International Fuel Tax
Agreement (IFTA)/
International
Registration Plan (IRP)
Audit Overview
(for non-auditors)
Don Williams,
Tax Policy Specialist, Idaho/
IFTA Audit Committee
Beginning Auditing Principles
• “Auditing” (narrowly defined) is a written report
on the examination of records for a client.
• Auditors do not certify records—but report
based on evidence provided—the records are
reliable.
• IFTA and IRP audits answer two specific
questions:
1. Where did you go with your truck?
2. IFTA adds: How much fuel did you use and
where did you gas up?
Beginning Auditing Principles (continued)
• IFTA licensee:
– Is generally a single fleet
– files a calendar quarter fuel tax report on one return for
multiple jurisdictions to:
• report tax paid (fuel purchase) and
• fuel use (distance traveled)
– Has a license and decals issued/renewed on calendar
year basis
• IRP registrant:
– Registers one or more fleets once a year
– Report distance from July 1-June 30
Beginning Auditing Principles (continued)
• IFTA audit determines if:
– The fuel use tax due is correctly paid
• by fleet per jurisdiction
• based on the fleet MPG
– Tax paid on fuel purchases
• IRP audit determines if:
– Registration fees are correctly paid
• per power unit per jurisdiction
• based on reporting period distance, and
– Based on apportionment percentage times fees by
jurisdiction per unit in each fleet
Beginning Auditing Principles (continued)
• IFTA auditor responsibilities:
– Independence—A210.200
• judicial impartiality
• obligation to fairness
– Equal consideration—A420.200
• all jurisdictions treated the same
– Proficient—A410.100
• Proper audit training
• IRP auditor responsibilities—APM302:
– Give all Registrants and Members fair consideration
• Promote consistent application of Plan
– Promote cooperation with Registrants and Members
– Improve audit proficiency through educational
opportunities
Some Resources
• IFTA Audit Procedure Sources
– Agreement:
• R209 and Article XIII Audits
– IFTA Audit Manual
– Additional Reference:
• IFTA Best Practices Guide
• Jurisdiction Laws, Rules, Policy, & Procedures.
• IRP Audit Procedure Sources
– The Plan:
• Article II, Definitions—Audit
• Article X, Records and Audits
– IRP Audit Procedures Manual
– Additional References
• Jurisdiction Laws, Rule, Policy, and Procedures
What is an “audit”?
• How does IFTA define “audit”?
– physical examination by detail or sample
– accounting system internal control evaluation
– determining material difference between actual and
reported operations by jurisdiction.
• How does IRP define “audit”?
– examination of records (including source documents)
– verify application distance
– evaluate accuracy of distance accounting system for the
fleet (can be multiple fleets and multiple years).
The Audit Process
• Pre-audit analysis and notification
• Opening conference
• Audit of records
– Evaluation of internal controls
– Identifying and communicating errors
• Closing conference
• Analysis of data
• Writing report, compilation of file, and
notification
• If protested, redetermining audit based on
additional information
Pre-Audit Analysis and Notification
IFTA returns 3rd & 4th
Qtrs 2010 plus 1st &
2nd Qtrs 2011
equals
IRP reporting period
RY2012 application
(for most registrants)
• Compare the IFTA returns and IRP applications:
– Review the jurisdictions distance reported by each
program
– Compare the number of IFTA decals to number of
units registered under IRP, if different—why?
– Review addresses, contacts, etc.
• Notify licensee/registrant 30 days before audit.
Opening Conference
• Discuss with the licensee/registrant:
–
–
–
–
Business operation,
The audit procedures,
The records to be examined,
The sample:
• Periods
• Methodology—How are you going to audit?
• Error projection—How and what will you project?
– Notification procedures
Audit of Records
• Evaluation of Internal Controls, A640 & APM 500
– Walk through to test control elements
– Tests of compliance
– Report on weaknesses
• Enter distance and fuel into spreadsheets or
databases then test using tools (distance
software, maps, etc.)
– Time constraints
• How long can you take to do an audit?
– Audit methodology
• How do you sample?
Closing Conference
• Outline preliminary findings to include:
–
–
–
–
–
Review findings
Explain possible penalty and interest,
Recommendations to improve operations,
Rights of appeal, and
Identify to whom audit report is sent
• “Preliminary findings” are not “audit results”
Analyzing Data
• Analysis is a review of the records by the auditor:
– All records should support each other
• Miles trace to fuel
• Fuel to miles
• MPG is based on both factors.
– Are there gaps and holes?
– Is there other missing information?
• The auditor determines an error rate and projects
rate against reported amounts.
– What is an error rate—A730?
Final Steps Before Notification
• Prepare the audit report:
– Include only factual information and data
– “If it is not in the audit report, it didn’t happen”
• Compile the audit file
• Send the audit report to licensee/registrant
Final Steps After Notification
• Notify affected parties of the final results
• Inform the licensee/registrant of protest rights
– 30-day protest period (IFTA, R1410; IRP, 1065a)
– IFTA: Use base jurisdiction procedure or R1400
– IRP: Use base jurisdiction procedure, Section 1065
• Notify jurisdictions of audit results
– IFTA: May request re-audit/re-examination, R1360, or
DRC, 1555
– IRP: May request re-examination, 1040, or DRC, 1400
What Areas of an Audit are Likely
to Result in a Protest?
• Protests are:
– more likely when the assessment is high
– not likely with a refund or no change
• Specific issues that may result in a protest:
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–
–
–
Audit selection
Audit sampling
Inadequate records assessment
Evaluation of internal controls
• IRP: Verify functions with walk-through
• IFTA: Formal report on weaknesses
IFTA Audit Selection
• A310 number of audits:
– 3% per year
– Multiple “years” or “fuel types” equal one “audit”
– Excludes new licensees
• A320 selection of audits:
– Accounts stratified by distance
• high (top 15%)
• low (bottom 25%)
– Selection is based on total fleet distance
– Must include 25% high and 25% low
IRP Audit Selection
• Article X, Section 1025:
– 3% per year of renewed fleets
– One “fleet” for one “registration year” equals one “audit”
• Three records reviews equal one audit (NEW)
– A records review:
•
•
•
•
Does not adjust fees
Determines adequacy of internal controls & record-keeping
May review less than one full registration year
May be conducted before first renewal
Comparison of Audit Selection
• IFTA requires stratification on audit size.
• IRP does not
• Jurisdictions may use:
– Pure random sampling using a random number
generator to select audits
– Judgmental sampling
– Other methods
Audit Selection Methods
• Red flags:
– Rounded numbers for distance on (both)
• IFTA report
• IRP application
– MPGs (IFTA)
– the same every quarter
– rounded (e.g. 5.0, 6.0)
– “1” or another low number used for distance in one or
more jurisdictions (IRP)
– Non-contiguous jurisdictions (both)
– Low mileage per truck or decal (both)
Audit Selection Methods (continued)
• Recommendations from 3rd party sources:
–
–
–
–
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Enforcement divisions
Fraud hotlines
Other tips with credible information
Visual oddities noted by staff
Shared information between divisions
IFTA Sampling
• A530-audit must be by sampling
• Samples:
– must be representative
– reflect business operations
• Licensee should be:
– Allowed input on sample selection
– licensee should sign an agreement that sampling is
appropriate
• A520-use of three representative months is
suggested
IRP Sampling
• APM 503
– Audits are generally conducted on a sample basis
– Discuss with registrant:
• sample vehicles,
• sample periods, and
• records required
– At least three representative months
– Auditor may use different sampling methods
Inadequate Records Definition—IFTA
• What should be audited?
– A540.200-audit completed using best information
• burden on licensee
– A540.300-reasonable attempt to verify reported
information
•
•
•
•
What is a “reasonable attempt”?
What are “inadequate” records?
What is the licensee’s responsibility?
What is an Individual Vehicle Distance Report
(IVDR), P650.100?
– “Trip report may be more than one page”
Inadequate Records Definition—IRP
• Official commentary for Section 1015—records
are “inadequate” if as a whole they cannot be
audited
• What can be audited:
– 1005(a)—adequate to verify application distance
– Official commentary for 1005(b)—records are
adequate when they are:
• Sufficient: substantially cover operations
• Appropriate: contain auditable information
Inadequate Records Assessment—IFTA
• A550-procedure for inadequate assessment?
– Estimate fuel use using:
•
•
•
•
•
prior experience with licensee
licensees with similar operations
industry averages
records available from distributor
other pertinent info obtained or examined
– “Unless the auditor finds substantial evidence to the
contrary by reviewing the above, in the absence of
adequate records, a standard of 4.0MPG/1.7KPL will
be used”
• A550.200- “When tax paid fuel documentation is
unavailable, all claims for tax paid credit will be
disallowed”
Inadequate Records Assessment—IRP
• Based on apportionable fees paid on actual and
estimated distance, the registrant will pay a
penalty for inadequate records. Additional fees
are as follows:
– First audit offense, 20%
– Second audit offense, 50%
– Third and subsequent audit offenses, 100%
• IRP Ballot 392—will add “unreported” distance
– Go to http://www.irponline.org. Select “IRP Ballots”
and “Open Ballots”
Evaluation of Internal Controls-IFTA
A640 Evaluation of Internal Controls
The auditor’s study and evaluation of the licensee’s
internal accounting system has several identifiable
phases
.100 Review and documentation
(information gathering)
.200 Preliminary Evaluation
(identify apparent weaknesses)
.300 Tests of compliance
(optional extensive tests)
.400 Report on weaknesses
(formal report before end of audit)
Evaluation of Internal Controls-IRP
• APM 202. Study and Evaluation
– Distance accounting system
• gain understanding
• document
– Evaluate internal controls
• document weakness
• inform registrant
• verify reported functions with walk-through
– Obtain sufficient and appropriate evidence (records) to make
reasonable conclusions
• sufficient—substantially cover operations
• appropriate—information needed to audit
General Definition of Internal Control
The process designed to provide reasonable assurance
regarding the reliability of reporting, effective and
efficient operations, and compliance with applicable
laws and regulations.
Safeguarding assets against theft (or unintentional
loss) and unauthorized use, acquisition, or disposal is
also part of internal control.
Why are Internal Controls Important to
Auditors?
• Are the internal controls reliable?
• What are the impacts of any weaknesses in the
controls?
Why is it Important to Study Internal
Controls?
The auditor can determine weaknesses in the internal
control system and decide whether the distance and
fuel records are reliable.
This helps the auditor select of sample periods as well
as sample size.
When the records are more reliable, fewer records are
required to sample—there is more assurance the
records are correct.
How are Internal Controls Evaluated?
To properly evaluate the internal controls the
auditor will conduct a review through inquiry and
observation and should gain an understanding of
the flow of the transaction process.
1) Is there separation of duties?
2) Are there policies and procedures in place to
encourage and support internal controls?
3) Are accounting codes used for the tracking of
distance and fuel?
How are Internal Controls Evaluated?
(continued)
3) Were there changes in the accounting
procedures or operations during the audit
period?
4) What records were used to compile the IFTA
reports and IRP applications?
5) What is the process used:
– To get distance and fuel information from
– The driver to support staff to the governing agency?
How are Internal Controls Evaluated?
(continued)
6) Does the staff create summaries (monthly,
quarterly)?
7) Does the company audit the summaries and
driver’s records before the tax returns or
applications are submitted to the base
jurisdiction?
8) Does the company ensure all distance traveled
and fuel consumed is being reported?
– In the the proper quarter or application year?
Questions?