International Fuel Tax Agreement (IFTA)/ International Registration Plan (IRP) Audit Overview (for non-auditors) Don Williams, Tax Policy Specialist, Idaho/ IFTA Audit Committee

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International Fuel Tax Agreement (IFTA)/
International Registration Plan (IRP) Audit
Overview(for non-auditors)Don Williams,Tax
Policy Specialist, Idaho/ IFTA Audit Committee
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Beginning Auditing Principles

• Auditing (narrowly defined) is a written report
  on the examination of records for a client.
• Auditors do not certify recordsbut report based
  on evidence providedthe records are reliable.
• IFTA and IRP audits answer two specific
  questions
• 1. Where did you go with your truck?
• 2. IFTA adds How much fuel did you use and
  where did you gas up?

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Beginning Auditing Principles (continued)

• IFTA licensee
• Is generally a single fleet
• files a calendar quarter fuel tax report on one
  return for multiple jurisdictions to
• report tax paid (fuel purchase) and
• fuel use (distance traveled)
• Has a license and decals issued/renewed on
  calendar year basis
• IRP registrant
• Registers one or more fleets once a year
• Report distance from July 1-June 30

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Beginning Auditing Principles (continued)

• IFTA audit determines if
• The fuel use tax due is correctly paid
• by fleet per jurisdiction
• based on the fleet MPG
• Tax paid on fuel purchases
• IRP audit determines if
• Registration fees are correctly paid
• per power unit per jurisdiction
• based on reporting period distance, and
• Based on apportionment percentage times fees by
  jurisdiction per unit in each fleet

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Beginning Auditing Principles (continued)

• IFTA auditor responsibilities
• IndependenceA210.200
• judicial impartiality
• obligation to fairness
• Equal considerationA420.200
• all jurisdictions treated the same
• ProficientA410.100
• Proper audit training
• IRP auditor responsibilitiesAPM302
• Give all Registrants and Members fair
  consideration
• Promote consistent application of Plan
• Promote cooperation with Registrants and Members
• Improve audit proficiency through educational
  opportunities

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Some Resources

• IFTA Audit Procedure Sources
• Agreement
• R209 and Article XIII Audits
• IFTA Audit Manual
• Additional Reference
• IFTA Best Practices Guide
• Jurisdiction Laws, Rules, Policy, Procedures.
• IRP Audit Procedure Sources
• The Plan
• Article II, DefinitionsAudit
• Article X, Records and Audits
• IRP Audit Procedures Manual
• Additional References
• Jurisdiction Laws, Rule, Policy, and Procedures

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What is an audit?

• How does IFTA define audit?
• physical examination by detail or sample
• accounting system internal control evaluation
• determining material difference between actual
  and reported operations by jurisdiction.
• How does IRP define audit?
• examination of records (including source
  documents)
• verify application distance
• evaluate accuracy of distance accounting system
  for the fleet (can be multiple fleets and
  multiple years).

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The Audit Process

• Pre-audit analysis and notification
• Opening conference
• Audit of records
• Evaluation of internal controls
• Identifying and communicating errors
• Closing conference
• Analysis of data
• Writing report, compilation of file, and
  notification
• If protested, redetermining audit based on
  additional information

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Pre-Audit Analysis and Notification
IFTA returns 3rd 4th Qtrs 2010 plus 1st 2nd
Qtrs 2011
IRP reporting period RY2012 application (for most
registrants)
equals

• Compare the IFTA returns and IRP applications
• Review the jurisdictions distance reported by
  each program
• Compare the number of IFTA decals to number of
  units registered under IRP, if differentwhy?
• Review addresses, contacts, etc.
• Notify licensee/registrant 30 days before audit.

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Opening Conference

• Discuss with the licensee/registrant
• Business operation,
• The audit procedures,
• The records to be examined,
• The sample
• Periods
• MethodologyHow are you going to audit?
• Error projectionHow and what will you project?
• Notification procedures

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Audit of Records

• Evaluation of Internal Controls, A640 APM 500
• Walk through to test control elements
• Tests of compliance
• Report on weaknesses
• Enter distance and fuel into spreadsheets or
  databases then test using tools (distance
  software, maps, etc.)
• Time constraints
• How long can you take to do an audit?
• Audit methodology
• How do you sample?

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Closing Conference

• Outline preliminary findings to include
• Review findings
• Explain possible penalty and interest,
• Recommendations to improve operations,
• Rights of appeal, and
• Identify to whom audit report is sent
• Preliminary findings are not audit results

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Analyzing Data

• Analysis is a review of the records by the
  auditor
• All records should support each other
• Miles trace to fuel
• Fuel to miles
• MPG is based on both factors.
• Are there gaps and holes?
• Is there other missing information?
• The auditor determines an error rate and projects
  rate against reported amounts.
• What is an error rateA730?

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Final Steps Before Notification

• Prepare the audit report
• Include only factual information and data
• If it is not in the audit report, it didnt
  happen
• Compile the audit file
• Send the audit report to licensee/registrant

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Final Steps After Notification

• Notify affected parties of the final results
• Inform the licensee/registrant of protest rights
• 30-day protest period (IFTA, R1410 IRP, 1065a)
• IFTA Use base jurisdiction procedure or R1400
• IRP Use base jurisdiction procedure, Section
  1065
• Notify jurisdictions of audit results
• IFTA May request re-audit/re-examination,
  R1360, or DRC, 1555
• IRP May request re-examination, 1040, or DRC,
  1400

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What Areas of an Audit are Likely to Result in a
Protest?

• Protests are
• more likely when the assessment is high
• not likely with a refund or no change
• Specific issues that may result in a protest
• Audit selection
• Audit sampling
• Inadequate records assessment
• Evaluation of internal controls
• IRP Verify functions with walk-through
• IFTA Formal report on weaknesses

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IFTA Audit Selection

• A310 number of audits
• 3 per year
• Multiple years or fuel types equal one
  audit
• Excludes new licensees
• A320 selection of audits
• Accounts stratified by distance
• high (top 15)
• low (bottom 25)
• Selection is based on total fleet distance
• Must include 25 high and 25 low

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IRP Audit Selection

• Article X, Section 1025
• 3 per year of renewed fleets
• One fleet for one registration year equals
  one audit
• Three records reviews equal one audit (NEW)
• A records review
• Does not adjust fees
• Determines adequacy of internal controls
  record-keeping
• May review less than one full registration year
• May be conducted before first renewal

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Comparison of Audit Selection

• IFTA requires stratification on audit size.
• IRP does not
• Jurisdictions may use
• Pure random sampling using a random number
  generator to select audits
• Judgmental sampling
• Other methods

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Audit Selection Methods

• Red flags
• Rounded numbers for distance on (both)
• IFTA report
• IRP application
• MPGs (IFTA)
• the same every quarter
• rounded (e.g. 5.0, 6.0)
• 1 or another low number used for distance in
  one or more jurisdictions (IRP)
• Non-contiguous jurisdictions (both)
• Low mileage per truck or decal (both)

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Audit Selection Methods (continued)

• Recommendations from 3rd party sources
• Enforcement divisions
• Fraud hotlines
• Other tips with credible information
• Visual oddities noted by staff
• Shared information between divisions

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IFTA Sampling

• A530-audit must be by sampling
• Samples
• must be representative
• reflect business operations
• Licensee should be
• Allowed input on sample selection
• licensee should sign an agreement that sampling
  is appropriate
• A520-use of three representative months is
  suggested

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IRP Sampling

• APM 503
• Audits are generally conducted on a sample basis
• Discuss with registrant
• sample vehicles,
• sample periods, and
• records required
• At least three representative months
• Auditor may use different sampling methods

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Inadequate Records DefinitionIFTA

• What should be audited?
• A540.200-audit completed using best information
• burden on licensee
• A540.300-reasonable attempt to verify reported
  information
• What is a reasonable attempt?
• What are inadequate records?
• What is the licensees responsibility?
• What is an Individual Vehicle Distance Report
  (IVDR), P650.100?
• Trip report may be more than one page

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Inadequate Records DefinitionIRP

• Official commentary for Section 1015records are
  inadequate if as a whole they cannot be audited
• What can be audited
• 1005(a)adequate to verify application distance
• Official commentary for 1005(b)records are
  adequate when they are
• Sufficient substantially cover operations
• Appropriate contain auditable information

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Inadequate Records AssessmentIFTA

• A550-procedure for inadequate assessment?
• Estimate fuel use using
• prior experience with licensee
• licensees with similar operations
• industry averages
• records available from distributor
• other pertinent info obtained or examined
• Unless the auditor finds substantial evidence to
  the contrary by reviewing the above, in the
  absence of adequate records, a standard of
  4.0MPG/1.7KPL will be used
• A550.200- When tax paid fuel documentation is
  unavailable, all claims for tax paid credit will
  be disallowed

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Inadequate Records AssessmentIRP

• Based on apportionable fees paid on actual and
  estimated distance, the registrant will pay a
  penalty for inadequate records. Additional fees
  are as follows
• First audit offense, 20
• Second audit offense, 50
• Third and subsequent audit offenses, 100
• IRP Ballot 392will add unreported distance
• Go to http//www.irponline.org. Select IRP
  Ballots and Open Ballots

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Evaluation of Internal Controls-IFTA
A640 Evaluation of Internal Controls The
auditors study and evaluation of the licensees
internal accounting system has several
identifiable phases .100 Review and
documentation (information gathering) .200
Preliminary Evaluation (identify apparent
weaknesses) .300 Tests of compliance (optional
extensive tests) .400 Report on
weaknesses (formal report before end of audit)
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Evaluation of Internal Controls-IRP

• APM 202. Study and Evaluation
• Distance accounting system
• gain understanding
• document
• Evaluate internal controls
• document weakness
• inform registrant
• verify reported functions with walk-through
• Obtain sufficient and appropriate evidence
  (records) to make reasonable conclusions
• sufficientsubstantially cover operations
• appropriateinformation needed to audit

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General Definition of Internal Control
The process designed to provide reasonable
assurance regarding the reliability of reporting,
effective and efficient operations, and
compliance with applicable laws and regulations.
Safeguarding assets against theft (or
unintentional loss) and unauthorized use,
acquisition, or disposal is also part of internal
control.
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Why are Internal Controls Important to Auditors?

• Are the internal controls reliable?
• What are the impacts of any weaknesses in the
  controls?

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Why is it Important to Study Internal Controls?
The auditor can determine weaknesses in the
internal control system and decide whether the
distance and fuel records are reliable. This
helps the auditor select of sample periods as
well as sample size. When the records are more
reliable, fewer records are required to
samplethere is more assurance the records are
correct.
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How are Internal Controls Evaluated?

• To properly evaluate the internal controls the
  auditor will conduct a review through inquiry and
  observation and should gain an understanding of
  the flow of the transaction process.
• Is there separation of duties?
• Are there policies and procedures in place to
  encourage and support internal controls?
• Are accounting codes used for the tracking of
  distance and fuel?

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How are Internal Controls Evaluated? (continued)

• Were there changes in the accounting procedures
  or operations during the audit period?
• What records were used to compile the IFTA
  reports and IRP applications?
• What is the process used
• To get distance and fuel information from
• The driver to support staff to the governing
  agency?

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How are Internal Controls Evaluated? (continued)

• Does the staff create summaries (monthly,
  quarterly)?
• Does the company audit the summaries and drivers
  records before the tax returns or applications
  are submitted to the base jurisdiction?
• Does the company ensure all distance traveled and
  fuel consumed is being reported?
• In the the proper quarter or application year?

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Questions?