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The Mechanics of Tangible Personal Property Auditing

The Mechanics of Tangible Personal Property Auditing. Neill Murphy, CPA Dan Crumley, CPA. Benefits of an Audit Program. Educates Taxpayers. Increased Compliance. Equity and Uniformity. Benefits of an Audit Program. An audit program may lead to increased tax revenues.

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The Mechanics of Tangible Personal Property Auditing

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  1. The Mechanics of Tangible Personal Property Auditing Neill Murphy, CPADan Crumley, CPA Mendola & Associates, LLC - 2009

  2. Benefits of an Audit Program Educates Taxpayers Increased Compliance Equity and Uniformity Mendola & Associates, LLC - 2009

  3. Benefits of an Audit Program • An audit program may lead to increased tax revenues. • That should not, however, be the primary purpose and goal of an audit program. • Equity and Uniformity should be the goal. Mendola & Associates, LLC - 2009

  4. Who is penalized if you don’t audit? • Taxpayers that file their Personal Property Returns correctly are penalized • Taxpayers who unknowingly report too much on their Personal Property return Mendola & Associates, LLC - 2009

  5. Why do you not audit? • Creates Extra Work • Politically Unpopular • Consumes Budgetary Resources Mendola & Associates, LLC - 2009

  6. Creates Extra Work Mendola & Associates, LLC - 2009

  7. Politically Unpopular • Auditing is not anti-business • It is pro-homeowner Mendola & Associates, LLC - 2009

  8. Consumes Budget Resources Mendola & Associates, LLC - 2009

  9. Why you should audit • The self-reporting nature of personal property, along with some misunderstanding of personal property, often results in reporting errors on the personal property return. Mendola & Associates, LLC - 2009

  10. Today’s Headlines… $280M in untapped tax beckons With budget cuts on the horizon, a neglected pot of business assessments may glimmer more brightly. As much as $280-million in local taxes go uncollected each year in Florida because many businesses duck their obligations and government looks the other way. At issue is the tangible personal property tax, a tax on business equipment, fixtures and furniture that brought about $1.9-billion to Florida's 67 counties last year. By SYDNEY P. FREEDBERGPublished July 8, 2007 Mendola & Associates, LLC - 2009

  11. Components of a Successful Audit Program • Obtain the approval and support of superiors • Adopt a selection process • Develop an audit program Mendola & Associates, LLC - 2009

  12. Obtain Support of Superiors No explanation needed Mendola & Associates, LLC - 2009

  13. Adopt a Selection Process • Random or Other Statistical Sample • Certain Criteria The County can audit: • every account more than $100,000 over the next five years • all non-filers • all new accounts • any account that shows a year over year increase or decrease of over 25% • any new account that shows up with older equipment Mendola & Associates, LLC - 2009

  14. Develop an Audit Program • Compose an Initial Audit Letter • Create a work-paper template • Review Financial Documents • Calculate Results • Provide results to taxpayer in draft format • Finalize audit results and process findings Mendola & Associates, LLC - 2009

  15. Initial Audit Letters • The initial audit letter is the who, what, where and when of the process. • It will notify the taxpayer that their account has been selected for audit for the selected years. • It will tell them how long they have to comply, who they should contact if they have questions and what information they need to provide. Mendola & Associates, LLC - 2009

  16. Initial Audit LetterPage 1 Mendola & Associates, LLC - 2009

  17. Initial Audit LetterPage 2 Mendola & Associates, LLC - 2009

  18. Create a Work-Paper Template • We recommend using Excel. • It works best because it can be easily communicated to the taxpayer. • Have columns for Year Acquired, Cost, RCN Factor, Percent Good, Audited Value, Reported Value, and Discovery. Mendola & Associates, LLC - 2009

  19. To tour or not to tour…that is the question Benefits of a tour: • Identify additional taxpayers not on tax rolls • Identify equipment not on depreciation schedule • They are good public relations • You get out of the office!! • They can be fun!! Minimize the risk of offending; nobody likes to be summoned to an office to produce records. Remember who the customer is. Mendola & Associates, LLC - 2009

  20. Document Review What are all these documents? • Balance Sheet • Depreciation Schedule • Trial Balance • Chart of Accounts Mendola & Associates, LLC - 2009

  21. Balance Sheet • A balance sheet is simply a snapshot of a company’s financial position at a certain point in time. • A balance sheet is also where we will find the total capitalized cost of the tangible personal property of a company. Mendola & Associates, LLC - 2009

  22. Depreciation Schedule • A depreciation schedule is a listing of the cost of assets capitalized by the company. It should include year acquired, cost, depreciable life and a description of the asset. • This will also be called a fixed asset listing. Mendola & Associates, LLC - 2009

  23. Trial Balance • A trial balance is a listing of the ending balances of all the accounts in use by the company. • Some things you can learn from a trial balance include…. Mendola & Associates, LLC - 2009

  24. Trial Balance [continued] • If a company has spare parts inventory • If a company has equipment leasing expense • If a company expenses certain assets below a certain cost threshold Mendola & Associates, LLC - 2009

  25. Chart of Accounts • A chart of accounts is a listing of all the accounts in a company’s accounting system. • If the trial balance is not available, you should review the chart of accounts and ask to see the ending balances in any accounts you believe may contain tangible personal property. Mendola & Associates, LLC - 2009

  26. Now What? • Reconcile the financial statements to the detailed depreciation schedule. • Put another way, make sure that the asset listing you have been provided is the complete population of the assets of the company. Mendola & Associates, LLC - 2009

  27. Reconciliation Mendola & Associates, LLC - 2009

  28. Classify the Assets • Classify the company’s assets according to the methodology employed by your county. • The “coded” asset list will show the County’s position on each asset and provide a filing template for the taxpayer in future years. Mendola & Associates, LLC - 2009

  29. Summarize the Data • Utilize subtotaling • Filtering • Pivot Tables • Whenever possible, try to obtain an electronic copy of the taxpayer’s depreciation table. Mendola & Associates, LLC - 2009

  30. Audit Results Summary Mendola & Associates, LLC - 2009

  31. Other Taxable Items • Review the trial balance for: • other taxable items in addition to those on the asset list. • capitalized supplies or spare parts. • expensed supplies (to formulate an estimate of taxable supplies on hand) • Inquire of management as to whether fully depreciated assets remain on the books or are removed. • Inquire of management as to the capitalization threshold for equipment purchases. Mendola & Associates, LLC - 2009

  32. Other Audit Issues • Asset Purchases vs. Stock Purchases • Book versus Historical Cost • Ghost Assets • Apply common sense Mendola & Associates, LLC - 2009

  33. Asset Purchase versus Stock Purchase • In an asset purchase, the acquirer is only buying the assets of the company and no liabilities. They will allocate the purchase price to the assets they have bought. • In a stock purchase, the entire company is acquired and the historical costs basis will generally be retained. Mendola & Associates, LLC - 2009

  34. Booked Cost versusHistorical Cost New • In an asset purchase, the acquiring company will allocate the purchase price based on their reading of the relative values of the assets. • Those assets will include receivables, inventory, equipment, and perhaps goodwill. • Often, the equipment will be shown at their net book value (which may be zero). Mendola & Associates, LLC - 2009

  35. Audits should be Objective, not Subjective • If the audit results show the taxpayer has over-reported their Tangible Personal Property, they should get a refund. • An audit is not punitive in nature. It is only designed to assess the value that is legally due. • Audits don’t ask “why”? They simply ascertain the “what”. • Property Tax Audits vis-à-vis other types of audits are unobtrusive. Mendola & Associates, LLC - 2009

  36. Typical Mistakes found on Audit • “Book” value reported as “Historical Cost” • Personal Property items used in the business considered “Real Property” by Taxpayer and vice versa (often found in “Leasehold Improvements” section of Fixed Asset list) • “Fully Depreciated” assets not returned • Expensed “assets” not returned. • Capitalized Repairs ignored • Assets reported net of Trade-in • Freight, installation charges not reported Mendola & Associates, LLC - 2009

  37. Questions, Comments, Funny Audit Stories? Mendola & Associates, LLC - 2009

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