Audit Manual - The Official Website of the State of Indiana

Audit Manual

May 2020

Indiana Department of Revenue

DISCLAIMER

The purpose of this manual is to provide general guidance to the public about the procedures employed by the Department of Revenue's Audit and Compliance Operations Division. The Department of Revenue reserves the right to depart from the procedures outlined herein, if the facts and circumstances of a particular audit warrant such a departure. Such departure will in no way undermine or invalidate any audit assessment where all applicable statutory and regulatory requirements are met.

This manual does not reflect changes in laws, regulations, notices, decisions, or administrative procedures that may have been enacted, issued or adopted since the manual was last updated. This manual and the information contained herein is not authorized to support any audit position or used as citation. The controlling statutes, regulations and case law should guide customers and the Department of Revenue auditors in presenting their respective positions when conducting an audit or investigation.

This manual does not constitute a public policy statement of the Department of Revenue. Moreover, this manual does not constitute written guidance by the Department of Revenue to the public at large or any specific customer.

The auditing methods and techniques suggested in this manual serve primarily as administrative guidance, and may not be appropriate, applicable or necessary for every audit. Auditors should use discretion when deciding which techniques to use in a particular audit and consult with their supervisors whenever unique factual patterns or legal issues arise.

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TABLE OF CONTENTS

CHAPTER 1 OVERVIEW

5

ABOUT THE DEPARTMENT OF REVENUE

5

PURPOSE OF THE AUDIT MANUAL

6

DOR RESOURCES AND REFERENCE MATERIAL

7

CHAPTER 2 AUDIT DIVISION

8

AUTHORITY

8

AUDIT DIVISION POWERS AND DUTIES

8

AUDIT OPERATIONS

8

AUDIT AND COMPLIANCE SUPPORT

8

CHAPTER 3 TAXPAYER RIGHTS AND RESPONSIBILITIES

11

TAXPAYER'S BILL OF RIGHTS

11

RESPONSIBILITIES AS AN INDIANA TAXPAYER

12

RIGHT TO REPRESENTATION

12

TAXPAYER ADVOCATE OFFICE

13

CHAPTER 4 AUDITOR EXPECTATIONS AND RESPONSIBILITIES

14

OVERVIEW

14

CONFIDENTIALITY

14

COMPETENCY

14

INTEGRITY

14

CONFLICTS OF INTEREST

15

DATA SAFEGUARDS

15

CHAPTER 5 GENERAL INFORMATION

16

ACRONYMS

16

GENERAL TERMS

16

EXTENDING THE STATUTE OF LIMITATIONS

18

INFORMATION DOCUMENT REQUEST (IDR)

18

INTEREST AND PENALTY

18

POSTMARK RULE IC 6-8.1-6-3

19

TRUST TAXES

19

RESPONSIBLE PERSONS

20

BANKRUPTCY

20

CHAPTER 6 PRE-AUDIT PREPARATION

21

PRELIMINARY REVIEW OF CUSTOMER'S RECORDS AND TAX RETURNS

21

DEVELOPING THE AUDIT PLAN

21

INITIAL CONTACT LETTER

21

INITIAL CONTACT-PHONE CALL/EMAIL

21

PRE-AUDIT INTERVIEW, TOUR, AND PRE-AUDIT QUESTIONNAIRE

22

DISCUSSING CUSTOMER'S RECORDS AND RECORDKEEPING SYSTEMS

22

DISCUSSING CUSTOMER'S ACCOUNTING PRACTICES

22

EVALUATING INTERNAL CONTROLS

22

CHAPTER 7 WITHHOLDING TAX AUDITS

23

WHAT TO EXPECT FROM A WITHHOLDING TAX AUDIT

23

WITHHOLDING TAX OVERVIEW

23

REGISTRATION OF NEW WITHHOLDING AGENTS

24

DOCUMENTATION REQUESTS

24

WITHHOLDING TAX AUDIT PROCEDURES

24

CONCLUDING THE AUDIT

24

WITHHOLDING TAX REFERENCE MATERIAL

25

CHAPTER 8 SALES AND USE TAX AUDITS

25

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WHAT TO EXPECT FROM A SALES AND USE TAX AUDIT

25

SALES AND USE TAX OVERVIEW

25

REGISTRATION AND REPORTING REQUIREMENTS

25

DOCUMENTATION REQUESTS

27

SALES TAX AUDIT PROCEDURES

27

USE TAX AUDIT PROCEDURES

28

ELECTRONIC VS. PAPER RECORDS

29

CONCLUDING THE AUDIT

29

SALES AND USE TAX REFERENCE MATERIAL

30

CHAPTER 9 "GENERAL" INCOME TAX AUDITS

31

WHAT TO EXPECT FROM AN INCOME TAX AUDIT

31

INCOME TAX OVERVIEW

31

DOCUMENTATION REQUESTS

32

AUDIT PROCEDURES

33

CHAPTER 10 SPECIFIC INCOME TAX ITEMS

34

NEXUS

34

APPORTIONMENT

34

CORPORATION THAT HOLDS INTEREST IN A PARTNERSHIP

35

COMPOSITE RETURNS

36

COMBINED AND CONSOLIDATED RETURNS

36

DEPRECIATION ADDBACKS AND DEDUCTIONS

37

STATE INCOME TAX ADDBACK

39

INTANGIBLE EXPENSES ADDBACK

40

OTHER ADDBACKS

41

NET OPERATING LOSSES

42

OTHER DEDUCTIONS

42

INCOME TAX CREDITS

44

CHAPTER 11 POST-AUDIT AND FINAL CONFERENCE PROCEDURES

49

POST-AUDIT CONFERENCE

49

INTERIM POST-AUDIT COMMUNICATIONS / CONFERENCES

49

FINAL CONFERENCE

49

ONGOING COMPLIANCE

49

CHAPTER 12 SAMPLING AND COMPUTER ASSISTED AUDITS

50

SAMPLING OVERVIEW

50

COMPUTER AUDIT SPECIALISTS

50

NON-STATISTICAL SAMPLING

50

STATISTICAL SAMPLING

52

CHAPTER 13 FILED AUDIT WORKPAPERS

56

WORK PAPER STANDARDS

56

CROSS REFERENCING

56

CONTENTS OF WORK PAPERS

56

OTHER AUDIT DOCUMENTS

57

CHAPTER 14 CASH INTENSIVE BUSINESSES

58

GENERAL INFORMATION

58

PRE-AUDIT PROCEDURES

58

ANALYSIS OF BOOKS AND RECORDS

58

USING AN INDIRECT AUDIT METHOD

59

CHAPTER 15 REFUND CLAIM PROCESSING

61

OVERVIEW

61

REFUND CLAIM PROCESSING / REVIEW PROCEDURES

61

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UTILITY STUDY REVIEW PROCEDURES (FORM ST-200)

62

SUPPORTING DOCUMENTATION

63

SALES TAX (NON-UTILITY)

63

SALES TAX (UTILITY)

63

WITHHOLDING

63

INTEREST AND PROTEST PROCEDURES

63

CHAPTER 16 ? AUDIT AND COMPLIANCE SUPPORT

65

LIMITED SCOPE / DESK AUDIT PROCEDURES

65

QUALITY ASSURANCE AND BILLING

65

NOTICE OF PROPOSED ASSESSMENTS

66

PROTEST PROCEDURES

66

AUDITOR SURVEY

66

OPTIONS TO PAY THE AUDIT BILL

66

CHAPTER 17 OTHER TAXES AND FEES

68

FOOD AND BEVERAGE TAX (FAB)

68

ENHANCED PREPAID WIRELESS TELECOMMUNICATIONS FEE

69

MOTOR VEHICLE RENTAL EXCISE TAX (MVR)

69

COUNTY INNKEEPER'S TAX (CIT)

70

WASTE TIRE MANAGEMENT FEE (TIF)

71

CHAPER 18 SPECIAL TAXES

72

CONTACT INFORMATION

72

FIREWORKS PUBLIC SAFETY FEE (FPS-103)

72

AVIATION FUEL EXCISE TAX (AVF-150)

73

GASOLINE AND OIL INSPECTION FEE (MF-360)

74

SPECIAL FUEL TAX AND OIL INSPECTION FEE (SF-900)

76

GASOLINE USE TAX (GUT) (GT-103 AND GT-103DR)

79

PETROLEUM SEVERANCE TAX (MF-600)

80

ALCOHOL EXCISE TAX ? BEER, CIDER, LIQUOR, WINE PRODUCERS (ALC-M)

81

FARM WINERY TAX (ALC-FW)

85

ALCOHOLIC BEVERAGE WHOLESALER EXCISE TAX (ALC-W)

86

RESIDENT & NON-RESIDENT CIGARETTE TAX (CIG-M):

87

RESIDENT & NON-RESIDENT OTHER TOBACCO PRODUCTS (OTP) TAX (OTP-M)

90

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