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Sulphur Production Manual

Revised 10/2005

Chapter 3 - Audit Procedures


Pre-Audit Research and Review

This chapter covers some of the activities that will be helpful when conducting these audits. This chapter is by no means meant to be exhaustive or exclusive.


Terminal Inquiries

The following terminal inquiries are available on the CICS system. These are inquiries that may prove useful and provide information on your specific taxpayer identification number. Inquiries on related entities may also provide information on outlet locations and business activities pertinent to your audit.

  • XICOLL.taxpayer #.tax type. - displays period and audit collection balances, both open and closed.
  • MTSUMM.taxpayer #. - displays master inquiry and summary status for all applicable taxes, indicating the taxes the taxpayer is currently set up for on the system
  • MTBALS.taxpayer#. – displays the current outstanding tax balance.
  • XIXREF.taxpayer#. - cross-references assigned refunds and successor/predecessor liabilities.
  • XIREFS.taxpayer#.tax type.sub-type#. - displays refunds for a specified period.
  • MTIGDI.taxpayer#. - displays multi-tax document index transactions by taxpayer.
  • LISUMM.indicator.case id or bankrupt id. - displays bankruptcy summary information.
  • NAMNUM.search code.exactness code.zip code.taxpayer name. – displays name vs. number.
    • Search Code:
      • 1 - Personal
      • 2 - Business
      • 3 - Bond Company
    • Exactness Code
      • 1 - Personal Code Match
      • 2 - Narrow Search
      • 3 - Wide Search

Audit History

The Audit History is a computer-generated summary of all transactions relating to a particular tax account. Each report filed by a taxpayer becomes a part of the history. The Audit History is divided into the following sections:

  • Summary Page
  • Report Information
  • Data Information
  • Payment Information
  • Collection Information
  • Status of Refund Claims

The history information in the Auditing Fundamentals Manual is also applicable to Sulphur Production. An audit should not be started without a current Audit History. As with all other taxes, an Audit History for the Sulphur Production Tax is requested via XIRPTS on the CICS System.

Summary Information Page, Example


T00141 - Summary Information Page

Besides useful taxpayer information, prior audit information would be listed on this page.


Report Information, Example


T00142 Report Information

The Report Information section will list any “Estimated Returns.” “Non-Filer Returns,” “Late Returns,” “Valid Judgment Periods,” or “Valid Certification Periods” during the requested period.  An “X” will appear in the applicable period and category.  XIDATA or XIPMTS inquiries on CICS should be run to ensure that there were not any amended returns during the period. The DUEDAY inquiry can be used to determine the correct due date for a report period. Returns should not be considered late if no Taxable Gallons were reported (“zero returns”).


Data Information, Example


Data Information

The Data Information will list the “Total Long Tons,” “Taxable Tons,” “Tax Rate,” and “Tax Due” by period. In addition, the “Postmark Date” for the report filed will be listed. The auditor should examine all reported amounts for any fluctuations that appear to be unusual. These fluctuations may indicate a change in personnel, accounting procedures, or internal control. These fluctuations need to be considered when choosing periods for preliminary testing or sampling.


Payment Information, Example


T00145 Payment Information

This report lists the postmark dates and types of payments made during each period. Sulphur Production Tax is due on a quarterly basis.


Collection Information, Example


T00148 Collection Information

This section of the Audit History lists any collection activity for the taxpayer during the requested period for all taxes.


Status of Refund Claims, Example


T00149 Status of Refund Claims

This section of the Audit History lists the status of refund claims by the taxpayer for all taxes.


Entrance Conference

The entrance conference section (Chapter 4) of the Auditing Fundamentals Manual also applies to the Sulphur Production Tax. Some items to discuss with the taxpayer’s representative(s) that are peculiar to Sulphur Production would be:

  • In the audit plan, list the taxpayer’s representatives who attend the entrance conference.
  • Does the taxpayer understand about the taxability of sulphur and the exemptions?
  • Does the taxpayer understand that the tax is based on production of sulphur rather than on sales of sulphur
  • Does the taxpayer understand that the tax rate is applied to number of long tons (2,240) of sulphur?
  • Determine all activities performed by the taxpayer:
    • Locations of sulphur production facilities in Texas – sulphur produced out-of-state is not taxable
    • Types of production facilities
      • Mining operations (i.e., Frasch wells)
      • Extraction from sour gas and/or sour crude oil
      • Scraping/digging sulphur from the earth
    • Method of storage of sulphur (solid vs. molten state)
    • Method of distribution of sulphur (solid vs. molten state as in heated railroad cars, etc.)
  • Discuss audit procedures
    • Audit period
    • Sampling and projection procedures
    • Possibility of obtaining statute extension agreement (Be sure to use the correct due dates of the returns extended, when completing the agreement – i.e., the last day of the calendar month following the end of the quarter).

Records To Be Examined

Generally, the records to be examined consist of:

  • Production reports
    • These reports may be maintained on a daily, weekly, monthly, or quarterly basis by the taxpayer
    • Production reports should show the quantity of sulphur produced within the given time period by whatever methods are used by to recover the sulphur
    • Production reports may be maintained in pounds, tons, or long tons – any mathematical calculations need to be verified
    • If production reports are not available or are incomplete, then:

      Sales for the period + inventory on hand = Production

  • Inventory records
    • These records should show the quantity of sulphur in storage at any given time, detailing increases and decreases to the inventory
  • Sales records
    • Invoices
    • Purchase orders
    • Shipping documents
    • Sales ledger
    • Beginning inventory + production – ending inventory = sales
  • Texas Railroad Commission Form R-3
    • If the taxpayer is extracting sulphur from natural gas, this form is required to be filed with the Texas Railroad Commission
    • This form lists in Section IV “Production of Sulphur form processing natural gas ______ tons.”  The taxpayer may list production in either normal tons (2,000 lbs.) or long tons (2,240 lbs.).  The auditor needs to verify this.  An example of this form is included later in this chapter.
  • Texas General Land Office Form GLO-2
    • If sulphur is mined from any lands on which there is an exempt royalty (state-owned lands), this form is required to be filed with the Texas General Land Office.  This form states “All weights in 2000 lb. tons unless otherwise specified.”  The auditor must verify this.
    • An example of this form is included later in this chapter.
  • Federal Energy Regulatory Commission (FERC) Form 2 (large producer or Form 2A (small producer)
    • If the taxpayer sells natural gas in interstate commerce and falls under the Federal Energy Regulatory Commission jurisdiction, this form is required to be filed.  This form will indicate any production and sales of sulphur.

Railroad Commission of Texas Form R-3, Example

Monthly Report For Gas Processing Plants (Example)

Monthly Report For Gas Processing Plants (Example) Monthly Report For Gas Processing Plants (Example)


General Land Office of The State of Texas Form GLO-2, Example

Gas Production Royalty Report (Example)

Gas Production / Royalty Report

Verifications

  • Examine the taxpayer’s working papers, if any, to separate taxable and nontaxable quantities of sulphur produced.
  • Is the taxpayer using the calendar quarter for the cut-off date or is an earlier date being used?
  • Verify that the quantity of sulphur taxed is the quantity of sulphur produced during the quarter rather than the sales amount.
  • The taxpayer may be maintaining records on sulphur production in various ways:
    • Sulphur in number of tons (2,000 lbs. per ton)
    • Sulphur in number of long tons (2,240 lbs. per ton)
    • Sulphur in molten state
    • Sulphur in number of pounds
  • Verify the taxpayer’s computations of taxable long tons
    • Are conversions from pounds, tons, or molten quantities to long tons correct?
    • Are fractions of a long ton rounded up to the next whole number?
  • Since the tax rate is based on the number of long tons (or fractional parts of long tons), the auditor must convert the production to long tons if the taxpayer’s records are maintained in normal tons (also called short tons) or in molten measurements.
    • Sulphur production maintained in normal tons is converted in two ways
      • # of normal tons

        x 2,000 lbs. per ton

        Total number of pounds*


        Total number of pounds/2,240 pounds per long ton =  # of long tons; or


      • # of normal tons

        x .892857 (ratio of 2,000 lbs./2,240 lbs)

        # of long tons*

        *All fractions of long tons must be rounded up to the nearest whole number since fractional parts are taxed as a whole.

        Example:

        The taxpayer has a quarterly production of 55.3 normal tons (2,000 lbs./ton) of sulphur:

        55.3 normal tons

        x 2,000 pounds per ton

        110,600 total pounds



        110,600 Total Pounds/2,240 Pounds per Long Ton = 49.375 Long Tons = 50 Long Tons; or

        55.3 Tons

        x .892857

        49.375 Long Tons = 50 Long Tons



    • Sulphur production maintained in a molten state can be converted to long tons by:

      # of gallons of molten sulphur

      x 14.994*

      # of Pounds of Sulphur



      # of Pounds of Sulphur/2,240 Pounds Per Long Ton = # of Long Tons

      *1.80 = Specific Gravity of Molten Sulphur

      x 8.33 – Pounds per Gallon of Water

      14.994 = Pounds of Molten Sulphur per Gallon

      or

      Weight of Liquid Sulphur in Pounds as Loaded or Stored/2,240 Lbs. per Long Ton = # of Long Tons (Round result up to next whole ton)

      Example:

      6,963 = # of Gallons of Molten Sulphur

      x 14.994

      104,403.22 = # of Pounds of Sulphur



      104,403.22/2,240 Pounds per Long Ton = 46.609

      Long Tons = 47 Long Tons (Round result up to next whole ton)

Note:  All conversions need to be clearly explained in footnotes on the audit schedules.


Exit Conference

  • Explain to the taxpayer the audit procedures performed. This would include a discussion of the following:
    • All records examined
    • A detail description of audit procedures utilized, audit adjustments and flow of audit package
    • Minor errors for which no adjustments were made
    • Applicable law, rulings and proper reporting procedures
    • Additional information the taxpayer may obtain to reduce the liability
    • Taxpayer's disagreements with the audit - these should be clearly understood by the auditor and documented
    • The reconciliation conference should be offered if the taxpayer disagrees.
    • The “What If I disagree with my audit results” brochure should be given to the taxpayer.
  • Other procedures which should be discussed with the taxpayer include:
    • The billing process (whether penalty waiver will be recommended and policies and procedures pertaining to penalty and interest).  The “What If I disagree with my Audit” brochure should be given to the taxpayer.
    • Payment should be requested.
    • Redetermination procedures must be explained.

Audit Plan

The Record of Audit Planning, Activities, and Results is the form that documents the audit plan for every audit and should be completed as the audit progresses. Continuation pages are available for use and generally will be necessary to record all information.  It is important for the auditor to document all appropriate and pertinent information.  Refer to the Auditing Fundamentals Manual for documentation that is required.

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