CITY OF CHICAGO. Department of Finance. Managed Audits

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1 CITY OF CHICAGO Department of Finance Managed Audits Effective January 1, 2007

2 Mission Statement of the Managed Audit program The mission of the program is to increase overall compliance with Chicago taxes by more effectively utilizing enforcement resources and providing individualized education to taxpayers on issues involving specific tax applications. The Department seeks to minimize the burden of the audit process and improve the efficient use of audit resources by implementing a program whereby taxpayers take an active role in the audit process. The purpose of the managed audit is to provide a thorough education to the taxpayer on each tax type covered by the program with less of a disruption to the taxpayer than a standard audit might involve. Our goal is to create a relationship with each taxpayer whereby that taxpayer s overall compliance with all City taxes is improved. A managed audit is an audit performed by the taxpayer, under the direction and guidance of the Department of Finance, pursuant to a formal written agreement outlining the duties and obligations of each party. The auditor will provide specific written instructions for the taxpayer and will review the work of the taxpayer. This program is an alternative to the standard audit and provides incentives for taxpayers. The program will reduce the average hours required to complete an audit and will assist the Department in administering and enforcing taxes more efficiently. This program will provide benefits to the taxpayer and the Department. By allowing taxpayers the opportunity to be directly involved in the review of their books and records, they will better understand the specific applications of the taxes to their operations, possibly identify operational processes that require modification, and receive penalty and/or interest waivers on the resulting liability. The Department will benefit from the program by freeing auditor time to pursue other enforcement matters with other taxpayers.

3 Managed Audit Process Department of Finance management will evaluate cases, individually, to identify specific cases for managed audits. Auditors will conduct opening conferences with business representatives to understand accounting systems and available records, determine whether the taxpayer is a candidate for a managed audit. And discuss the managed audit process and procedures with the authorized business representatives to insure that they understand what is required and what benefits they will receive. Auditors will prepare a managed audit agreement, including a detailed explanation of the specific audit steps of the audit that the taxpayer will be completing establish deadlines providing specific dates by which the taxpayer will have its audit work completed, present the agreement to the audit supervisor for his/her approval before presenting it to the taxpayer, and discuss processes and procedures for requesting additional time to complete audit work. Auditors will review and/or test taxpayers worksheets and summary schedules. The completed audit will be submitted for supervisor review as if it were a regular audit, and it will go through the normal review and point clearance process. Auditors will prepare amended returns and validate liability for each period under review. Auditors will process all penalty and interest waivers pursuant to the Managed Audit Agreement. A closing conference will be held with the taxpayer where copies of the audit file are provided to the taxpayer along with amended returns for approval and authorized signatures of the taxpayer. Although full payment of audit-determined liability is expected, payment plans can be entered. Although the program provides for interest waivers on audit determined liabilities, interest accrues throughout the payment plan term on the full amount of tax outstanding.

4 Audit Methodology, Sampling and Workpapers The methodology used to compute or otherwise determine the amount due or level of compliance will be discussed before any detailed work is undertaken. The methodology will be documented and agreed upon before the detailed work is started to insure that both parties understand what work needs to be done and how it will be summarized. The approach used will be very similar to that used by the Department during the course of any other audit. Sample periods can be utilized when circumstances warrant and actual reviews of entire audit periods can also be conducted if necessary. Sample periods will be identified and agreed upon by both parties. The Department will provide workpaper templates for use in documenting the audit findings. These templates are intended to provide taxpayers with a guide of how the detail is to be summarized. Fluctuations from the standard templates are acceptable but should be discussed before hand. The objective is to have the audit work summarized in such a manner that the auditor can efficiently review the work to verify that the liabilities, if any, have been computed correctly. If the taxpayer has suggestions or recommendations that it believes will achieve the objective yet require less time, those concerns should be raised directly with the auditor. At the conclusion of the detailed work, the auditor will meet with the taxpayer to review the schedules compiled and perform a limited verification of the records reviewed and summarized. Once satisfied that all testing was done to his/her satisfaction, the auditor will present the file to his/her supervisor for final review. No payments are required or expected until after the supervisor has accepted and approved the audit. In the event that something is incomplete or not completed to the satisfaction of the supervisor, the auditor may need to revisit the business to obtain explanations or additional records. After supervisory approval has been secured, amended tax returns will be generated using the audit-determined findings, and taxpayers will sign and file those returns, which will include all agreed penalty and interest waivers. Settlements must be either within pre-approved parameters or specifically approved by the appropriate supervisors within the Departments of Finance and Law.

5 Managed Audit Agreements A managed audit agreement (MAA) is an agreement between the Department of Finance and a taxpayer that specifies an agreed-upon methodology for calculating and remitting a tax. Many state and local taxing jurisdictions across the United States are utilizing some form of MAA to improve their efficiency and overall effectiveness. Increased demand for greater efficiencies in government has prompted many taxing authorities to consider alternatives to improve overall compliance levels. The traditional audit has been the most common tool used in tax enforcement. The MAA will enhance that process by involving taxpayers in their own audits. In addition to an elimination and/or reduction of penalties and interest, taxpayers will also benefit from an MAA because it will allow them an opportunity to analyze their own business operations and possibly identify areas where changes can be made to make their own operations more effective and compliant with City taxes. Eligibility for program A taxpayer s inclusion in an MAA is based on its willingness and ability to participate. Generally the Department will consider entering into an MAA with taxpayers who have maintained an acceptable system of business records, cooperated with any previous tax enforcement efforts of the Department and demonstrated a willingness and ability to comply with the tax laws. Taxpayers with whom the Department may decline to enter into an MAA include those who have failed to cooperate in past audits, those who have failed to remedy improper reporting practices identified in a prior audit, those who have been or currently are the subject of ongoing criminal investigations, or those who maintain poor internal controls or inadequate systems of business records. The Department will negotiate in a spirit of cooperation for a methodology and agreement that will meet the needs of both parties.

6 Chicago Department of Finance MANAGED AUDIT AGREEMENT This managed audit agreement (MAA ) is entered into between the Chicago Department of Finance ( Department ) and ( Taxpayer ), to conduct a managed audit of the Tax for the period of through. The parties agree to the following: 1. The Taxpayer will review appropriate books and records as determined by the audit plan. This review will identify unreported transactions and/or receipts for the above period and should be completed within days from the signing of this agreement. Amendments to this time frame during the course of the audit may be necessary to facilitate completion. All records, work papers and computations will be made available to the Department for verification. 2. The Department agrees to accept upon verification, for assessment purposes, the taxpayer s determination of unreported transactions, receipts and/or tax. If the Taxpayer complies with the audit plan and all other provisions of the MAA, the Department will (a) waive all penalties, and (b) waive half of the interest computed due, with the waiver of interest limited to a maximum amount of $20, The Department has provided written procedural guidelines to be included as part of this audit which specify the portion(s) of the audit that the Taxpayer is to conduct. This guidance includes the general scope of the audit, specific records expected to be reviewed, specific test periods or methodologies to be used, layout of appropriate schedules and other technical information necessary to complete the review as detailed in the audit plan. The Department will be available for ongoing consultation during the audit as issues or concerns develop. 4. The Department will arrange a closing conference with the Taxpayer to provide the results of the audit. At that time the Taxpayer will receive the final tax determination reports, including copies of all work papers compiled during the audit and tax returns for review, signature and payment. 5. It is agreed that in the event the Taxpayer fails to fulfill the terms of this agreement, the Department will conduct the audit. Any change in liability will be based on all available information and may include any completed audit work of the Taxpayer and/or the Department. TAXPAYER DEPARTMENT REPRESENTATIVE Print Name Signature Print Name Signature.. Date Date.