Motor Fuels Tax Audit Procedures Manual - Ch. 153

Terminal Inquiries

There is a great deal of information available to the auditor through terminal inquiry. The information used in an audit is not limited to the account being audited. Inquiries are made to obtain information on related entities, customers and vendors. This section will also reference some useful inquiries used in audits as well as pre-audit activities.

As of September 1, 2000, the motor fuels data was converted to the Fee System. This conversion coincided with the implementation of SB 1547 when additional reporting categories were added. The chart depicted below indicates the various reporting categories before and after this conversion. These reporting category changes should be kept in mind when creating samples, reconciling amounts, and performing pre-audit research.

		FEE SYSTEM Reporting Category	"OLD" System Reporting Category
PURCHASES
	TAX-FREE
		From Permit Holders Refined, Distilled, Manufactured in Texas Imports Blending Materials	From Permit Holders Other Tax-Free Purchases Other Tax-Free Purchases Other Tax-Free Purchases
SALES
	TAX-FREE
		To Permit Holders To Aviation Fuel Dealers Deliveries directly into aircraft or aircraft servicing equipment Gallons exported from Texas Public School Districts or companies providing Texas public school transportation services Dyed Diesel sold on a signed Statement Undyed (clear) diesel sold on a Signed Statement Tax-Free sales/uses in off-highway equipment (diesel only)	To Permit Holders To Aviation Fuel Dealers Other Tax-Free Sales/Uses Other Tax-Free Sales/Uses - Diesel Exports - Gasoline Other Tax-Free Sales/Uses Other Tax-Free Sales/Uses Other Tax-Free Sales/Uses Other Tax-Free Sales/Uses
USERS
	DD Bonded User		Bonded User
		Dyed Diesel Purchases - Tax Free Dyed Diesel Uses - Tax Free Taxable Uses - Dyed Diesel	Tax-Free Purchases (Dyed and/or undyed) Tax-Free Uses (Dyed and/or undyed) Taxable Uses (Dyed and/or undyed)>
	AG Bonded User		Bonded User
		Undyed Diesel Tax-free Purchases Tax-Paid Purchases Undyed Diesel Uses - Tax Free Dyed Diesel Uses - Tax Free Taxable Uses	Tax-Free Purchases (Dyed and/or undyed) Tax-Paid Purchases - Undyed Tax-Free Uses (Dyed and/or undyed) Tax-Free Uses (Dyed and/or undyed) Taxable Uses (Dyed and/or undyed)

The inquiry T-code will be referenced as well as some information as to its use in an audit. Entry techniques, formats and less used T-codes will not be discussed. Two excellent guides exist for your assistance in these matters:

STS Quick Reference Manual - A list of available codes, descriptions and entry formats.
Fee System Manual

In addition, some inquiries have been developed in aid in use of the terminal:: ITIMSL -List of functions available and description; ITIMSF - Inquiry codes and different entry formats; ABBREV - List of abbreviations used on inquiry screens.

The following is a list of some commonly used inquiry codes and some of their uses.: NAMNUM - Used to find taxpayer numbers when you only have the name.

Other inquiries use the taxpayer number instead of taxpayer name.: XREFER - A cross reference between sole owners and partnerships. Also used in tracing entity type changes; XIPRTN - Gives all partners within a partnership; EXPT - Will display information on tax exempt organizations useful in verifying non-taxes sales/deleting obvious exemptions.

Agency Work Manager - Will show if a taxpayer has been audited or in an audit is in progress.: Gives more information than history audit section; Useful in checking if an entity has been audited prior to setting up audit lead, or verifying that amounts were set up in another audit.

The AFCONT screen can also be accessed through this inquiry. This screen shows audit contact for prior audits.

XICOLL: Gives all open collection records (option 1). The auditor should be aware of any open collection records within the audit period prior to starting the audit. The taxpayer should be notified that there are open collection records and the auditor must verify if they are valid. Invalid records must be closed prior to submitting an audit. If an open collection record is due to a non-filer period, the return must be filed and the record closed prior to sending the audit to the RPC.
XIHIST: Can be accessed through the XICOLL function by entering an "X" beside a record. Useful for tracing payments to open collection records, particularly audit records, collection activity, and billing information.
XIPMTS: This gives reported payment amounts for each fuel type broken down by period, transfers in or out, and refunds.
XIDATA: Gives reported amounts for each fuel type broken down by period.
Update histories
Check postmarks on returns flagged on history as late
Examine reported sales or purchases of entities claiming exemptions or payment through returns.

Also note:

That "audit period" appears in the upper right if an audit has been completed that includes the period on the screen.
That the return type is noted as a regular, amended or manual estimate (filed by enforcement) return.

LISUMM: This is one of several bankruptcy screens available on inquiry. This screen displays case related information such as case ID, bankrupt ID, Chapter type, petition date, file by date, and confirmation date.

Note: The case ID is the bankruptcy number assigned to the case by the court, and bankrupt ID is the taxpayer number or social security number of the entity that filed. To access this screen enter the T-Code followed by a "1," and the taxpayer number or the T-code followed by a "2" and the case ID (i.e., LISUMM.1.12345678903 or LISUMM.2.9130246.).
LIACID: This bankruptcy screen lists all bankruptcy cases associated with a specific ID. This screen also indicates whether the ID entered is set up as bankrupt on the taxpayer database.
LIASCA: This bankruptcy screen lists all taxpayers associated with a specific case number.
LICORR: This bankruptcy screen lists the attorney or trustee associated with the case.
LMMAIN: This is the bankruptcy system main menu. Most of the T-Codes mentioned above can be accessed through this screen by entering an "x" on the appropriate line and either the case ID or the taxpayer number (bankrupt ID) in the appropriate field.

If the taxpayer is in bankruptcy but there is no bankruptcy screen information, contact the Bankruptcy Section of Revenue Accounting. The Bankruptcy Section of Revenue Accounting needs tax due figures of bankruptcy audits at least 10 working days before the file by date as indicated on LISUMM. Tax estimates will be accepted if the audit cannot be completed by this date. Notify the Bankruptcy Section with as accurate an estimate as possible. Notify the Bankruptcy section if significant changes to the estimate are known before the confirmation date.

If the audit is completed within one month of the file by date, notify the Bankruptcy section of Revenue Accounting of the tax due and that the audit is being sent to the RPC. Audits of taxpayer sin bankruptcy status should be sent to the RPC with an "expedite" handling flag attached. (See Sales Tax Policy/Procedures manual for more information on bankruptcies.)

XISUMM: Gives information for all automated taxes administered by the agency for which the taxpayer is liable. Gives a phone number for contact and open collection record, non-filer and hot check counts. Also tells if the taxpayer is in bankruptcy or management halt and what enforcement is working the account.
XISTAT: This multi-tax inquiry briefly summarizes all taxes for which the taxpayer has been permitted. This inquiry may also include limited information on the status of the permit or the last report filed by the taxpayer.
XIANFO: Show all fuels permits and permit information, i.e., type of permit, begin and end date. This screen should be run on all fuels audits because of the changes in the fuels tax statutes.
XILOCA: Show the physical location for each outlet that is set up with a Texas address. Out-of-state locations may be listed as information only, but not necessary for tax responsibility. (Does not apply directly to Motor Fuels, but can be helpful.)
XISCHD: Displays all supplementary schedules.

Universal Refund System

Inquiry Line

TCODE.PAYEE #.TAX TYPE.JULIAN DATE.UNIQUENESS #.
 |     |       |         |          |
 |     |       |         |          |
 |     |       |         |          3-digit
 |     |       |         |          uniqueness
 |     |       |         |          number
 |     |       |         5-digit julian process date
 |     |       2-digit tax type (see below)
 |     11-digit payee number, usually the taxpayer number
 TCode is standardized as RCXXXZ where:
    RC  = System code for Universal Refund Claims
    XXX = Abbreviation, i.e., 'PMT' for PAYMENT, 'REF' for REFUND
    Z   = Transaction type, for example:
          I = Inquiry
          A = Add
          U = Update
          T = Transfer

RCDATI - Shows the amount of the claim, the amount paid and/or denied, and the status of the claim. The reference number on this inquiry is the same as the Document Locator Number shown on the refund history.

RCSUMI - Shows the total number of claims filed under the taxpayer number.

RCPMTI - Shows the date paid and amount of payment, by claim.

Tax Types (See Fee System Manual)
82 - Manufacturing refund claims
83 - Enterprise zone refund claim
84 - Qualified business - sales tax refund claims
85 - Qualified business - franchise tax refund claims
86 - Motor fuel tax refund claims
87 - Diesel fuel refund claims

Account Information Cards

The card is completed by an auditor or enforcement officer and sent to the appropriate field audit office. Account Information Cards are initiated when:

An investigation of a non-filer discloses that an audit is warranted.
A non-permitted account needs to be audited.
During an examination of purchases for use tax, it is apparent that a seller is selling tax-free without the receipt of exemption or resale certificates.
During an examination of sales an auditor feels that a customer is issuing invalid resale or exemption certificates.

The cards should be filled out as completely as possible. In some cases, it may be necessary to attach copies of contracts, certificates, audit schedules, newspaper articles, or other pertinent data.

The auditor should pay particular attention to whether the items listed on the reverse side of the form were included in the audit where the transaction was seen.

Upon completion of the audit, the results should be relayed to the initiating office. This response may be written on a copy of the original account information card or in the form of a memo. The original account information card should remain with the audit file in the auditor's workpapers.

Prior Audits

The auditor can determine if there has been a prior audit by checking the audit history. Additional information can be obtained by running the Work Manager terminal inquiry and by looking in the local office files.

If there has been a prior audit:

Note the prior audit period to avoid re-auditing the same report periods.
Look for errors and exceptions noted in the prior audit and discuss them with the taxpayer to determine if corrective action has been taken. Note even if corrections were made. Often there is a period early in the audit, prior to the change, where adjustments are necessary.
If the taxpayer disagreed with the audit, follow the audit through the hearings process to see how hearings decisions affect the audit.
Study audit procedures, plan, and notes of the prior audit to:
- Become familiar with records retained
- Use as a guide to help estimate the time required for completion.
- See if the contact is the same as on the questionnaire. If not, this change may indicate policy or reporting procedure changes in the audit period.

A prior audit should not serve as a blueprint for the current audit. Changes in tax law and business operations occurring since prior audits are important areas to cover. The prior audit can be used to enhance the current auditor's use of time by identifying records examined, the difficulties of certain audit methods and areas where no errors were found that may require less emphasis in the current audit.

An auditor can obtain copies of prior audits that have been archived based on the storage media indicated on Agency Work Manager. Imaged audits can be viewed and/or printed via FileNet. Prior audits that are not imaged can be obtained by contacting Audit Processing.

Email requests go to Revenue Accounting/Audit Processing and the following information is required: (Work Manager can provide some of this information.)

Taxpayer Name
Taxpayer Number
Tax Type
Audit Period
Completion Date
Date Needed
Requester's Name
Additional Comments

Tax Fraud Awareness

Introduction

With the current tax rate on a gallon of fuel - $ .20 state plus $ .184 federal tax on gasoline and $.244 federal tax on diesel, there is a real potential for dishonest person to make large amounts of profit in a hurry by stealing fuels taxes. The combined state and federal tax on one transport load of diesel (approximately 7,400 gallons) is $3,285.60.

The additional penalty for fraud or intent to evade motor fuels is 75% of the tax, penalty and interest.

Combined Effort to Stop Fraud

In past years, the State of Texas realized that there was substantial non-compliance with the fuels tax laws. The Comptroller is sensitive to fuels tax problems and cooperates with other states and agencies, including the Federal Bureau of Investigation, the IRS, Texas Department of Public Safety, and the Travis County District Attorney's Office in detecting fuels tax fraud and collecting fuels taxes owed to the State. Investigations by our Criminal Investigation Division (CID) and audits have uncovered millions of dollars in fuels taxes which have been evaded by individuals and companies across the state.

It is important to detect problems early and assess and collect the tax before the money is placed beyond reach in foreign bank accounts, etc. Every effort is being made to recover as much as possible, but the primary goal is to put tax cheats out of business and in jail. This not only brings in the fuel revenue to the State, but it provides equal opportunity to fuel marketers to sell their product throughout Texas without unfair competition.

Fraud Detection

Most of the schemes used to evade fuels taxes are very hard to detect in performing a routine audit of a distributor or supplier, unless every audit is approached with fraud detection in mind. Fraud can, and does, occur in the largest corporation right down to the smallest business. This not to say that every audit is a fraud audit but the auditor should be ever-mindful of the possibility. If fraud is detected, it should be brought to the immediate attention of the auditor's supervisor and/or manager, in accordance with established procedures.

What is Fraud?

Fuels tax fraud occurs when a person, knowingly and intentionally, diverts tax funds to personal or business use, or, when a person knowingly and intentionally, evades the payment of fuels tax. The operative words are "knowingly and intentionally." That is, there must be conscious deliberate effort in order for fraud to be present. Fraud is not always present just because all tax collected has not been remitted.

Distributor A is experiencing financial difficulties, and every month when the fuels tax report is due, Distributor A reports whatever amount of money he has in the checking account on the due date, even thought the accrual account indicates more tax is due. Distributor B also sends in less tax than is in the accrual account. The account is cleared out every month by journal entries, or credit memos showing alleged tax refunds. During the audit, the bookkeeper confides in the auditor that Distributor B's instructions were to report 50% of the tax in the accrual account each month.

In the testimony or other documentation, Distributor A probably has a pretty good defense, particularly if partial payments are being made on other obligations or there is other evidence of financial difficulties. A jury is not likely to convict a person in that situation, absent clear and convincing evidence that there was intent to defraud. On the other hand, Distributor B manifested intent to defraud by giving instructions to the bookkeeper and by falsifying documents.

Various Methods of Fraud

Listed below are some of the ways that fuels tax has been evaded. The list is not all-inclusive, but should give the auditor an idea of what to look for:

Reselling diesel fuel purchased on a signed statement. This is not as effective as it once was due to the gallon limitations and registration numbers.
Extending tax-paid fuel by blending other products with diesel fuel or gasoline.
Permits obtained in the name of non-existent companies or individuals.
Theft of fuel.
Sale of off-spec products as fuel (example: cutter stock may not quite meet the specifications of No. 2 diesel but is sold as diesel fuel.)
The use of daisy-chain schemes where a variety of tax-free transactions are recorded on paper in order to confuse the issue and conceal the actual purchaser of the fuel.
The sale of permits on the black-market.
The importation of tax-free fuel sold as tax paid fuel.
Fuel purchased for export tax free, but sold in Texas as tax paid.

Audit Procedures

In addition to regular audit procedures, selective third-party verification and research should be utilized in the audit to verify recorded transactions. The supplements can be very helpful when verifying sales to other permit-holders. Cross checks performed by the mainframe verify that the seller and purchaser are reporting the same gallon amounts. Differences appear on the discrepancy reports. Look for repetitive major discrepancies. Also, using inquiry, trace the purchased fuel to see what the purchaser did with it. Be particularly alert for purchasers who are reporting large amounts of "Other Tax-Free Sales" and "Exports" with little or no taxable sales. Investigate further.

Non-permitted purchasers should be selectively contacted to verify the amounts of tax-free fuel they purchased, and the purpose(s) for which it was purchased.

Third-party research and verification is a very useful audit tool, and if used properly, can give a good level of assurance without expending a lot of time. The use of such procedures is highly recommended.

Audit Leads

A good source of audit leads that is often overlooked is convenience stores and other retail outlets that sell gasoline and/or diesel fuel. During the course of a sales tax audit, a few moments spent looking over fuel purchase invoices can be time well spent. Be alert for the following, which might indicate that the seller of fuel is not legitimate:

Fuel is purchased with cash, cashier's checks, or checks made payable to "cash"
Checks given in payment for fuel are hand-endorsed and cashed at a check-cashing service or at a bank
The seller does not provide an invoice for the fuel; or the invoice does no contain the pre-printed name, address, and phone number of the seller
The purchaser has no way to contact the seller other than a pager number
The purchaser does not know who they are purchasing fuel from; all they know is someone comes around to take the order and collect the money

Any leads like the above should be documented and discussed with the supervisor and/or field manager. In certain instances, fuels tax can be assessed against purchasers. In addition, the above information should be referred to the Criminal Investigation Division (CID) for evaluation.

To summarize, be alert and investigate transactions that appear out of the ordinary, or that do not conform to established business practices; be ever-mindful that fraud can and does occur everywhere; and, don't be afraid to ask questions.

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(Revised 02/2004)

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