Excise Tax Audits

When people think of taxes and tax audits, and federal taxes and tax audits in particular, they usually think of the IRS and income taxes.  While the IRS is certainly a massive agency that touches the lives of virtually every American, it is not the only federal tax agency.  The Alcohol and Tobacco Tax and Trade Bureau (TTB) administers federal alcohol and tobacco excise tax audits.  Just like the IRS, the TTB performs audits, collections, and all the other functions that IRS performs.  However, it has its own unique set of rules and procedures.

Alcohol and tobacco taxes are some of the oldest taxes in the United States.  The IRS was started during the civil war, but alcohol tobacco taxes go back to the founding of our nation.  President George Washington had to contend with the Whiskey Rebellion because 18^th Century Americans were not too happy with excise taxes imposed on alcohol.  The excise taxes imposed in George Washington’s day live on in the form of the laws and regulations the TTB enforces. 

Both the IRS and TTB administer taxes created by Title 26 of the United States code.  TTB and IRS taxes share some laws in common.  The IRS procedures are largely governed by the Title 26 of the Code of Federal regulations and the Internal Revenue Manual.  The TTB operates under Subtitle E of the Internal Revenue Code and is governed by its own set of regulations.   TTB regulations tend to require a higher level of record keeping and reporting requirements than does the IRS.  TTB laws are not just concerned with taxing revenue but also documenting and controlling the movement of alcohol and tobacco products. 

The TTB’s different set of laws and regulatory requirements create challenges for alcohol and tobacco producers who find themselves under audit.  At a normal IRS income tax audit, the auditor is looking to see if the income and deductions reported on the return were accurate.  The auditor is usually not concerned with who the taxpayer transacted with, where the taxpayer’s goods and products went, and whether the taxpayer can account for its inventory.

TTB audits are different.  A TTB auditor is not only looking to see if the sales and excise taxes reported by the Taxpayer were correct, the TTB auditor is concerned with the taxpayer’s inventory, who received it, and how it was shipped.  Alcohol and tobacco producers claiming exemptions from tax for exports will need to be able to properly document the export of their product.  They will need to document how much product leaves their facility and when it was shipped.  Unlike an income tax audit which is largely about dollars and cents, a TTB audit is about dollars, cents, and gallons (or pounds for tobacco producers). 

Alcohol and tobacco businesses that keep good business records fare better at TTB audits.  This does not just include keeping receipts, ledgers, and other records of the business’ income and expenses.  This also includes keeping records of all shipping documents, invoices, and other records tracking raw materials entering and exiting a business’ facilities.  

RJS LAW represents clients facing a wide variety of tax matters before numerous taxing authorities including the TTB, IRS, EDD, and the CDTFA.  If you and/or your business are facing an audit or would benefit from a review of reporting processes and procedures, please contact us for a free consultation.  Proactivity, understanding and addressing tax regulations can save many dollars and cents.    

Written by Joseph Cole, Esq., LL.M.