Audit Reports, Workpapers and Documentation Not Reviewed Before Provided to Taxpayers
Audit Documentation Did Not Include Audit Confirmation Letters and Signed Copies of Notice of Preliminary Audit Determination
Last week the Michigan Office of the Auditor General released the results of its Performance Audit of the Tax Compliance Bureau (TCB) of the Michigan Department of Treasury. The Tax Compliance Bureau is responsible for tax audits including desk audits. Following are the Auditor General's findings relating to Audit Guidelines.
TCB - Tax Compliance Bureau
NOPAD - Notice of Preliminary Audit Determination
TCB did not review and document all audits in compliance with its audit guidelines. As a result, TCB did not have assurance that audit results were accurate, supported by appropriate documentation, and consistent in the application of tax laws before the results were provided to the taxpayer.
TCB's audit guidelines require certain documentation and reviews of audit working papers subsequent to the completion of the audit fieldwork.
Our review of the audit working papers for a sample of 54 taxpayer audits
conducted by TCB during our audit period disclosed:
a) TCB audit supervisors did not review the working papers of 16 (30%) of the audits before the Notice of Preliminary Audit Determinations (NOPADs) were provided to the taxpayers. Also, for 8 (15%) other audits, TCB could not provide documentation that the supervisory review was completed before the NOPADs were sent to the taxpayer. The NOPAD is the notification to the taxpayer of the preliminary determination of the tax deficiency, penalty, and interest amounts owed to the State. TCB's audit guidelines require the audit supervisor to review the audit working papers before the NOPAD is provided to the taxpayer to ensure consistency in the application of tax laws, correctness of the calculations, use of approved sampling methodologies, and overall concurrence with the auditor's conclusions.
b) TCB did not include documentation of the audit confirmation letters and the signed NOPADs in 7 (13%) and 8 (15%) of the audit working papers, respectively. TCB's audit guidelines require scanned copies of the audit confirmation letter and the signed NOPAD to be documented in the audit working papers. The audit confirmation letter establishes the audit commencement date, which suspends the statute of limitations during the audit.
We recommend that TCB review and document all audits in compliance with its
AGENCY PRELIMINARY RESPONSE
TCB agrees with the recommendation
TCB indicated that, effective March 1, 2013, it will incorporate testing of completed audits for compliance with the audit guidelines in its quality assurance review process. TCB also indicated that supervisors and managers have been instructed to strictly adhere to the audit guidelines that require the review of the working papers before the NOPAD is provided to the taxpayer.