Advanced Audit Management

Question 1

What are 4 things that you should check for when receiving the audit engagement letter?

Answer 1

• If the company info is accurate (name, address, FEIN, etc)
• If the company is registered
• If the company has nexus
• Audit period
• SOL and waivers

Question 2

True or false: Only registered taxpayers (i.e., those filing returns) are protected by a statute of limitations.

Answer 2

True

Question 3

True or false: If a return was not filed and would otherwise be out of statute, the jurisdiction cannot include that period in its review.

Answer 3

False, the jurisdiction has every right to include that period in its review.

Question 4

True of false: If a statute has expired, a jurisdiction cannot ask you for a waiver after the fact. If a waiver has been signed which has included an expired period, the waiver for that period is unenforceable.

Answer 4

True

Question 5

Once you’ve received the audit engagement letter and confirmed all of the info is correct, what are the 3 things you should do in regards to your response?

Answer 5

• Acknowledge the letter
• Request follow-up discussions with auditor
• Create an internal audit file

Question 6

What is the difference between an estimated assessment and jeopardy assessment?

Answer 6

• Estimated assessment - An assessment based on estimation that’s made if the taxpayer is unable or unwilling to produce certain records. The estimate must be reasonable.
• Jeopardy assessment - a mechanism for the jurisdiction to use when it believes that the collection of tax will be jeopardized if the assessment is not made immediately.

Question 7

What are the 7 types of defense opportunities a taxpayer can use during an audit?

Answer 7

1. Managed audits – TP conducts audit themselves
2. Managed compliance agreements – allow TP to accrue tax on percentage basis each month
3. Desk audit – TP conducts all the work, but not formal agreement. Usually focused on singular aspect (Ex. Use tax on imported items or aircraft purchases)
4. Cycle error rate projection – calculating total dollars and applying the previous error rate to the population to get your liability
5. Limited scope refunds – When a long-standing law is overturned, it can allow for refunds during the current audit period. The refunds will usually be accepted, but will be tested in future audits.
6. Offsets (from things like overpayments/tax refunds) – for the purposes of interest netting
7. VDAs

Question 8

True or false: Desk audits are similar to managed audits there is no written agreement between the taxpayer and the state and the auditor never visits.

Answer 8

True

Question 9

What is the upside for the taxpayer of conducting a desk audit?

Answer 9

The completion of the desk audit closes periods from further review.

Question 10

A cycle error rate projection should be used if there is a substantial increase in sales/purchases for only a few customers/vendors in the current period compared to the last audit.

Answer 10

False, only use the cycle error rate projection if there is a proportional increase or decrease across the board for all customers/vendors.

Question 11

What are 3 things that should be confirmed before using a cycle error rate projection?

Answer 11

• No material improvements/controls have been set in place since the previous audit to correct the errors.
• A homogeneous increase/decrease in sales/purchases has occurred among all of the customers/vendors between the last audit and the current period.
• The cycle error rate was determined using a statistically valid sample. If the error rate was derive from a previous block sample, it could cause issues if you try to apply it to the current period since block samples are inherently biased.

Question 12

True or false: If a taxpayer enters into a VDA with a state during their audit, and the state believes that the disclosure provided by the taxpayer materially misrepresents the liability, the agreement may be voided, and the taxpayer could face a full audit along with full penalty and interest.

Answer 12

True

Question 13

Why is stratification beneficial when it comes to audit sampling?

Answer 13

Stratification groups together “like things” allowing each group to get tested rather than performing a detail of all the records.

Question 14

What are 3 things you can do to improve your audit data and subsequent audit sample?

Answer 14

• Set expectations and meet your obligations and commitments
• Engage necessary parties to obtain data
• Ensure your data is complete

Question 15

What is stratification?

Answer 15

The separation of the original population into two or more smaller more homogeneous groups.

Question 16

What is the “population”?

Answer 16

The entire group of data that you are looking at

Question 17

What is the “universe”?

Answer 17

The entire group of data that exists

Question 18

What is an error rate?

Answer 18

A quantification of the errors found in the sample

Question 19

What is an extrapolation?

Answer 19

The methodology by which the error rate found in a sample is projected across the population

Question 20

What is a managed audit?

Answer 20

An audit that the taxpayer conducts themselves, where the taxpayer and auditor agree on the parameters and sign an agreement.

Question 21

What does a managed compliance agreement allow the taxpayer to do?

Answer 21

Accrue tax on a percentage basis each month

Question 22

What are 4 benefits of entering into a VDA?

Answer 22

• Limits lookback period
• Abates penalties
• Reduces interest
• Closes period from further review

Question 23

What are the 7 steps involved in the audit management process?

Answer 23

1. Engagement
2. Reserve
3. Opening conference
4. Pre-Audit Review
5. Data exchange
6. Assessment and Payment
7. Payment