1. TTB Audits: What to Expect February 16 – 18, 2016| Washington, DC Alcohol and Tobacco Tax and Trade Bureau

2. TTB Audits: What to Expect ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 2 Presented by: Michael Stephenson, CPA Excise Tax Auditor Tax Audit Division – Western I Field Office

3. ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 3 Tax Audit Division (TAD) Mission & Structure Overview of TAD’s Audit Process The Three (3) Audit Phases (Planning, Fieldwork, Reporting) How to Prepare for Your Next TTB Excise Tax Audit Informational Resources Small Domestic Wine Producer’s Credit Agenda

4. Tax Audit Division ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 4 TAD’s mission is to ensure the proper payment of excise taxes and compliance with laws and regulations in a manner that protects the revenue and prevents unlawful activity in the commodities TTB regulates.

5. Tax Audit Division Organization ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 5

6. Professional Audit Standards ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 6 All audits are conducted in accordance with auditing standards that incorporate Generally Accepted Government Auditing Standards (or Yellow Book Standards) as published by the General Accounting Office (GAO). Most audits focus on promoting voluntary compliance by partnering with industry members using a “no surprises” approach to provide a value-added service.

7. TTB Audit Process ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 7 Risk Analyses Planning the Audit Audit Fieldwork Reporting Audit Results

8. TTB Audit Process (Continued) ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 8 Risk Analyses Audit Schedule Planning Fieldwork Reporting Audit Results

9. TAD Risk Model ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 9 TAD uses a risk-based approach to develop an annual audit schedule that is focused on revenue risk indicators. The types of audits typically performed are:  Cyclical Audits (every 3 – 5 years) - for large industry members with annual tax liability > $1,000,000  Risk Based Audits - to ensure industry members are complying with laws and paying the correct excise tax  Random Audits - of any industry member Auditors may also perform a limited-scope audit or desk review rather than a full-scope audit. All permitted industry members are subject to an audit or a review at any time.

10. Planning the Audit ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 10 After an industry member is selected for an audit/review, the planning process typically includes: Review and analysis of historical information filed with TTB’s National Revenue Center (NRC). Review of prior audits/investigations, if applicable. Development of the Audit Program. Notification to the industry member by - Issuance of an Engagement Letter with some exceptions Release of a Taxpayer Information Request to the industry member.

11. Planning the Audit Taxpayer Information Request ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 11 A Taxpayer Information Request may include requests for the following information: Powers of Attorney Organizational Charts and maps of the premises Bonds/Surety files with proof of premium payments Approved Application for Basic Permit and / or Application to Establish and Operate Wine Premises Chart of accounts, general ledger, and financial statements Documented internal control procedures

12. Planning the Audit Taxpayer Information Request (Continued) ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 12 Historical physical inventory records Removal records – sales invoices and bills of lading; or similar in an electronic format (e.g. MS Excel, MS Access) Supporting documentation for items reported on Federal excise tax returns – increasing/decreasing tax adjustments Supporting documentation for items reported on historical monthly Operations Reports IT/Plant security procedures/disaster recovery plan

13. Audit Fieldwork ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 13 Opening conference and tour of the operation. Interview subject matter experts, including accounting and/or government compliance personnel. Assess or evaluate the effectiveness of applicable internal controls. Audit testing of transactions. Identification of audit issues or findings.

14. Audit Fieldwork (Continued) Records (Audit Trail) – TTB auditors must be able to verify and trace the quantity and movement of wine making materials and bulk and bottled wines, involved in each transaction or operation: Daily records: §24.301 Bulk still wine record and §24.308 Bottled or packed wine record. Summary records/reports TTB F 5120.17 Report of Wine Premises Operation TTB F 5000.24 Federal Excise Tax Returns (FETR) ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 14

15. Audit Fieldwork (Continued) ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 15 Closing Meeting: Audit Issues or Findings discussed with the industry member Audit recommendations/instructions provided by the audit team Industry member addresses any corrective actions to be implemented

16. Reporting Audit Results ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 16 Management Letter to industry member  Tax Adjustments  Compliance Violations  Internal Control Weaknesses Written response from industry member Audit Report (internal) Adverse Actions: Warning Letter or Offer In Compromise (OIC) escalating to Suspension or revocation of permit.

17. Common Audit Findings ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 17 Some examples of common audit findings include issues with: Records General record keeping Transfer in bond records Tax paid removal records Export documentation Inventory Inventory timing, records and signature Inventory losses and loss limits Records of bottled or packed wine

18. Common Audit Findings ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 18 Some examples of common audit findings include issues with: Reporting and Tax Payment Timely filing the Report of Wine Premises Operations (TTB F 5120.17) and completing the form correctly Accurately calculating and paying federal excise tax on winealculating and paying tax on wine Filing claims for wine or spirits lost or destroyed while in bond Tax payment and filing TTB F 5000.24 Excise Tax Returns Signature authority

19. Common Audit Findings ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 19 Some examples of common audit findings include issues with: Basic Permit, Registration and Bond Filing amended applications to report changes Maintaining adequate bond coverage

20. Record-Keeping Tips ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 20 What the regulations require: Maintain records that support Report attached to it and attach records that support Tax Return to it. §24.300 General (a) Records and reports and §24.270 Determination of tax. Audit trail: TTB must be able to trace transactions throughout the production process: Daily Records  Summary Records  Monthly Reports and Federal Excise Tax Returns. Think of it as Grape weight tags to bottle to removals. For each operation that you conduct, create a dedicated record that contains all the mandatory information listed in the corresponding regulation.

21. How to Prepare for Your Next TTB Excise Tax Audit ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 21 Pay and file your FETR timely! §24.271 Payment of tax by return with remittance. Consider using Pay.gov File all monthly Operations Reports in a complete, accurate and timely manner. §24.300 General (a) Records and reports Maintain required supporting records (for a minimum of 3 years). Be aware of and follow the laws and regulatory requirements. ASK TTB if anything is unclear or if you need guidance!

22. Informational Resources ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 22 Title 27 Code of Federal Regulations (CFR) - Alcohol, Tobacco Products and Firearms Wine Online Seminar http://www.ttb.gov/main_pages/tutorials_and_resources.shtml# virtual http://www.ttb.gov/main_pages/tutorials_and_resources.shtml# virtual TTB.GOV  Wine Homepage: www.ttb.gov/wine/index.shtmlwww.ttb.gov/wine/index.shtml  Common Compliance Issues in a TTB Bonded Wine Premises (BWP) Audit: http://www.ttb.gov/wine/common_compliance_tax_issues.sh tml http://www.ttb.gov/wine/common_compliance_tax_issues.sh tml  Helpful Hints in Preparing Form 5000.24 - Excise Tax Return www.ttb.gov/forms/helpful_hints500024.shtml www.ttb.gov/forms/helpful_hints500024.shtml

23. Informational Resources ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 23 Helpful Hints in Preparing Form TTB F 5120.17 – Monthly report http://www.ttb.gov/wine/new_guide.shtml http://www.ttb.gov/wine/new_guide.shtml Wine Learning Center http://www.ttb.gov/main_pages/tutorials_and_resources.shtml# virtual http://www.ttb.gov/main_pages/tutorials_and_resources.shtml# virtual Subscribe to receive the weekly TTB Newsletter: www.ttb.gov/newsletters/ttb-news.shtml www.ttb.gov/newsletters/ttb-news.shtml FAQs – Wine W7 What are the rules for transferring small domestic producer’s tax credit?, W11 What are the Federal requirements for “Custom Crush” clients and winemakers?, W10 What are the rules for sharing bonded wine premises?: http://www.ttb.gov/wine/wine-faq.shtml http://www.ttb.gov/wine/wine-faq.shtml

24. Informational Resources ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 24 National Revenue Center (NRC) Bonded Wine Premises Applications and Taxes If you have questions regarding permits, applications, bonds, tax payments, etc., you may contact the National Revenue Center.National Revenue Center Email: ttbwine@ttb.govttbwine@ttb.gov Phone: 877-882-3277 (Toll Free) Mail: TTB National Revenue Center 550 Main Street, Room 8002 Cincinnati, OH 45202

25. §24.278 Tax Credit for Certain Small Domestic Producers Production: Producers of not more than 250,000 gallons of wine are eligible for a credit which reduces the tax due on the first 100,000 gallons of wine taxably removed each calendar year. The credit fluctuates based on a sliding scale for production levels between 150,999 and 250,000 gallons. This scale establishes the credit rate for that year. Production and removals of all members of a controlled group are treated as if they were the production and removals of a single taxpayer for the purpose of determining what credit a person may use. Must Produce in year of removals for credit. Removals: Only first 100,000 gallons of wine taxably removed each calendar year, from ANY source, are eligible for the credit. This means removals at the winery and any other bonded facilities. Maximum credit per gallon is $0.90. Maximum yearly credit is $90,000.00. (Assuming sliding scale does not apply). A proprietor who has a Basic Permit to produce wine but does not produce wine during a calendar year may not take the small producer wine tax credit on wine removed during that calendar year. A proprietor who has obtained a new wine producer Basic Permit may not take the small producer wine tax credit on wine removed until the proprietor has produced wine. Credit for cider is lower than that of wine. Sparkling wines are not credit eligible. ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 25

26. Small Domestic Wine Producer’s Credit - Continued Production: Production. For purposes of determining if a person's (control group, LLC, Corporations, etc.,) production of wine is within the 250,000 gallon limit, production includes, in addition to wine produced by fermentation, any increase in the volume of wine due to the winery operations of amelioration, wine spirits addition, sweetening, or production of formula wine. Production of sparkling and other sparkling wines is included for purposes of determining whether total production of a winery exceeds 250,000 gallons. Production includes all wine produced at qualified bonded wine premises within the United States and wine produced outside the United States by the same person. Removals: Non-producing wine premises and companies which produce more than 250,000 gallons per year are generally not eligible to use the Small Domestic Producer’s Credit when making taxable removals from their bonded premises. Credit may not be used on the taxable removal of sparkling wine or be transferred. ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 26

27. There are four conditions which must be met before a person other than the small producer (transferor) may use the small producer’s credit on behalf of an eligible small producer: The wine produced by the small domestic producer would have been eligible for the credit if it had been removed by the small domestic producer itself during the calendar year. The transferee removes the wine during the calendar year of eligibility and becomes liable for the tax when it receives the wine in bond. The producer holds title to the wine at time of taxable removal. The producer provides credit information to the transferee in writing each time wine is to be taxpaid. See §24.278 Tax credit for certain small domestic producers and §24.279 Tax adjustments related to wine credit. ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 27 Small Domestic Wine Producer’s Credit - Continued

28. The written statement must contain the following: The names of the producer and the transferee The quantity and tax class of wines to be shipped The date the wine is to be removed from bond for consumption or sale Confirmation that the producer is eligible for credit and credit rate to which the wine is entitled Confirmation that the shipment is within first 100,000 gallons removed by (or on behalf of) the producer for the calendar year (If Blended with wines not produced, then percentage eligible.) ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 28 Small Domestic Wine Producer’s Credit - Continued

29. Reasons why transferred credit might be denied: 1)Small producer has not filed reports reflecting production for the calendar year claimed. 2) All or part of wine was not produced by the small producer. 3) Person holding title was not the small producer, often times custom crush clients or wholesalers hold title to the wine. 4) Total removals exceeded 100,000 wine gallons. 5) Based on production levels, wrong rate was used. 6) Did not produce in calendar year of removal. ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 29 Small Domestic Wine Producer’s Credit - Continued

30. Summary ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 30 All audits are completed in accordance with professional auditing standards. TAD’s audit process begins with risk analysis and an audit schedule. All excise tax audits include three (3) phases: Planning, Fieldwork and Reporting. Be prepared for your next excise tax audit. Take advantage of TTB’s available informational resources. Confused on SDWPC, review web page or call.

31. Tax Audit Division Contact Information ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 31 TAD OfficeAudit DirectorEmail Address Eastern IMichele CarterAnne.Carter@ttb.gov Eastern IIRandy GettmannRandy.Gettmann@ttb.gov Central IChris TorelloChristopher.Torello@ttb.gov Central IIMarty FriersonMarty.Frierson@ttb.gov Western ITom WernerThomas.Werner@ttb.gov Western IIDaniel RyanDaniel.Ryan@ttb.gov Forensics Analysis OfficeCurtis HolshouserCurtis.Holshouser@ttb.gov

32. Speaker Contact Information Michael Stephenson, CPA Excise Tax Auditor Tax Audit Division – Western I Field Office Cell Phone: (206) 276-5765 Email: Michael.Stephenson@ttb.gov ALCOHOL AND TOBACCO TAX AND TRADE BUREAU 32