taxes

Motor Fuels Tax Audit Procedures Manual - Ch. 153

Bonded User, AG User, DD User 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.
b. Date of history (should be current).
2. Has there been a change in permit type?
3. Check audit status.
4. Schedule the reported data on a computerized spreadsheet for easy reference and note any extraordinary items and changes. See Exhibit VII in Chapter 5.
5. Review Data Reported.
a. Look for obvious inconsistencies or patterns in reported amounts.
b. Review history and supplemental schedules to get a general understanding of taxpayer's fuel uses as reported.
6. Check for and analyze any open collection records.
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.
1. Discuss the taxpayer's interpretation of both law and rules.
2. Is the taxpayer aware of recent changes in tax policy/law affecting his business?
C. Discuss the taxpayer's business operations.
1. Business activities.
2. Determine number of trucks.
3. Determine non-highway vehicles and equipment.
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 insure 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. Determine the location and capacity of bulk storage.
B. How is the fuel measured when delivered into fuel supply tanks of highway vehicles?
C. How is the fuel measured when delivered into fuel supply tanks of non-highway vehicles and equipment?
IV. PURCHASES
A. Are any bulk purchases tax-paid? If so, verify in detail.
1. Are separate storage facilities maintained for tax-paid fuel?
2. Are tax-paid bulk purchases included in inventories? The procedure for accounting for tax-paid purchases should be examined closely.
B. Are any Texas tax-paid purchases made on the road?
C. Test the reported tax-free purchases to invoices.
V. USES - BONDED USERS (prior to September 1, 2000) and AG USERS
A. The audit procedure should involve the determination of whether enough fuel was reported to cover all miles traveled by highway vehicles and the fuel used on the highway by non-highway vehicles.

The following is a list of items that will need to be considered in making the above determination.
1. Vehicles and Equipment
a. Make a list of highway vehicles operated. This may be determined from license receipts, titles, depreciation schedule, etc.
1) Are all highway vehicles being reported for fuel use?
2) When was each vehicle bought and sold or retired?
3) What size and horsepower is each?
4) Which highway vehicles have auxiliary power units or power take-off equipment?
5) How are fuel deliveries into these vehicles maintained and completed?
6) Are all required items included on the fuel invoices or the distribution log?
7) Are all the invoices serially numbered and accounted for?
8) If any highway vehicles travel interstate, refer to the Fuels Tax Checklist for Interstate Truckers.
b. Make a list of non-highway vehicles and equipment.
1) How is this fuel recorded and compiled?
2) Is fuel used in non-highway vehicles while traveling on the highway reported by Bonded Users?
3) For incidental highway use by AG Users see Rule 3.183.
B. What controls are there on fuel disbursed?
C. Who makes out the fuel tickets/log?
D. If practical, conduct a test of miles per gallon for each highway vehicle for a specific period, which can be traced to the report.
1. Is the miles per gallon reasonable?
2. If not, extend test period or test another period and if still unreasonable, adjustments should be made. Fuel tickets are sometimes accumulated and not reported in the period when used, causing the miles per gallon factor to be distorted.
E. The records of Bonded Users, AG Users and DD Users are often found to be inadequate. The odometers may be broken and mileage not recorded. Also, fuel tickets may not be made out when the vehicle is fueled. All permitted users are required by the statutes to keep specific records and document the distribution of fuel by use of a distribution log. Any fuel unaccounted for will be deemed to have been used in a taxable manner and should be scheduled as an adjustment.
VI. DD USERS (beginning September 1, 2000)
A. Is the taxpayer exempt from federal excise tax, i.e., counties, cities, state agencies, etc.?
1. If so, follow the guidelines in "V. USES - BONDED USERS (prior to September 1, 2000) and AG USERS."
2. These taxpayers are allowed to use low sulfur dyed diesel on the public roads under federal regulations.
3. State tax must be accrued and reported for on-road use.
B. Taxpayers not exempt from federal excise tax.
1. The records required by Section 153.219.Records (c) are to be maintained for four years.
a. Is all dyed diesel accounted for?
b. Verify that dyed diesel is not being used in on-road vehicles.
c. If records are not being maintained in accordance with the statutes and rules, advise the taxpayer of the requirements.
VII. 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 and Texas public school transportation companies.
C. Verify that credit gallons have been properly accounted for and not duplicated on monthly reports and refund claims.
VIII. 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.

Interstate Trucker 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.
b. Date of history (should be current).
2. Has there been a change in permit type?
3. Check audit status.
4. Schedule the reported data on a computerized spreadsheet for easy reference and note any extraordinary items and changes. See Exhibit VII in Chapter 5.
5. Review Data Reported.
a. Look for obvious inconsistencies or patterns in reported amounts.
6. Check for and analyze any open collection records.
7. Check the credit gallon collection record and determine if any credit gallons not refunded are still available for refund. (1-year statute of limitations applies)
E. Run Terminal Inquiry
1. See Chapter 5 for types of inquiries.
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 stores, 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 law and rules.
2. Is the taxpayer aware of recent changes in tax policy/law affecting his business?
C. Determine business activity.
1. Determine number of trucks.
2. Where are the truck terminals located?
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 insure that all taxable uses are reported?
E. Verify the data from the history with the taxpayer and complete the appropriate file maintenance.
III. AUDIT PROCEDURE The audit procedure should involve the sampling of how the taxpayer compiles the data from the source documents into the reports. Basically, the data needed in filing an Interstate Trucker report is:
A. Miles traveled by all trucks in Texas and Mexico.
B. Fuel put in all trucks in Texas and Mexico.
C. Fuels used in Texas by all trucks which is computed using an average miles per gallon which is computed by dividing total miles in all states by total gallons from all states. The result is then divided into Texas miles to arrive at gallons of fuel used in Texas.

In performing the above audit procedure, the following is a list of items that need to be considered.
1. How many (diesel)(gasoline)(liquefied gas) trucks are operated?
a. What size are they? - (i.e. tractor, bobtail, pickup)
b. Do all trucks travel interstate each month?
2. Are all trucks used in the average miles per gallon computations including those that do not travel interstate?
a. If pickups or other smaller vehicles are included they should be deleted since they are not required to be reported and their higher average miles per gallon will distort the computations.
b. If qualified motor vehicles which do not travel interstate are included in the computations, then determine whether their inclusion affects the average miles per gallon computations. If these trucks are the same make and horsepower as those, which travel interstate, they need not be deleted. However, if, for instance, they are bobtail and the interstate trucks are tractors, then the interstate bobtails would need to be deleted.
3. Are any trucks leased from other entities reported? Is the lessor or lessee responsible for the fuel?
4. Are any trucks leased to others reported? Is the lessor or lessee responsible for the fuel?
5. Evaluate the internal controls.
a. Does the taxpayer have maximum MPG limits?
b. If yes, how is it applied?
6. Do the trucks travel established routes?
a. How is mileage computed?
1) Predetermined from map or computer software according to route?
2) Is extra driver mileage or detour route mileage accounted for?
3) Driver's logs?
4) Trip reports filed by drivers?
5) Dispatcher's records?
6) Global Positioning Satellite (GPS) transmittals from the truck?
b. How are fuel tickets filed?
1) By truck, by month, or by quarter?
7. Is the average MPG reasonable?
a. Do they fluctuate from month to month?
b. MPG figures are affected by many factors, including age and type of equipment, load carried, and driver techniques. Usually MPG for a tractor-trailer combination will average anywhere from 3 to 6 MPG. Some newer vehicles equipped with aerodynamic and/or electronics may get an MPG as high as 7. Consistency is the key in determining accuracy of reported figures.
8. How are fueling from the taxpayer's bulk storage brought into the computations?
a. Has tax been paid on bulk purchases for Texas terminals?
b. Was any fuel transferred to Texas terminals from other states by common carrier or in taxpayer's own trucks? This sometimes occurs during a fuel crisis.
c. If an interstate trucker is also a supplier or a bonded user, was tax properly included on the report for truck fueling out of bulk storage? Also check the power-take-off (PTO) allowance deduction carefully. The PTO allowance must be limited to the fuel used in Texas in these trucks. However, the taxpayer may also have operated PTO interstate trucks. The report is not designed to handle this situation, and a separate calculation must be made.
D. Generally, an examination of an interstate trucker's reporting procedure is sufficient. Although a detail examination of the mileage and fuel documents of each truck would be preferable for a month or quarter, it would probably not be practical if the taxpayer operates more than a handful of trucks. However, a detail check of a few selected trucks for both mileage and fuel should be made for a sample test.
E. As in all tax auditing, the auditors should decide whether an adjustment is necessary and that taxpayer's reporting is adequate. Time required and additional revenue would be factors in the auditor's decision. Adjustments will usually entail additional Texas miles or lower average miles per gallon. Projections are usually necessary and in a situation where records are inadequate, a four miles per gallon factor may be used on a per truck or fleet basis, whichever is more appropriate.

Where mileage records are inadequate, it may be necessary to examine driver's expense accounts, waybills, dispatcher's records, commodity purchases, sales or any other records that will establish the number of trips and destinations. Based on the number of trips and destinations, map mileage can be used and projected.
IV. REFUND CLAIMS
A. Examine refund claims.
1. Verify that Texas tax had been previously paid on all gallons claimed.
2. Verify that fuel was properly measured if from taxpayer bulk storage.
3. Verify diesel claims for PTO on auxiliary power units. These should be based on fuel used in Texas rather than fuel placed in the vehicle in Texas.
V. 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)