• Audits may be conducted to ensure and encourage compliance, to carefully review the recordkeeping system in place, and to offer suggestions to improve the system and/or compliance.
• Audit selection occurs in several ways including random selection, targeting delinquent taxpayers, or targeting jurisdictions with consistently late or delinquent reports.
• Motor carriers can typically expect to receive notification of an impending audit in advance, either by telephone or through written correspondence.

In some cases, a motor carrier may be subject to a combination of two or more audits, such as International Registration Plan (IRP) and International Fuel Tax Agreement (IFTA), at the same time. A jurisdiction will normally notify the registrant ahead of time what the audit will cover.

When conducting audits of any nature, jurisdictions will generally have a predetermined purpose before beginning. They can be conducting the audit to primarily ensure and encourage compliance; in this case they will be looking very carefully at the recordkeeping system in place, and may be offering suggestions to improve the system, and/or compliance. Such an attitude indicates that the jurisdiction believes that through motor carrier compliance, revenue will be received fairly and in a timely fashion.

Audit selection occurs in several ways. Jurisdictions may employ a system of random selection, in which a specified number of taxpayers are chosen for audit during a specific year. Delinquent taxpayers are often targeted for an audit. Consistently late or delinquent reports will cause the jurisdiction to believe a problem exists with the account, and an audit will be conducted to investigate the situation. Some jurisdictions perform audits on all entities that close out their IFTA/IRP accounts.

The registrant can usually expect to be audited by the base jurisdiction only. Sometimes, joint IFTA and IRP audits may occur. An accurate and reliable distance accounting system is an important element in both plans, and the jurisdiction is encouraged to perform both audits simultaneously.

Notification of audit

Motor carriers can typically expect to receive notification of an impending audit in advance, either by telephone or through written correspondence. Usually, a telephone notification will be followed by some type of letter from the jurisdiction. Jurisdictions try to provide enough notice to allow the motor carrier adequate time to prepare records. The International Fuel Tax Agreement (IFTA) requires a 30-day notification in writing prior to conducting a routine audit.

When notice is received by the taxpayer, immediate attention should be given to communicating with the jurisdiction. The communication should be prompt and cooperative; the earlier a positive relationship is established with the jurisdiction, the easier the audit process is likely to be.

The request from a jurisdiction for preliminary information should also be given prompt and careful consideration. Most jurisdictions have a questionnaire of some kind that is used to inform the jurisdiction of the taxpayer’s record keeping system, organization of records, information available, and other general information. These pre-audit questionnaires vary in length; some jurisdictions send requests several pages in length, while others limit questions to one page. Regardless of the length, the response should be as complete as possible, and submitted in a timely fashion.

The date of audit stated by the jurisdiction should be examined carefully; if it is obviously going to pose a problem (due to another audit, a company move or reorganization, for example), the jurisdiction should immediately be contacted about the possibility of a change. Jurisdictions are usually somewhat flexible about the date if a carrier demonstrates a valid reason for the request. Taxpayers are cautioned against attempting to change the date without a very good reason, or simply to delay the audit. A good relationship with the jurisdiction should be maintained whenever possible.

At this point in the audit process, it is very important to clarify details of the audit with the jurisdiction. The type of audit to be performed should be verified. It is a good idea to verify the account being audited if the operational records of several accounts are housed at the same location. The location of the audit should be defined. Usually, the audit is conducted at the taxpayer’s principal place of business. However, the audit could take place at the office of a service agency, leasing company, or in the office of the auditing jurisdiction.

The anticipated arrival date of the auditor should also be clearly determined to ensure that required records are available and adequate preparations may be completed. Thorough preparation and organization before the auditor arrives means a faster audit completion and departure by the auditor.

An extremely important element of the pre-audit communication process is the choice of the sample audit period. Usually, the jurisdiction will provide notification of what year(s) or time period the audit will cover. Sometimes, however, the taxpayer is permitted to choose the sample period, or the units for the sample. Be sure to determine immediately from the jurisdiction if this is possible. If so, this provides the opportunity to use a representative time period that will result in an accurate audit. Most jurisdictions will be somewhat flexible because they want the sample period to be representative of the licensee’s operations.

A sample period that is not a typical representation of company operations should be avoided. For example, a period of lower-than-normal activity may seem as though it would be fast and easy to audit; however even a small number of missing or undocumented distances in this case can result in an assessment that is proportionally higher than the same number of missing distances in a period of normal or high activity.

The jurisdiction may request the motor carrier to sign a waiver stating that the carrier will accept the results of the sample period, so it is important to be comfortable with the sample period agreed upon.

A final matter to clarify prior to the audit is the issue of audit expenses. The IRP and IFTA guidelines state that if the auditor must travel out of the jurisdiction to gain access to the records, the licensee may be required to pay the travel and per diem expenses incurred by the auditor. If there will be any audit fees, or expenses to be billed to the carrier, it is wise to discuss these in advance, and be aware of them. Expenses are usually billed after the audit and should be examined at that time by the licensee. A few jurisdictions require payment of auditor fees in advance; these payments should also be reviewed after the audit is completed.

To prevent confusion and misunderstanding, all of the above items that are discussed with the jurisdiction prior to the audit should be confirmed in writing.