The International Fuel Tax Agreement Audit Manual has been subject to amendments under Section R1600 of the Articles of Agreement, which were effective January 1, 2017. The amendments resulted in a rewrite of the Audit Manual.
The previous version of the Audit Manual, effective from January 1996 through December 31, 2016 can be found on the IFTA, Inc. website at www.iftach.org. This version includes commentary and consensus board interpretations that affected that Audit Manual. All commentaries initiated from Consensus Board Interpretations of issues or history/intent segments of IFTA ballots.
It is the purpose of this publication to provide a commentary when sections have been amended. An asterisk (*) next to a Section number indicates commentary to that Section. As revisions occur commentary will be inserted. All commentary after January 1, 2017, will be recorded in the Audit Manual which was effective on that date.
Audit is a critical element of ensuring compliance with the International Fuel Tax Agreement (IFTA). Under the provisions of IFTA, a member jurisdiction must audit, on behalf of all member jurisdictions, the tax returns and supporting documents of licensees based in that jurisdiction. The purpose of this manual is to set standards for auditors and member jurisdictions and to provide guidance and procedures specifically for the performance of IFTA audits.
The Audit Manual is the basis used by the Program Compliance Review Committee (PCRC) in evaluating a member jurisdiction’s compliance with the audit requirements as set forth in Article XIII of the Agreement. When the Audit Manual uses the word “must” or “shall” in connection with a procedure, this indicates an unconditional requirement for a member jurisdiction and a subject for compliance review. The use of the word “should” in the Audit Manual also indicates a requirement for a member jurisdiction, although one where noncompliance will be accepted if the jurisdiction has documented the relevant circumstances and the reasons for not complying. In all instances where deviation is required, the rationale to support the deviation must be documented in the work papers.
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A200
AUDIT PROGRAM STANDARDS
Each member jurisdiction must use an audit program. An audit program provides for uniformity and consistent application of audit procedures, serves as a training tool for new auditors, and facilitates the review of the audit. An audit program does not preclude the use of auditor judgment. Deviations from an audit program are acceptable if they are reasonable given the audit circumstances.
A210 PROFICIENCY AND DUE PROFESSIONAL CARE
The audit is to be performed and the audit report prepared by a person or persons having adequate technical training and proficiency in auditing, while exercising due professional care and maintaining an objective state of mind.
A220 AUDITOR INDEPENDENCE
The audit engagement, the audit organization and the individual auditor, whether government, public or contracted by a member jurisdiction, must be free from personal, external, and organizational impairments to independence, and must avoid the appearance of such impairments to independence.
A230 PLANNING AND SUPERVISION
The base jurisdiction shall adequately plan and supervise audits, and shall maintain documentation of such planning and supervision in the audit files. Documentation of these factors, by way of example, include work papers showing analysis of reported figures, observations regarding the licensee’s account, and records of communication between the auditor and his or her supervisor. Documentation that the auditor’s proposed audit results were reviewed for accuracy and for compliance with IFTA requirements shall be included in the audit file.
A240 AUDITOR QUALIFICATIONS AND RESPONSIBILITIES
.100
Each member jurisdiction is responsible for the staffing of qualified auditors based on the member jurisdiction’s personnel guidelines.
.200
Auditors should conduct themselves in a manner promoting cooperation and good relations with licensees and member jurisdictions.
.300
Auditors must give all licensees and member jurisdictions fair consideration.
.400
Each member jurisdiction must ensure its auditors maintain proficiency in IFTA auditing by providing training opportunities through internal or external training sources.
.500
The auditor must make a reasonable attempt to verify information reported on the tax returns.
A250 NUMBER OF AUDITS
Base jurisdictions will be held accountable for audits and will be required to complete audits of an average of 3 percent per year of the number of IFTA accounts required to be reported by that jurisdiction on the annual reports filed pursuant to the IFTA Procedures Manual, Section P1110.300.005 excluding new licensees, for each year of the program compliance review period, other than the jurisdiction’s IFTA implementation year. Such audits shall cover at least one license year. This does not preclude audits of individual licensees several times during the program compliance review period. However, audits of a
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single licensee that cover multiple license years, fuel types, or both shall be counted as one audit for program compliance review purposes.
A260 SELECTION OF AUDITS
The following guidelines shall be used in selecting audits to fulfill the IFTA auditing requirements:
.100
Low-Distance/High-Distance Accounts Requirement
At least 15 percent of each member jurisdiction's audit requirement shall involve low-distance accounts. Low-distance accounts are considered to be the 25 percent of the previous year's licensees who had the lowest number of miles/kilometers reported in all member jurisdictions. At least 25 percent of each member jurisdiction's audit requirement shall involve high-distance accounts. High-distance accounts are considered to be the 25 percent of the previous year's licensees who had the highest number of miles/kilometers reported in all member jurisdictions.
.200
Low-Distance/High-Distance Computations
Low-distance computations and high-distance computations shall be based on total miles/kilometers reported by all IFTA licensees included on the annual report filed by the jurisdiction pursuant to the IFTA Procedures Manual, Section P1110.300.005 excluding new licensees, but including licensees who report no operations during a quarter, for the first three quarters of each calendar year.
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A300
AUDIT PROCEDURES
A310 PRELIMINARY AUDIT PROCEDURES
The purpose of performing preliminary audit procedures is to familiarize the auditor with the licensee’s business and reporting history.
.100
The auditor must identify, and document in the audit file, the licensee’s vehicles operated in the audit period, and vehicle characteristics that might affect the audit.
.200
The auditor must identify, and document in the audit file, how the licensee obtains fuel, the types of fuel used, and the locations of any bulk fuel storage.
.300
The auditor must analyze the licensee’s tax returns subject to audit, note trends or variances, and document findings in the audit file.
A320 EVALUATION OF INTERNAL CONTROLS
The auditor must provide a summary description of the licensee’s distance and fuel accounting systems. The auditor should compare the distance and fuel summaries provided by the licensee to the tax returns, and document any differences. An example of the licensee’s records examined by the auditor should be included in the audit file.
The auditor must:
.100
Identify the records the licensee maintains to support the tax returns;
.200
Attempt to determine if there have been changes in the licensee’s distance or fuel accounting procedures or operations during the audit period;
.300
Document the existence of any internal controls;
.400
Review and test the reliability of the licensee’s internal controls;
.500
Determine if sampling techniques are appropriate based on the effectiveness of the internal controls.
.600
When sampling, the reliability of the licensee’s internal controls should determine the degree to which the records are tested.
.700
The above items, and the strengths and weaknesses identified in the licensee’s distance and fuel accounting systems, must be documented in the audit report.
A330 SAMPLING AND PROJECTION
Unless a specific situation dictates, all audits will be conducted on a sampling basis.
.100
Sample period(s) must be representative of the licensee's operations.
.200
Sample period(s) may be different for member jurisdictions due to seasonal
operations.
When the summary information does not match information reported on the quarterly returns, the auditor must attempt to determine the reason for the discrepancy. The auditor must also determine whether to project the sample findings per the summaries or tax returns. It is generally preferable to project to
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summary distance and fuel (corrected as necessary). The auditor must document in the audit file and note in the audit report the conclusions made as to whether the distance and fuel per summary or tax return has sufficient accuracy and reliability to be used in sampling projections.
If the base jurisdiction utilizes a distance software program to verify the records of the licensee, that software program shall be used as an audit tool for verification of reported distances.
A340 UNREPORTED DISTANCE
If the auditor discovers distance that was unreported, and cannot ascertain where that distance was traveled, the distance shall be allocated using a rational and unbiased approach. The reasoning for the approach must be documented in the audit file.
A350 AUDIT ADJUSTMENTS
.100
When records for the fleet as a whole are adequate for audit, the base jurisdiction shall have the authority to adjust the MPG or KPL.
.200
In instances where the records for specific vehicles in the fleet under audit are substantially impaired or missing, the base jurisdiction may make audit adjustments for fuel and distance for those vehicles based on factors such as:
.005
Prior experience of the licensee;
.010
Licensees with similar operations;
.015
Other vehicles in the fleet with similar operations;
.020
Industry averages;
.025
Records available from fuel distributors or other third parties;
.030
Other pertinent information the base jurisdiction may obtain or examine;
.300
If the base jurisdiction determines that such factors as those in A350.200 fail to provide a basis to support an audit adjustment, the jurisdiction may, for the specific vehicles at issue, either
.005
reduce the vehicle MPG or KPL by 20% or
.010
adjust the vehicle MPG to 4.00 or the KPL to 1.7.
.400
Nothing in this section shall affect the grant or denial of credits for tax-paid fuel in accordance with P550.
A360 REDUCTION TO TOTAL FUEL
The total fuel reported by a licensee shall only be reduced when there is clear proof, based on the records provided by the licensee, to support such a reduction and such proof is documented in the audit file. The absence of tax paid fuel receipts and a subsequent denial of tax-paid credits claimed does not, in and of itself, warrant a reduction to reported total gallons.
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A400
AUDIT COMMUNICATIONS
All audit communication, both written and oral, must be documented in the audit file.
A410 COMMUNICATIONS BETWEEN JURISDICTIONS
Jurisdictions may contact each other to obtain pertinent information in accordance with each jurisdiction’s disclosure policy.
A420 NOTIFICATION
.100
The licensee should be contacted at least 30 days prior to the conduct of an audit. Through the initial or subsequent audit contacts, the licensee must be advised of the audit period, the type of records to be audited, and the proposed audit start date.
.200
The base jurisdiction may begin the audit within the 30 day notification period with agreement from the licensee, or for just cause.
A430 REQUEST FOR RECORDS
The auditor must request the appropriate records to conduct an audit of the selected audit period.
A440 OPENING CONFERENCE
A documented opening conference should be held with the licensee to discuss the licensee’s operations, distance and fuel accounting system, audit procedures, records to be examined, sample period, sampling procedures, etc.
A450 CLOSING CONFERENCE
A documented closing conference should be held with the licensee during which any areas of non-compliance, and any requirements and recommendations for improvement to the distance and fuel accounting systems are discussed.
A460 AUDIT REPORT
An audit report, including a narrative and a billing summary documenting the audit, must be prepared by the base jurisdiction and provided to the licensee and all affected member jurisdictions. Where appropriate a checklist may serve this purpose. A copy of the audit report must be kept in the audit file. The base jurisdiction should send the audit report to all affected jurisdictions at the same time it sends the final report to the licensee. The audit report must contain:
.100
General Information:
.005
Name of base jurisdiction;
.010
Auditor’s name;
.015
Licensee’s name;
.020
Licensee’s address;
.025
Licensee’s phone (where required);
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.030
Licensee’s representative;
.035
Account number;
.040
Fleet number (where applicable);
.045
USDOT number (where required);
.050
Audit Period;
.055
Summary of licensee’s business operations;
.060
Note trends or variances;
.200
Summary of the Evaluation of Internal Controls:
.005
Reliability of internal controls;
.010
Strengths and weaknesses in internal controls;
.015
Changes in the licensee’s accounting procedures during the audit period;
.300
The opening and closing conference dates and attendees or reason why, if not held;
.400
Sampling Methodology Information:
.005
Description of sampling methodology or reason sampling was not performed;
.010
The periods and vehicles sampled;
.500
Distance and Fuel Examination:
.005
Identify source documents used by the licensee to determine distance and fuel;
.010
Identify the information in the source documents;
.015
Describe procedures used to verify reported distance, fuel and MPG/KPL;
.020
Explanation of distance and fuel adjustments;
.025
Note any discrepancies between summaries and licensee’s tax returns;
;
.030
Auditor’s evaluation of adequacy of records;
.600
Summary:
.005
The report must indicate the procedures, findings, any requirements to become compliant and any additional information deemed necessary.
.700
Billing Summary:
.005
Net distance adjustment in total;
.010
Net distance adjustment by jurisdiction;
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.015
Net tax paid fuel purchases adjustment;
.020
MPG/KPL as reported;
.025
MPG/KPL as a result of audit;
.030
Net fuel tax adjustment per jurisdiction;
.035
Reported tax by jurisdiction;
.040
Audited tax by jurisdiction;
.045
Penalty;
.050
Interest by jurisdiction; and
.055
Total by jurisdiction.
A470 AUDIT FILE CONTENTS
In addition to a copy of the audit report and any pertinent post-audit communications concerning the audit, the audit file shall contain at least the following information:
.100
Schedules
.005
Supplementary Schedules
Supplementary schedules shall provide additional detail corroborating the results reflected in the Billing summary required in A460. The schedules shall illustrate how the audited fuel and distances were calculated and the computation of adjustment factors determined from a sample, if applicable.
.200
Support Documentation
.005
Detail Information
Information, in the form of schedules, working papers or examples that document the records reviewed and support the audit results. Such information shall include detail of retail and/or bulk purchases, detail of bulk fuel withdrawals, and analysis of trips audited, showing audited distance in total and per jurisdiction.
.010
List of Records Maintained
A list of records, which shall indicate what records are maintained by the licensee and whether those records comply with the Agreement.