## _tnm1003 ## Source details **Canonical URL:** [_tnm1003](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2010/_tnm1003.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2010/_tnm1003.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2010/_tnm1003.pdf.json) --- ### Types of audit - Registration checks: A quick check on businesses to establish that they are correctly registered. - Advisory audits: A visit to newly established businesses advising obligations in terms of tax types, filing of returns, payment of amounts due, records to be maintained. Very appropriate when introducing new laws. - Record keeping audits: The visit points out the obligations of the taxpayer in regard to the keeping of records and followed up with penalties if the taxpayer continues to disregard record keeping requirements. - Desk audits: Basic checks conducted at the tax office when the auditor is confident that all necessary information can be ascertained through in-office examination. - Single (or specific) issue audits: Focusing on a single tax type or a single period. - VAT Refund audits: Verifying the taxpayer’s entitlement to a refund prior to processing the refund. Usually undertaken for first refund claims as well as where the refund claim varies significantly from established patterns and trends. - Audit projects: Audits can be organized as a separate project for specific groups of taxpayers: an industry (e.g., construction); or a line of business (e.g., retail) and/or certain items from the declaration or profit and loss account (e.g., depreciation); to address a particular risk or to establish the degree of non-compliance in a particular sector. - Comprehensive (or full) audits: All tax obligations over a number of tax periods. As they are usually time consuming, they should only be applied to those taxpayers if there is an indication of under reporting that will impact across taxes. - Fraud Investigations: Involve the most serious cases of non compliance that have criminal implications—fraud, evasion, and criminal activity. Require special skills in investigation and evidentiary requirements. ### Role in operational planning and resource allocation - The audit products described above can be used across all segments, however time for completion will vary substantially from segment to segment. - Step six: allocate time to audit products. Audit coverage will be dependent upon the nature of auditor intervention and the duration of that intervention. - Factors influencing the standard time allowed for the completion of an audit include: scope of audit; methodology adopted; type of taxpayer; skill level of auditors; and number of auditors to be allocated to a case. - Example average times (from Box 3 context): comprehensive audit average time to complete one audit: Large - 60 staff days; Medium - 25; and Small -10. - Selection of the appropriate product (e.g., desk audit versus comprehensive audit) depends on knowledge of the business environment and the extent of the risk. ### Coverage adjustment and resource allocation (Box 3 example) - Example baseline: completing 133 large case audits in a large taxpayer population of 325 will result in coverage of 41 percent. - Alternative sequencing (if resources ample): decide required level of coverage first (e.g., audit 50 percent of large construction companies) and then determine staff needs. - Typical constraint: base coverage on the number of audits that can be performed by available staff and vary coverage by altering the mix of audit products. - Concrete staffing/product-mix scenario: - Large segment staff days: 4,000 days. - Initial mix (1:1): specific issue audits = 2,000 days; comprehensive audits = 2,000 days. - Alternate mix (3:1): specific issue audits = 3,000 days; comprehensive audits = 1,000 days. - Resulting audit counts: 150 specific audits and 17 comprehensive audits, totaling 167 audits. - Coverage outcome under alternate mix: 51 percent (versus 41 percent earlier) without increasing number of staff. ### Aggregating into a national audit operational plan - Combine audit plans for: large; medium; and small taxpayer groups to create a national audit plan allocating all operational resources. - Case selection process: - If the plan requires auditing 25 large multinational manufacturing companies, identify taxpayers with those characteristics, use assigned risk ratings, select highest-ranking taxpayers for audit, and allocate them to audit teams with necessary skills. - Dependence on data and staff: - Plan quality depends on availability and integrity of information and staff. - Disaggregation of taxpayer population requires reliable information enabling classification into respective groupings. - Standard completion times must be achievable and resources must be available and trained in the specified audit types. ### How an audit case plan is developed (stages) - Purpose: ensure auditors adopt techniques relative to risks and complete audits in line with program policies, plans, and procedures. Plan is created at commencement but should be flexible. - Stage one: understand the task and outcomes expected (includes the risk assessed; other activity leading to selection; purpose such as educational, record keeping, detect avoidance, or compliance measurement). Outcomes can be revenue or non-revenue related (e.g., establishing compliance level; adjusting understatements; advisory visit; record keeping inspections). - Stage two: understand the taxpayer’s compliance history (filing records; payment records; declarations; financial statements; previous communications; previous audit records). - Stage three: understand the taxpayer’s operations (business activity; ownership; organizational arrangements; size; competitors; likely suppliers and customers; expected margins). Note: administrations increasingly develop sector and taxpayer profiles to aid auditors. - Stage four: audit focus (identify key areas: sales, cost of goods sold, depreciation, transfer pricing, withholding taxes). Include sequencing to address critical areas early. - Stage five: scope of the audit (select audit type and methodology; plan information to gather and recording method; access to documentation; analysis techniques; interview targets/questions; direct or indirect methods). - Stage six: understand areas of law and policy (familiarity with law, policy, and rulings relevant to focus areas, e.g., eligibility for deductions, exemptions, rebates). - Stage seven: determine periods of review (plan should focus on latest tax period unless clear indication of understatement in prior periods). - Stage eight: resource and time management (assess size, complexity, duration of activities; staff experience/expertise; travel arrangements; establish timeframes and milestones for interviews, inspections, analysis, position papers, and finalization). - Stage nine: documentation (record planning process in standard working papers file). - Stage ten: authority to audit (auditor’s supervisor should endorse the audit plan to authorize the audit). - Stage eleven: changes to plan (document and endorse reasons for added focus areas, additional resources, or reduced scope; record changes in planning section of audit working papers). ### How plans can be evaluated - Performance judged on achievement of objectives in line with plan performance measures, but execution can be affected by many circumstances. - Effective plans seek to optimize outputs and outcomes from available inputs in a particular environment. - Plans should differ across jurisdictions due to diverse risks and capabilities; no single model fits all. - Use the described steps as a checklist of elements that should be covered in audit planning. ### Key points for tax administration design - Audit plans guide management of a function that usually consumes the largest proportion of a tax administration’s resources and is critical for managing compliance. - Essential to institute formal planning processes at strategic, operational, and case levels in line with principles and practices detailed in the technical note. *Box 1. Description of types of audit — Technical Notes and Manuals 10/03 | 2010* ### Box 1. Description of types of audit ### Box 1. Description of types of audit ### Types of audit - Registration checks. A quick check on businesses to establish that they are correctly registered. - Advisory audits. A visit to newly established businesses advising obligations in terms of tax types, filing of returns, payment of amounts due, records to be maintained. Very appropriate when introducing new laws. - Record keeping audits. The visit points out the obligations of the taxpayer in regard to the keeping of records and followed up with penalties if the taxpayer continues to disregard record keeping requirements. - Desk audits. Basic checks conducted at the tax office when the auditor is confident that all necessary information can be ascertained through in-office examination. - Single (or specific) issue audits. Focusing on a single tax type or a single period. - VAT Refund audits. Verifying the taxpayer’s entitlement to a refund prior to processing the refund. Usually undertaken for first refund claims as well as where the refund claim varies significantly from established patterns and trends. - Audit projects. Audits can be organized as a separate project for specific groups of taxpayers: an industry (e.g., construction); or a line of business (e.g., retail) and/or certain items from the declaration or profit and loss account (e.g., depreciation); to address a particular risk or to establish the degree of non-compliance in a particular sector. - Comprehensive (or full) audits. All tax obligations over a number of tax periods. As they are usually time consuming, they should only be applied to those taxpayers if there is an indication of under reporting that will impact across taxes. - Fraud Investigations. Involve the most serious cases of non compliance that have criminal implications—fraud, evasion, and criminal activity. Require special skills in investigation and evidentiary requirements. ### Role in operational planning and resource allocation - The audit products described in Box 1 can be used be used across all segments, however time for completion will vary substantially from segment to segment. - Step six: allocate time to audit products. Audit coverage will be dependent upon the nature of auditor intervention and the duration of that intervention. - Factors influencing the standard time allowed for the completion of an audit include: scope of audit; methodology adopted; type of taxpayer; skill level of auditors; and number of auditors to be allocated to a case. - Example average times (from Box 3 context): comprehensive audit average time to complete one audit: Large - 60 staff days; Medium - 25; and Small -10. - Selection of the appropriate product (e.g., desk audit versus comprehensive audit) depends on knowledge of the business environment and the extent of the risk. *Box 1. Description of types of audit — Technical Notes and Manuals 10/03 | 2010* ### Box 3, completing 133 large case audits in a large taxpayer population of 325 will result in cover- ### _tnm1003 - Box 3, completing 133 large case audits in a large taxpayer population of 325 will result in coverage of 41 percent. ### Coverage adjustment and resource allocation - Example baseline: completing 133 large case audits in a large taxpayer population of 325 will result in coverage of 41 percent. - Alternative sequencing (if resources ample): decide required level of coverage first (e.g., audit 50 percent of large construction companies) and then determine staff needs. - Typical constraint: base coverage on the number of audits that can be performed by available staff and vary coverage by altering the mix of audit products. - Concrete staffing/product-mix scenario: - Large segment staff days: 4,000 days. - Initial mix (1:1): specific issue audits = 2,000 days; comprehensive audits = 2,000 days. - Alternate mix (3:1): specific issue audits = 3,000 days; comprehensive audits = 1,000 days. - Resulting audit counts: 150 specific audits and 17 comprehensive audits, totaling 167 audits. - Coverage outcome under alternate mix: 51 percent (versus 41 percent earlier) without increasing number of staff. ### Aggregating into a national audit operational plan - Combine audit plans for: large; medium; and small taxpayer groups to create a national audit plan allocating all operational resources. - Case selection process: - If the plan requires auditing 25 large multinational manufacturing companies, identify taxpayers with those characteristics, use assigned risk ratings, select highest-ranking taxpayers for audit, and allocate them to audit teams with necessary skills. - Dependence on data and staff: - Plan quality depends on availability and integrity of information and staff. - Disaggregation of taxpayer population requires reliable information enabling classification into respective groupings. - Standard completion times must be achievable and resources must be available and trained in the specified audit types. ### How an audit case plan is developed (stages) - Purpose: ensure auditors adopt techniques relative to risks and complete audits in line with program policies, plans, and procedures. Plan is created at commencement but should be flexible. - Stage one: understand the task and outcomes expected (includes the risk assessed; other activity leading to selection; purpose such as educational, record keeping, detect avoidance, or compliance measurement). Outcomes can be revenue or non-revenue related (e.g., establishing compliance level; adjusting understatements; advisory visit; record keeping inspections). - Stage two: understand the taxpayer’s compliance history (filing records; payment records; declarations; financial statements; previous communications; previous audit records). - Stage three: understand the taxpayer’s operations (business activity; ownership; organizational arrangements; size; competitors; likely suppliers and customers; expected margins). Note: administrations increasingly develop sector and taxpayer profiles to aid auditors. - Stage four: audit focus (identify key areas: sales, cost of goods sold, depreciation, transfer pricing, withholding taxes). Include sequencing to address critical areas early. - Stage five: scope of the audit (select audit type and methodology; plan information to gather and recording method; access to documentation; analysis techniques; interview targets/questions; direct or indirect methods). - Stage six: understand areas of law and policy (familiarity with law, policy, and rulings relevant to focus areas, e.g., eligibility for deductions, exemptions, rebates). - Stage seven: determine periods of review (plan should focus on latest tax period unless clear indication of understatement in prior periods). - Stage eight: resource and time management (assess size, complexity, duration of activities; staff experience/expertise; travel arrangements; establish timeframes and milestones for interviews, inspections, analysis, position papers, and finalization). - Stage nine: documentation (record planning process in standard working papers file). - Stage ten: authority to audit (auditor’s supervisor should endorse the audit plan to authorize the audit). - Stage eleven: changes to plan (document and endorse reasons for added focus areas, additional resources, or reduced scope; record changes in planning section of audit working papers). ### How plans can be evaluated - Performance judged on achievement of objectives in line with plan performance measures, but execution can be affected by many circumstances. - Effective plans seek to optimize outputs and outcomes from available inputs in a particular environment. - Plans should differ across jurisdictions due to diverse risks and capabilities; no single model fits all. - Use the described steps as a checklist of elements that should be covered in audit planning. ### Key points for tax administration design - Audit plans guide management of a function that usually consumes the largest proportion of a tax administration’s resources and is critical for managing compliance. - Essential to institute formal planning processes at strategic, operational, and case levels in line with principles and practices detailed in the technical note. *International Monetary Fund — Technical Notes and Manuals 10/03; Fiscal Affairs Department; Revenue Administration: Taxpayer Audit—Development of Effective Plans* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2010/_tnm1003.pdf_