Audit Manual - Indiana

1 Audit Manual May 2020 Indiana Department of Revenue Indiana DOR Audit ManualDISCLAIMER 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 Depar tment 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.

2 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 suppor t 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.

3 Moreover, this Manual does not constitute written guidance by the Depar tment 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 par ticular Audit and consult with their supervisors whenever unique factual patterns or legal issues arise. 1 Indiana DOR Audit Manual 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

4 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 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.

5 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 2 Indiana DOR Audit ManualWHAT 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.

6 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

7 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 3 Indiana DOR Audit ManualUTILITY 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)

8 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 4 Indiana DOR Audit Manual CHAPTER 1 OVERVIEW ABOUT THE DEPARTMENT OF REVENUE The Indiana Department of Revenue (DOR) has been serving Indiana and its diverse population and business community since 1947.

9 DOR s more than 700 dedicated team members administer over 60 different tax types and annually process more than $19 billion of tax revenue including: Processing millions of tax returns Handling pieces of correspondence and phone calls for hundreds of thousands of Hoosiers Completing thousands of diverse audits Addressing tax protests and legal issues Working in-person with individuals, business owners, tax preparers and a variety of stakeholders The DOR headquarters is located in the Indiana Government Center North in downtown Indianapolis.

10 Other locations include the Ameriplex complex west of Indianapolis, 11 District Offices throughout Indiana and 9 other states. DOR conducts operations through eight internal divisions, each responsible for a specific business function: Office of the Commissioner Communications Division Finance Division Information Technology Division Revenue Inspector General Legal Division Tax Policy Division Operations Division Meet the DOR s Leadership team at DOR introduced new programs and initiatives in 2017 focused on improving the design, operation, management, and level of service for all DOR functions.