Chicago Department of Finance. Tax Audit Process

Transcription

1 Chicag Department f Finance Tax Audit Prcess Audit Overview There are varius ways a business gets selected fr audit. The mst cmmn are referrals frm anther divisin f the Department f Finance, referral frm anther City Department, infrmatin btained during anther audit, referral frm anther business r cmpetitr, referral frm anther gvernment agency under an infrmatin exchange agreement, selectin based n analysis f infrmatin cntained in a filed tax return r randm selectin frm registered taxpayers. If a business is selected fr audit, the authrized representative f the taxpayer will be cntacted by an auditr and audit cmmencement date set. The auditr will explain generally hw the business was selected fr audit, hwever if a referral was made the specifics f the referral may nt be divulged. The specific tax types and audit perids t be reviewed will be explained during this initial cntact. An audit ntice will als be sent denting the taxes and perids under audit, the date, the time and the lcatin where the audit will take place and taxpayer recrds and dcuments that maybe required at the start f the audit. Many variables affect the time required t cmplete an audit. Generally, a taxpayer can expect an audit t extend ver a three t fur-mnth perid with the auditr spending apprximately three t fur weeks at the audit site in ttal. Guidelines fr Retaining Recrds All business recrds shuld be retained fr any perid fr which the Department f Finance can issue a Tax Determinatin and Assessment, as per the Statute f Limitatins utlined in sectin f the Unifrm Revenue Prcedures Ordinance (URPO). Certain exceptins t this rule may apply wherein the municipal cde authrizes recrd destructin if apprval is granted by the City Cmptrller. Once selected fr audit r during the curse f an audit a taxpayer may be asked t sign a cnsent t waive the statute f limitatins waiver allwing the Department additinal time t cnduct r cmplete an audit. This ccurs when the date when the statute f limitatins wuld run n the department's right t issue a tax determinatin and assessment is appraching r will pass befre the audit is cmpleted. The statute waiver allws the Department additinal time t cmplete the audit and during this time perid n additinal l interest will accrue n any tax liability. Taxpayer Respnsibilities Maintaining bks and recrds Every taxpayer and tax cllectr shall keep accurate bks and recrds f its business r activity, including riginal surce dcuments and bks f entry denting the transactins that gave rise, r may have given rise, t any tax liability, exemptin r deductin. All such bks and recrds shall be kept in the English language and, at all times during business hurs f the day, shall be subject t and available fr inspectin by the Department.

2 Duty t prduce dcuments If, during an audit r investigatin, any taxpayer r tax cllectr fails t make its bks and recrds available fr inspectin t the Department, then the Cmptrller may serve written ntice by United States registered r certified mail r by persnal service n the persn being audited r investigated t prduce the requested dcuments within 45 days frm the date the ntice is received. The Cmptrller may extend the 45-day time limit. If the taxpayer r tax cllectr fails t prvide the dcuments requested in subsectin A f this sectin within the time s prvided, then: The Cmptrller may issue a tax determinatin and assessment based n the best estimate f the persn's tax liability, r The Cmptrller may issue a subpena requiring the attendance f any persn having persnal knwledge f any relevant facts and may issue subpenas duces tecum fr the prductin f bks, recrds, papers r memranda. In additin, the Cmptrller may issue a citatin fr each day beynd the 45-day time limit, r extensin theref, that the dcuments are nt tendered and may request the City's Crpratin Cunsel t bring, r cause t be brught, an actin t impse fines fr disbeying r refusing t cmply with a request made under this sectin. Fines shall be as prvided fr in Sectin f this chapter. Audit Prcess Steps Step 1: Opening Cnference The actual audit field wrk begins with an pening cnference with the taxpayer s representative. At this cnference the auditr develps a thrugh understanding f the business activities, their accunting system and the bks and recrds maintained by the business. The duratin and detail f this cnference depend in large part upn the cmplexity f the businesses activities and the vlume f detailed recrds maintained. The infrmatin btained at this meeting will directly affect the directin and extent f the audit apprach. If a business will be represented by an Attrney r Accuntant nt directly emplyed by the business, a Pwer f Attrney frm must be executed by an authrized business representative authrizing such individual(s) befre the Auditr can discuss specific details f the audit with them. Step 2: Sampling Methds After the pening cnference the auditr will test the accunting system t ensure that prcedures are in place as explained by the taxpayer and he r she will determine thse areas which require further detailed testing. The auditr will use his r her best judgment in frmulating the audit apprach t determine the level f cmpliance with each tax type under review. Many factrs must be cnsidered in determining the best apprach.

3 Factrs such as the availability f cmplete and accurate bks and recrds, vlume and materiality f transactins, previus enfrcement actin with the business and accunting practices f the business all will have a ntable effect n the apprach. Tw basic audit sampling methds used by the Department are judgmental sampling and statistical sampling. Befre beginning the review f the bks and recrds, the auditr will present the taxpayer with an Audit Methd Electin Frm utlining the audit apprach they have selected. Judgmental Sampling: The majrity f the audits cnducted by the Department are dne using a frm f judgmental sampling whereby the auditr identifies and reviews test perids frm within the audit perid and the results frm these test perids are extraplated ver the remainder f the audit perid. This technique invlves the auditr judgmentally selecting perids r sequences fr review (mnths, quarters, weeks, days r sequences f invices) and reviewing all items in that sample perid r sequence. This apprach is slightly less accurate hwever the csts assciated with perfrming this type f test are significantly less t bth the taxpayer and the City than thse f a statistical test. The mst imprtant factr with such a sample is t select a sample perid which is representative f the entire audit perid. Statistical Sampling This apprach requires significantly mre time and effrt than judgmental sampling; hwever, it will result in a mre accurate result. Obviusly a statistically valid apprach is the preferred methdlgy. Hwever, certain cnditins must exist fr this apprach t be fllwed. Mst imprtant, cmplete and accurate bks and recrds fr the entire audit perid must be available. Fr an audit t be statistically valid, every transactin must have an equal chance f being selected. Generally this presents a tremendus burden n a business and statistical sampling may nt be the best methd. If cmplete and accurate recrds are available the auditr shuld seriusly cnsider the feasibility f perfrming a statistical test, particularly if a taxpayer prefers such an apprach. Despite the accuracy resulting frm a statistically valid test, the burdens and csts assciated with such a test usually utweigh the benefit. Step 3: Audit Methd Electin Frm Befre beginning the review f the detailed infrmatin, the auditr will present the taxpayer with an Audit Methd Electin Frm utlining the audit apprach they have selected. The auditr will als slicit that taxpayer's pinin n the audit apprach selected r any pssible alternative. The taxpayer's cncerns are either incrprated int the apprach r reasns why they cannt are prvided. The taxpayer and the auditr then sign ff n the frm cnfirming that we explained the apprach. If the taxpayer refuses t sign the frm, the audit supervisr must review the audit prgram and electin frm t determine what, in their judgment, is the best apprach. The audit will then prceed based upn the supervisr s decisin. In these cases, after the detailed audit wrk has been cmpleted, the supervisr will again cnsider all factrs influencing their decisin t cnfirm that the apprach was sund. If anything ccurred which wuld render the test nnrepresentative r unreasnable, further testing may need t be dne. Occasinally an actual review will be the best r nly way t determine the level f cmpliance with a tax rdinance; in these cases an audit methd electin frm is nt required.

4 Step 4: Clsing Cnference Pursuant t sectin F. a clsing cnference takes place after the audit has been cmpleted and the audit file has been reviewed and apprved by the audit supervisr. A clsing cnference will generally be held 20 calendar days prir t the issuance f a ntice f tax determinatin and assessment by the Department f Finance. At the clsing cnference the taxpayer will be prvided with a cmplete cpy f the audit file and a Reprt f Field Cllectin f Audit Determined Liabilities. The auditr will g ver the wrkpapers with the taxpayer and answer any questins they may have. The nly exceptin t this is taxpayers lcated ut f the area where the cpy f the file and Reprt f Field Cllectin are sent by certified mail. The clsing discussins take place via telephne after the file has been reviewed by the taxpayer s representative. There are tw pssible ways the audit file can prgress: 1. The taxpayer will be given an pprtunity t clse the case ut by signing ff n a Reprt f Field Cllectin f Audit Determined Liabilities, signing all tax returns that were due during the audit perid and remitting the full amunt f tax and interest cmputed due within twenty days f the clsing cnference. All applicable penalties are waived under the Field Cllectin Reprt. If a taxpayer has additinal infrmatin which wuld impact the results f the audit r they identify an errr in the file the twenty days may be extended and thse adjustments will be made. At that time, revised tax returns will be generated. The taxpayer will then be expected t sign the Reprt f Field Cllectin, tax returns and make the required remittance immediately. If a taxpayer needs additinal time t cmply with the terms f this ffer, thse requests shuld be directed t the Audit Supervisr r Manager. When reslving any audit determined liability via the Filed Cllectin prcess tw requisites must be addressed; i. The taxpayer must cmpute and file amended returns fr any perids subsequent t the audit perid where liability exists r prvide an acceptable explanatin as t why n additinal liability exists fr that tax type. If the taxpayer has implemented crrective prcedures t address the areas f liability befre this agreement, a Pst-Audit Cmpliance Affidavit must be filed explaining thse crrective measures taken. ii. The taxpayer must have reslved any nn-tax debts due the City f Chicag. 2. If the taxpayer disagrees with the audit findings r refuses the Reprt f Field Cllectin ffer, a Ntice f Tax Determinatin and Assessment is issued which will include all applicable tax penalties. The taxpayer then has thirty-five days frm the date they receive the assessment t file a written prtest and petitin fr hearing. A cpy f the prtest frm, the Department Administrative Hearing rules and a taxpayer s statement f rights are prvided t the taxpayer at the clsing cnference. The statement f rights utlines the rights f taxpayers and tax cllectrs as well as the bligatins f the department as they relate t the tax determinatin and assessment that was issued.

5 Step 5: Settlement Prcess When a prtest frm is filed timely, prehearing cnferences and hearing dates are scheduled by the Department f Administrative Hearings. In the pre-hearing cnferences, infrmal discussins are held n any relevant issues including any prpsed crrectins t the assessment, reasns fr waivers r cmprmises and all ther matters relating t the pssible settlement r reslutin f the assessment. If a taxpayer is unable t pay its tax assessment in a lump sum r is experiencing financial difficulties, they can request a payment plan r file a financial hardship applicatin with the Department f Revenue Financial Hardship Cmmittee via the City Cmptrller s Office. The standard terms f a payment plan require a 30% dwn payment with a 12-mnth term. Payment plans include the accrual f interest n the utstanding tax balance at a rate f 12% interest per annum. Step 6: Taxpayer Audit Evaluatin At the cnclusin f an audit with the Chicag Department f Finance, the taxpayer will be prvided an Audit Evaluatin Frm and ffered an pprtunity t prvide feedback n the audit prcess and Department persnnel. The taxpayer cmments n the Audit Evaluatin Frm will be utilized by the Department t evaluate its peratins and will have a direct impact n future audits.