales recorded?
B. Evaluate the internal controls.

VI. REFUND CLAIMS

A. Examine refund claims.
B. Verify that tax had been previously paid on all gallons claimed for refund, including sales to the U.S. Government, Texas public school districts, Texas public school transportation companies and Texas non-profit electric and telephone cooperatives.
C. Verify that credit gallons have been properly accounted for and not duplicated on monthly reports and refund claims.

VII. EXIT CONFERENCE

A. Explain to the taxpayer the audit procedures performed. The audit procedures would include a discussion of the following:
1. All records examined.
2. A detailed description of audit procedures utilized, audit adjustments and flow of audit package.
3. Minor errors for which no adjustment(s) were made.
4. Applicable law, ruling and proper reporting procedures.
5. Additional information the taxpayer may obtain to reduce the liability.
6. Taxpayer's method of correcting errors noted in the audit for future compliance. Provide copies of any printed material, which the taxpayer may use.
7. Taxpayer's disagreements with the audit should be clearly understood by the auditor and documented.
B. Other procedures, which should be discussed with the taxpayer, include:
1. The billing process.
2. Payment procedures.
3. Right to a Dispute Resolution Conference and provide brochure.
4. Redetermination procedures. Provide "What If I Don't Agree With My Tax Bill?" brochure.
5. Policies and procedures pertaining to penalty and interest.

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(Revised 02/2004)