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.
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
Each member jurisdiction is responsible for the staffing of qualified auditors based on the member jurisdiction’s personnel guidelines.
Auditors should conduct themselves in a manner promoting cooperation and good relations with licensees and member jurisdictions.
Auditors must give all licensees and member jurisdictions fair consideration.
Each member jurisdiction must ensure its auditors maintain proficiency in IFTA auditing by providing training opportunities through internal or external training sources.
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
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:
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.
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.
A310 PRELIMINARY AUDIT PROCEDURES
The purpose of performing preliminary audit procedures is to familiarize the auditor with the licensee’s business and reporting history.
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.
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.
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:
Identify the records the licensee maintains to support the tax returns;
Attempt to determine if there have been changes in the licensee’s distance or fuel accounting procedures or operations during the audit period;
Document the existence of any internal controls;
Review and test the reliability of the licensee’s internal controls;
Determine if sampling techniques are appropriate based on the effectiveness of the internal controls.
When sampling, the reliability of the licensee’s internal controls should determine the degree to which the records are tested.
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.
Sample period(s) must be representative of the licensee's operations.
Sample period(s) may be different for member jurisdictions due to seasonal
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
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
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.
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:
Prior experience of the licensee;
Licensees with similar operations;
Other vehicles in the fleet with similar operations;
Records available from fuel distributors or other third parties;
Other pertinent information the base jurisdiction may obtain or examine;
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
reduce the vehicle MPG or KPL by 20% or
adjust the vehicle MPG to 4.00 or the KPL to 1.7.
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.
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.
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.
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:
Name of base jurisdiction;
Licensee’s phone (where required);
Fleet number (where applicable);
USDOT number (where required);
Summary of licensee’s business operations;
Note trends or variances;
Summary of the Evaluation of Internal Controls:
Reliability of internal controls;
Strengths and weaknesses in internal controls;
Changes in the licensee’s accounting procedures during the audit period;
The opening and closing conference dates and attendees or reason why, if not held;
Sampling Methodology Information:
Description of sampling methodology or reason sampling was not performed;
The periods and vehicles sampled;
Distance and Fuel Examination:
Identify source documents used by the licensee to determine distance and fuel;
Identify the information in the source documents;
Describe procedures used to verify reported distance, fuel and MPG/KPL;
Explanation of distance and fuel adjustments;
Note any discrepancies between summaries and licensee’s tax returns;
Auditor’s evaluation of adequacy of records;
The report must indicate the procedures, findings, any requirements to become compliant and any additional information deemed necessary.
Net distance adjustment in total;
Net distance adjustment by jurisdiction;
Net tax paid fuel purchases adjustment;
MPG/KPL as reported;
MPG/KPL as a result of audit;
Net fuel tax adjustment per jurisdiction;
Reported tax by jurisdiction;
Audited tax by jurisdiction;
Interest by jurisdiction; and
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:
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.
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.
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.