Earlier this year the Joint Committee on Administrative Rules (JCAR) of the Michigan Legislature approved eleven new audit rules titled Audit Standards For Field Audits. Although the new rules apply to all field audits performed by the Department of Treasury, the greatest effect will be on Sales and Use Tax field audits.
In general, the package of bills restricts the use of "indirect methods," or sampling, during the course of an audit by the Department of Treasury to determine a taxpayer's income and expenses and, ultimately, a tax liability, or to determine a reporting entity's unclaimed property liability. The bills define "indirect audit procedure" to mean an audit method that involves the use of "circumstantial evidence" to determine a tax liability based on omitted income and/or overstated deductions or expenses. The term "circumstantial evidence" is defined as evidence from which more than one logical conclusion can be reached.
The acts provide that if the taxpayer fails to file a return or to maintain and preserve proper records, or the Department of Treasury has reason to believe that records maintained by the taxpayer are inaccurate or incomplete, the department may assess additional taxes based on the information that is available or that may become available. The bills add that where the department believes additional taxes are due because the taxpayer has maintained inaccurate or incomplete records, the department may assess additional taxes based on an indirect audit procedure.
The new rules were mandated by Public Act 35 of 2014 (2014 PA 35) which provides that “Any audit performed by the department or its duly authorized agents under section 3(A) shall be performed in accordance with auditing standards which shall include, but are not limited to, confidentiality, technical training, independence, due professional care, planning, supervision, understanding of the entity audited including internal control and an assessment of risk, audit evidence and documentation, sampling and sampling projections, and elements of the audit report of findings.” 2014 PA 35 mandated that Treasury promulgate administrative rules on audit standards within one year of enactment.
2014 PA 35 also provides that “A taxpayer who has been audited by the department or its agent or a taxpayer whose books, records, and papers have been examined by the department shall, upon request, be provided a complete copy in printed or electronic format of the complete audit workpapers and the audit report of findings.”
The intent was to follow as closely as possible Generally Accepted Auditing Standards (GAAS). The MICPA had extensive involvement in the rule making process which was designed to adapt GAAS to Treasury audits of Michigan taxpayers for Michigan taxes.
Contributed by Edward S. Kisscorni.