Ohio Tax. Workshop F. CAT, Sales & Use and PTE Audits Best Practices to Effectively Plan & Manage the Audit Process

Transcription

1 26th Annual Tuesday & Wednesday, January 24 25, 2017 Hya Regency Columbus, Columbus, Ohio Ohio Tax Workshop F CAT, Sales & Use and PTE Audits Best Practices to Effectively Plan & Manage the Audit Process Tuesday, January 24, :45 p.m. to 2:45 p.m.

2 Biographical Information Julie M. Barlow, Senior Director Corporate Tax, Cincinnati Bell Inc. 221 East Fourth Street, Cincinnati, Ohio Julie has over twenty years of corporate tax experience. She began her tax career working for a small public accounting firm while obtaining her accounting degree from Northern Kentucky University in After graduating she worked in Ernst and Young s Cincinnati Tax practice before leaving public accounting and joining the tax department at Cincinnati Bell (NYSE:CBB). During her initial years with the phone company she held a variety of roles in both corporate income and transaction tax compliance. From was employed as a tax manager by Rescare Inc. before returning to Cincinnati Bell to lead their income tax compliance group in She spent several years in this role before shifting responsibilities to bring the regulatory compliance function in-house and manage a year-long Universal Service Fund audit. After the conclusion of the audit, she spent many years managing special tax projects before eventually assuming her current role as Senior Director of Corporate Tax. While her time is heavily weighted toward income tax accounting and SEC reporting, she is also ultimately responsible for oversight of income and transaction tax compliance and audits. She manages a department of eleven and continually strives to drive improvements in efficiency and accuracy through the use of technology, review of current processes and collaboration with other departments. Richard Clum, Tax Program Assistant Administrator Audit Division Ohio Department of Taxation, 4485 Northland Ridge Blvd. Columbus, OH Richard.Clum@tax.state.oh.us Fax: Rich began his career with Taxation in 2007 as a Tax Commissioner Agent in the Taxpayer Services Division. Rich progressed at Taxation to become a manager in Taxpayer Services and then an Audit Manager overseeing a large business tax audit team. In his current position as Tax Program Assistant Administrator, he oversees units that audit Sales and Use Tax, Commercial Activity Tax, IFTA/IRP, Employer Withholding Tax and Personal Income Tax. Most recently, Rich has been a part of a team responsible for implementing a new audit selection process for the audit division, which uses data mining and analytics to ensure a fair and equitable selection and distribution of audit activities. Rich is a graduate of Franklin University with a B.S. in Accounting. John R. Trippier, CPA, Director (non-attorney professional), Zaino Hall & Farrin LLC 41 South High Street, Suite 3600, Columbus, OH jtrippier@zhftaxlaw.com Fax: John is Director of Multistate Tax and serves clients with more than 25 years of experience in government, public accounting/law firm and industry. He assists clients with evaluating current multistate tax positions to identify refund opportunities and to mitigate potential exposures. John also uses his previous Dept. of Taxation experience to defend clients throughout the audit process, which helps to ensure the client pays the minimum due. John is a certified public accountant who served as the Administrator of the Ohio Department of Taxation s Audit Division for over eight years beginning in At the Ohio Department of Taxation, John was responsible for developing and implementing audit policy for the sales, use and commercial activity taxes. He was the architect for the commercial activity tax audit process and the audit tools that are used by auditors and managers to research taxability issues. John also spent two years as an income/franchise tax and sales/use tax auditor in the Department s Chicago office. John has worked over 10 years in public accounting as a state and local tax consultant for Coopers & Lybrand, KPMG Peat Marwick and RSM McGladrey, Inc. As a consultant, John assisted clients with multistate sales/use, income/franchise, personal/real property, intangible and unclaimed property tax audits and appeals. John also assisted clients with multistate refund reviews, corporate restructuring, compliance studies, nexus studies, voluntary disclosures and sales tax software implementations. John also worked 9 months for the law firm of McDonald Hopkins where he was director of Multistate Tax Services. John worked in industry as a state and local tax manager of a telecommunications company responsible for audits, appeals and state and local sales/use, personal/real property and income/franchise tax compliance. John is a frequent presenter on Ohio sales, use and commercial activity taxes for the Ohio Society of CPAs, Ohio Tax Conference and various other associations throughout Ohio.

3 2017 Ohio Tax Conference Workshop F: Best Practices to Effectively Plan & Manage the Audit Process January 24, 2017 Julie Barlow, Cincinnati Bell Rich Clum, Ohio Department of Taxation John Trippier, Zaino Hall & Farrin LLC

4 Notice (The Legal Mumbo Jumbo) This document and information is provided by Zaino Hall & Farrin LLC for general guidance only, and does not constitute the provision of legal advice, accounting services, investment advice, written tax advice under Circular 230, or professional advice of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult with a professional adviser who has been provided with all pertinent facts relevant to your particular situation. The information is provided as is with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose. 2

5 Agenda Audit Division Update Audit Before Audit Notice Nexus Questionnaires Audit Selection Audit Notice (ACL) Initial Contact Information Requests Initial Meeting Sampling Field work Review periods Refund reviews Appeal Tax Appeals Division 3

6 Audit General information focusing on the process Focus on Ohio commercial activity tax (CAT) and sales/use tax (SUT) 4

7 Audit Selection Predictive and Trending Analytical Models Cross tax comparisons Peer group comparisons Tax filing trends Etc. Leads are analyzed and assigned, if taxpayer appears to be non compliant Leads involve various tax types, industry sectors and geographic locations Selection and assignment processes are objective, efficient, fair and equitable Ultimate goal is increased taxpayer compliance 5

8 Audit Lite/Tax Discovery Limited Scope Analytics from audit selection indicate areas on potential non compliance Middle ground between discovery inquiries and full fledged, multi issue field audits Fewer records requested Compressed Time Commitment Goal is to have audits completed quicker Increase the number of non compliant taxpayers contacted 6

9 Audit Penalties Application of statutory penalty on audits that result in a tax due liability Reduces subjectivity of penalty application Increases consistency in treatment of taxpayers Penalty Reduction Penalty group within the audit division reviews all requests for penalty reduction on all requests prior to assessment Reviews TP request, facts and findings of the audit, audit history, cooperation during the audit and other items to make fair and consistent decisions. Moves penalty decision to the administrative level 7

10 Direct Pay Update Direct Payment Permit Audits/Reviews ODT contacting all DPP holders (Began May, 2015) Audit Status 166 Complete, 113 Active, 169 to be audited 52 Cancelled DP s Consideration being given as to whether DPP is optimal reporting method Goal: increase accuracy of compliance of DPP holders Significant over or underpayment of tax can result in revocation of one s DPP account. 8

11 Direct Pay Update Direct Payment Permit Audits/Reviews ODT intends to conduct follow up reviews moving forward to better manage the program and ensure that changes in procedures, accounting systems, business model, etc. are being communicated with ODT TP must communicate to ODT any changes in accordance with the agreement 30 days prior to making them Direct payment authority for paying sales and use tax is a privilege granted to businesses to promote the efficient administration of Ohio s sales and use tax law pursuant to ORC

12 Refund Issues Refund Unit Handles CAT, sales tax and use tax 10 to 12 tax examiners 7,200 sales/use tax refund claims last year Handles all claims except those sent to Audit Division Technical issues, field visits, under audit or previously audited 10

13 Refund Issues Refund Unit Claim needs to be perfect Usage explanations Proof of payment Canceled check EFT Other proof not defined Reconciliations for use tax or sales tax (threshold?) Multiple Points of Use (MPU) 60 day letter 11

14 Before the Audit Notice Document, document, document Keep a file of positions taken while they happen Facts and details are fresh Individuals with knowledge of issue are more likely to be involved Multiple Points of Use (MPU) Software, services and digital goods Ohio Department of Taxation (ODT) checklist 12

15 Before the Audit Notice Stay current on law/policy changes and judicial decisions Adjust tax decision software/manuals and document change Consider Voluntary Disclosure/Amnesty Save penalty Possible reduction of tax liability and interest More control over timing of review No fishing expeditions from taxing jurisdictions Knowledge of issues for future compliance ODT Policies 13

16 Before the Audit Notice Consider Voluntary Disclosure ODT specific issues Application (ST VDA, CAT VDA) is required Look back periods 60 days to complete, with one 30 day extension Must reapply if not complete after 90 days SUT tax collected not remitted Must remit all tax, 10% penalty (not 50%) CAT Provide complete organizational chart May be able to obtain retroactive CET 14

17 Nexus Questionnaires/Letters of Inquiry Determine policy of how to handle Who receives them? Who will respond, if choose to respond? Potential for estimated assessments with no response What does contact mean? Michigan no contact, can still complete voluntary disclosure 15

18 Audit Notice/ACL Entity or entities being audited Type of tax SUT: Sales (120 day, test check, mark up) Purchase Audit period Make sure periods are not out of statute Department standard: only include periods where audit can be completed without the need for a waiver 16

19 Audit Notice/ACL Field work start date Commit to a reasonable completion date May want to consider waiver Request action plan Help keep audit on schedule Hold auditor/taxpayer accountable 17

20 Audit Notice/ACL Information request SUT/CAT Organization chart (no longer SUT) Trial balance Chart of accounts Additional Information Location Listing Sales Journal Exhibit A (CAT, SUT) 18

21 Audit Notice/ACL Bill of Rights Know your rights Taxpayer representation (TBOR 1) Data Transfer Methods Responsible Party Questionnaire 19

22 Audit Notice/ACL ODT Preparation Prior to ACL Understand filing history Understand business operations Understand business structure Review previous audits Review other tax filings/concurrent audits 20

23 Audit Notice/ACL Taxpayer Preparation Understand filing history Review documented positions Review previous audits and steps to resolve issues (or lack thereof) Review other tax filings/concurrent audits Review reserve (if any) Consider sampling methods 21

24 Initial Contact Logistics Timing of audit Place of audit Number of auditors Method of audit Regular Managed Participatory PARSA 22

25 Initial Contact Logistics Type of audit Comprehensive Sample Amount of records Location of records Type of records Paper Electronic 23

26 Obtain Requested Information Review before providing to Department Need to understand ramifications of information Provide what is requested or an acceptable substitute 24

27 Case Study See handout Possible Issues? 25

28 Field Work/Records Review Prior to on site field work, set parameters within company Communication with auditor(s) Conversations around auditor(s) 26

29 Field Work Initial Meeting Set parameters with auditor Audit location (work area, restrooms, etc.) Work hours One point of contact tax rep Additional information requests in writing Copying procedures Review action plan Discuss audit review process (preliminary & final) 27

30 Field Work/Records Review Meet regularly with auditors Document conversations, especially any verbal agreements Make sure auditor understands facts Provide information as timely as possible Identify disagreements and develop supporting documentation Maintain records provided to auditor Keep timeline of requests and responses 28

31 Sampling Sales, Use and CAT Sales 120 day letter/exemption certificates Test check Mark up Use Expenses (typically not fixed assets) Statistical sample Block sample 29

32 Sampling Agreement Indicates method to be used to project liability Identifies sample period AP v. GL data Missing invoices Make sure you understand how projection works and that auditor follows the method in the agreement Indicates method of how use tax paid will be credited in audit Line item credit Bulk credit 30

33 Sampling Statistical Full download v. partial download Make sure data is clean No other state transactions No duplications Match up credits Strata Top stratum is comprehensive quantity of invoices to review depends on threshold 31

34 Sampling Representative Signing the sampling agreement typically locks in the sample period May be able to separate one time, extraordinary transactions from sample and determine comprehensively Taxpayer needs to understand potential results for the sample period selected 32

35 Workpaper Review Analyze workpapers for errors Typically easier (and less costly) to remove issues at audit level than appeal levels 33

36 Refund Reviews Excellent time to review for overpayments If identified, auditors should point out refunds Samples are not designed to identify refunds Generally completed on comprehensive basis unless stat sample audit completed with ODT cooperation If you believe you are in a refund position can request Participatory audit 34

37 Negotiation Ability to negotiate settlement of issues/audit? Auditor/Manager Audit Administration Legal Counsel 35

38 Review Periods Preliminary proposal (Letter of Confirmation SUT, Preliminary CAT, PTE) 30 day response ST 807 Summary for Recommending Assessment Supporting Workpapers Final proposal (Audit Results Notification SUT, Final CAT, PTE) Formal notification letter of audit results to taxpayer Assessment is issued 36

39 ODT Audit Review ODT Audit Review Previous more decentralized Now a centralized review Brings uniformity to reviews and audit techniques used by auditors 37

40 Appealing an Assessment/Denial Assessment 60 days from receipt to appeal to the legal division of the Department Can be paid and a refund sought within statute of limitations Denial of Refund 60 days from date of receipt of denial letter (often earlier than assessment if part of an audit) 38

41 Tax Appeals Division Review by an independent group at the Department Can submit information (waiving hearing), hearing over the phone, or hearing in person Informal hearing with attorney to discuss technical merits, but additional information can also be provided Crucial to raise all arguments before a final determination issued Taxpayer can propose a settlement 39

42 40 Questions & Answers

43 Contact Information Julie Barlow Cincinnati Bell (513) Rich Clum Ohio Department of Taxation (614) John R. Trippier, CPA Zaino Hall & Farrin LLC