The Mechanics of Tangible Personal Property Auditing

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The Mechanics of Tangible Personal Property
Auditing
Neill Murphy, CPADan Crumley, CPA
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Benefits of an Audit Program
Educates Taxpayers
Increased Compliance
Equity and Uniformity
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Benefits of an Audit Program

• An audit program may lead to increased tax
  revenues.
• That should not, however, be the primary purpose
  and goal of an audit program.
• Equity and Uniformity should be the goal.

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Who is penalized if you dont audit?

• Taxpayers that file their Personal Property
  Returns correctly are penalized
• Taxpayers who unknowingly report too much on
  their Personal Property return

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Why do you not audit?

• Creates Extra Work
• Politically Unpopular
• Consumes Budgetary Resources

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Creates Extra Work
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Politically Unpopular

• Auditing is not anti-business
• It is pro-homeowner

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Consumes Budget Resources
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Why you should audit

• The self-reporting nature of personal property,
  along with some misunderstanding of personal
  property, often results in reporting errors on
  the personal property return.

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Todays Headlines

• 280M in untapped tax beckons
• With budget cuts on the horizon, a neglected pot
  of business assessments may glimmer more
  brightly.
• As much as 280-million in local taxes go
  uncollected each year in Florida because many
  businesses duck their obligations and government
  looks the other way.
• At issue is the tangible personal property tax, a
  tax on business equipment, fixtures and furniture
  that brought about 1.9-billion to Florida's 67
  counties last year. By SYDNEY P.
  FREEDBERGPublished July 8, 2007

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Components of a Successful Audit Program

• Obtain the approval and support of superiors
• Adopt a selection process
• Develop an audit program

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Obtain Support of Superiors
No explanation needed
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Adopt a Selection Process

• Random or Other Statistical Sample
• Certain Criteria The County can audit
• every account more than 100,000 over the next
  five years
• all non-filers
• all new accounts
• any account that shows a year over year increase
  or decrease of over 25
• any new account that shows up with older equipment

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Develop an Audit Program

• Compose an Initial Audit Letter
• Create a work-paper template
• Review Financial Documents
• Calculate Results
• Provide results to taxpayer in draft format
• Finalize audit results and process findings

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Initial Audit Letters

• The initial audit letter is the who, what, where
  and when of the process.
• It will notify the taxpayer that their account
  has been selected for audit for the selected
  years.
• It will tell them how long they have to comply,
  who they should contact if they have questions
  and what information they need to provide.

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Initial Audit LetterPage 1
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Initial Audit LetterPage 2
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Create a Work-Paper Template

• We recommend using Excel.
• It works best because it can be easily
  communicated to the taxpayer.
• Have columns for Year Acquired, Cost, RCN Factor,
  Percent Good, Audited Value, Reported Value, and
  Discovery.

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To tour or not to tourthat is the question

• Benefits of a tour
• Identify additional taxpayers not on tax rolls
• Identify equipment not on depreciation schedule
• They are good public relations
• You get out of the office!!
• They can be fun!!
• Minimize the risk of offending nobody likes to
  be summoned to an office to produce records.
  Remember who the customer is.

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Document Review

• What are all these documents?
• Balance Sheet
• Depreciation Schedule
• Trial Balance
• Chart of Accounts

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Balance Sheet

• A balance sheet is simply a snapshot of a
  companys financial position at a certain point
  in time.
• A balance sheet is also where we will find the
  total capitalized cost of the tangible personal
  property of a company.

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Depreciation Schedule

• A depreciation schedule is a listing of the cost
  of assets capitalized by the company. It should
  include year acquired, cost, depreciable life and
  a description of the asset.
• This will also be called a fixed asset listing.

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Trial Balance

• A trial balance is a listing of the ending
  balances of all the accounts in use by the
  company.
• Some things you can learn from a trial balance
  include.

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Trial Balance continued

• If a company has spare parts inventory
• If a company has equipment leasing expense
• If a company expenses certain assets below a
  certain cost threshold

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Chart of Accounts

• A chart of accounts is a listing of all the
  accounts in a companys accounting system.
• If the trial balance is not available, you should
  review the chart of accounts and ask to see the
  ending balances in any accounts you believe may
  contain tangible personal property.

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Now What?

• Reconcile the financial statements to the
  detailed depreciation schedule.
• Put another way, make sure that the asset listing
  you have been provided is the complete population
  of the assets of the company.

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Reconciliation
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Classify the Assets

• Classify the companys assets according to the
  methodology employed by your county.
• The coded asset list will show the Countys
  position on each asset and provide a filing
  template for the taxpayer in future years.

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Summarize the Data

• Utilize subtotaling
• Filtering
• Pivot Tables
• Whenever possible, try to obtain an electronic
  copy of the taxpayers depreciation table.

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Audit Results Summary
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Other Taxable Items

• Review the trial balance for
• other taxable items in addition to those on the
  asset list.
• capitalized supplies or spare parts.
• expensed supplies (to formulate an estimate of
  taxable supplies on hand)
• Inquire of management as to whether fully
  depreciated assets remain on the books or are
  removed.
• Inquire of management as to the capitalization
  threshold for equipment purchases.

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Other Audit Issues

• Asset Purchases vs. Stock Purchases
• Book versus Historical Cost
• Ghost Assets
• Apply common sense

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Asset Purchase versus Stock Purchase

• In an asset purchase, the acquirer is only buying
  the assets of the company and no liabilities.
  They will allocate the purchase price to the
  assets they have bought.
• In a stock purchase, the entire company is
  acquired and the historical costs basis will
  generally be retained.

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Booked Cost versusHistorical Cost New

• In an asset purchase, the acquiring company will
  allocate the purchase price based on their
  reading of the relative values of the assets.
• Those assets will include receivables, inventory,
  equipment, and perhaps goodwill.
• Often, the equipment will be shown at their net
  book value (which may be zero).

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Audits should be Objective, not Subjective

• If the audit results show the taxpayer has
  over-reported their Tangible Personal Property,
  they should get a refund.
• An audit is not punitive in nature. It is only
  designed to assess the value that is legally due.
• Audits dont ask why? They simply ascertain the
  what.
• Property Tax Audits vis-à-vis other types of
  audits are unobtrusive.

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Typical Mistakes found on Audit

• Book value reported as Historical Cost
• Personal Property items used in the business
  considered Real Property by Taxpayer and vice
  versa (often found in Leasehold Improvements
  section of Fixed Asset list)
• Fully Depreciated assets not returned
• Expensed assets not returned.
• Capitalized Repairs ignored
• Assets reported net of Trade-in
• Freight, installation charges not reported

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Questions, Comments, Funny Audit Stories?