1、TNM/10/05 International Monetary Fund Fiscal Affairs Department 700 19th Street NW Washington, DC 20431 USA Tel: 1-202-623-8554 Fax: 1-202-623-6073 Revenue Administration: Taxpayer Audit Use of Indirect Methods Edmund Biber Fiscal Affairs Department INTerNATIoNAl MoNeTAry FUND Technical noTes and Ma
2、nualsINTerNATIoNAl MoNeTAry FUND Fiscal Affairs Department Revenue Administration: Taxpayer AuditUse of Indirect Methods Prepared by edmund Biber Authorized for distribution by Carlo Cottarelli April 2010 JEL Classification Numbers: H20, H29, H83, M42 Keywords: taxpayer audit, tax audit methods, ind
3、irect methods, indirect audit methods Authors E-Mail Addresses: .au DISCLAIMER: This Technical Guidance Note should not be reported as representing the views of the IMF. The views expressed in this Note are those of the authors and do not necessarily represent those of the IMF or IMF policy.Technica
4、l Notes and Manuals 10/05 | 2010 1 Revenue Administration: Taxpayer Audit Use of Indirect Methods Edmund Biber I. Why do tax administrations need to use indirect methods? A taxpayer audit program must embrace a range of methods and techniques for determining and verifying a taxpayers income if it is
5、 to be an effective component of a balanced compliance man- agement strategy . Detecting and deterring non-compliance requires more than a mere examination of a taxpayers books and records and necessitates an analysis of the taxpayers financial affairs to correctly assess tax liabilities. Direct met
6、hods, often referred to as specific issue or specific item methods, rely upon verifica- tion of income or expenses by direct reference to the books and records used to prepare the tax declaration. Adjustments to declarations or assessments are supported by specific evidence in rela- tion to an incom
7、e or expense item. Indirect methods involve the determination of tax liabilities through an analysis of a taxpayers financial affairs utilizing information from a range of sources beyond the taxpayers declaration and formal books and records. Assessments are often based on circumstantial evidence in
8、dicating a reasonable estimate of the taxpayers correct liability . TECHNICAL NoTEs ANd MANUALs This technical note addresses the following questions: Why do tax administrations need to use indirect audit methods? What indirect audit methods are commonly used by tax administrations? What are the leg
9、islative requirements for the use of indirect audit methods? In what circumstances is it appropriate to use indirect audit methods? What is required to withstand challenges to indirect audit methods? Note: Edmund Biber is a former Assistant Commissioner of the Australian Tax Office and member of the
10、 IMFs Fiscal Affairs Department roster of experts.2 Technical Notes and Manuals 10/05 | 2010 Auditors in many administrations only check that a taxpayers declaration reflects the figures in their books of account. However, if tax administrations rely solely upon taxpayer declarations, business recor
11、ds, and books of account to determine tax liability , taxpayers could limit their li- ability by creating records that do not truly reflect their financial position, or by merely opting not to maintain books and records and not filing tax declarations, avoid a tax assessment. Therefore, indirect met
12、hods have been developed to assist auditors in objectively determining tax liabilities when the books and records are either unavailable or do not adequately reflect the taxpayers financial affairs. Indirect methods of income measurement can also be valuable in risk assessment and testing the veraci
13、ty of taxpayer claims. II. What indirect methods are commonly used by tax administrations? Tax administrations have developed a range of formal indirect income measurement meth- ods to consistently and efficiently deduce a reasonable estimate of income to demonstrate under reporting when declaration
14、s and books and records cannot be relied upon. Although some admin- istrations will vary terminology and modify approaches and techniques, the methods commonly adopted and their respective usefulness are outlined below. This paper does not attempt to provide detailed tuition in the application of in
15、direct methods, however further guidance in the use of common indirect methods, together with examples of computation, is available in the IRS Internal Revenue Manual 1through the IRS public website. 2 Bank deposits and cash expenditure method is based on the premise that money received must either
16、be deposited or spent. This approach is particularly useful if an analysis of bank accounts and a taxpayers cash expenditure indicates a likelihood of undeclared income and the taxpayer makes regular payments into bank accounts that appear to be from a taxable source. A detailed analysis of all bank
17、 deposits into business and personal accounts, loan accounts, and accounts held with credit unions, investment trusts, and other financial institutions, that may be maintained or controlled by the taxpayer, provides the auditor with a figure for total deposits. Non-taxable receipts, for example loan
18、s, gifts, inheritances, are then deducted where the taxpayer is able to provide evidence of such receipts, giving the auditor a net receipts deposited figure. To establish receipts that were not deposited, cash expenditures need to be accounted for. Business expenses claimed in the declaration but n
19、ot paid out of bank accounts are taken to have been paid by cash. Cash purchases of capital items and cash loan repayments, both personal and business, personal expenses paid with cash, and increases in cash on hand need to be determined through a thorough analysis of the taxpayers financial affairs
20、. Any non-taxable cash, for example, loans, withdrawals from accounts, or gifts that are used to make above payments, where substanti- ated by the taxpayer, are deducted to ascertain taxable gross receipts. 1 Internal Revenue Manual Formal Indirect Methods of Determining Income, Chapter 4.10.4.6 2 w
21、ww.irs.gov/irm/part4/irmTechnical Notes and Manuals 10/05 | 2010 3 For taxpayers using an accrual basis of accounting, the above computation of gross receipts is adjusted for movements in accounts receivable and accounts payable and then compared to the gross receipts reported in the taxpayers decla
22、ration to calculate the adjustment to income. As expenses claimed in the declaration, but not paid out of the bank account, are included in cash payments, an adjustment will represent overstatement of deductible expenses or understatement of income. As with most indirect methods, the burden is on th
23、e taxpayer to prove that receipts came from a non-taxable source. However, the auditor should endeavor to establish a likely source of the income or negate the taxpayers contentions as to the non-taxable sources. During examination of all bank deposits and cash disbursements the auditor is likely to
24、 uncover leads as to the source of unreported income that will support assertions as to the likely source of the income. On the basis that all income must be either deposited or spent, accurate execution of this methodology provides a strong case for adjusting or establishing the veracity of declare
25、d income. Non cash items such as deprecia- tion need to be considered separately as specific item adjustments. Source and application of funds method, also often referred to as the excess expenditure method, the T - account method, or a funds statement, is based on the theory that if expenditure exc
26、eeds declared income plus income from unreported sources in a given tax period, that excess expendi- ture represents undeclared income from taxable sources. That is, funds applied cannot exceed funds available unless there are undisclosed sources of income. Although the method requires a detailed an
27、alysis of all funds (taxable and non-taxable) avail- able to a taxpayer, all expenditure (business deductible and non-deductible and private), increases and decreases in assets and liabilities, and adjustments to account for deductions not involving application of funds (e.g. depreciation), it is a
28、favored approach when it is clear that the taxpayers declared income could not sustain the evident wealth, expenditure, or lifestyle of the taxpayer. Sources of funds are represented by the taxpayers declared income and income from non tax- able sources which the taxpayer is able to substantiate (e.
29、g. gifts), decreases in assets (e.g. bank account balance or accounts receivable), and increases in liabilities (e.g. principal amount of loans or accounts payable). Applications of funds include increases in assets (business and personal), purchases, business expenses, personal living expenses, and
30、 decreases in liabilities. Box 1. Formula for using bank deposits and cash expenditure method Total deposits (including business and personal accounts) Add Cash expenditure (cash payments for business, capital, and private expenses) Add Increase in cash on hand Less Nontaxable receipts (e.g. VAT or
31、sales tax, transfers between accounts, loans) Equals Gross receipts as corrected Less Gross receipts as per declaration Equals Understated income4 Technical Notes and Manuals 10/05 | 2010 If income has been correctly declared and the auditor has accurately reconstructed the taxpayers financial affai
32、rs using the source and application of funds method, the T-account will balance, that is, the source of funds will equal the application of funds. However, if the application of funds figure is greater than the source of funds, it is concluded that the excess expenditure represents an understatement
33、 of income, or overstatement of deductible expendi- ture, and unless the taxpayer can prove that income was derived from a non-taxable source, the taxpay- ers declaration of income is adjusted accordingly . Net worth method, also known as an asset bet- terment or asset accretion method, assumes that
34、 increases in net assets, after adjustments for non- deductible expenditure and non-taxable income, represent taxable income. As it is also based on the theory that funds applied or expended cannot exceed funds available, the analysis required is simi- lar to that used in the source and application
35、of funds method, however it extends over a number of years or tax periods to ascertain changes to net worth from one year to the next. The method relies upon a thorough analysis of all assets, liabilities, expenditure (business and private), and non-taxable sources of funds to reconstruct a taxpayer
36、s financial affairs over a num- ber of years. For this reason, it is more commonly used in cases where the taxpayer is suspected to have avoided tax and accumulated considerable assets or had substantial changes in net worth over some period of time. As the formula below illustrates, the taxpayers n
37、et worth (total assets less total liabilities) is determined at the beginning and at the end of the taxable year. The difference between these two amounts will be the increase or decrease in net worth. Adjustments are then made for non-deductible and non-taxable items to arrive at taxable income. De
38、clared taxable income is then compared with income computed to determine whether income was understated, or if there was no declaration, the calculation determines the amount of taxable income. Percentage mark-up method relies upon apply- ing a dependable ratio to a known base figure to Box 2. Formu
39、la for computing income by source and application of funds method. Application of funds Asset Increases Liability decreases Deductible expenditure per declaration Non deductible expenditure Less Sources of funds Asset decreases Liability increases Non taxable income Declared income Equals Understate
40、ment of income or overstatement of deductible expenditure Box 3. Formula for computing in- come by the net worth method. (a) Assets less liabilities = net worth (b) Net worth at end of year Less: Net worth at beginning of year Equals Increase or decrease in net worth Add: Nondeductible expenditure L
41、ess: Nontaxable income Equals Aggregate annual income as corrected.Technical Notes and Manuals 10/05 | 2010 5 establish a taxpayers gross receipts. For example, a taxpayers customs declaration or a sup- pliers record, shows the cost of a unit to be $100 and if the auditor has evidence that the taxpa
42、yer is selling the units for $175, then the auditor can apply a 75 percent mark up to the cost of goods to establish a gross receipts figure. In reverse, a mark-down methodology may be adopted to establish cost of goods sold when the sales figure is the known factor and it is suspected that the purc
43、hase claim has been inflated. These methods are particularly useful in indirect tax audits when it is necessary to establish the value of inputs or outputs, and is also valuable in income tax audits as it focuses on establishing either the sales or purchases figure rather than reconstructing the tax
44、payers financial affairs as necessary in methods described above. The strength of the method will depend upon the reliability of the percentage figures used in computa- tions. Although industry standards and references to similar businesses or situations may provide a good guide as to the mark-ups u
45、sed, even if the taxpayers accounts are incomplete, an analysis of subsidiary records will often provide a better indication of actual margins adopted in that tax- payers business. For instance, gross profit percentages may be determined by comparing purchase invoices to sales invoices, analyzing pr
46、ice lists, examination of inventory records, order books, shelf prices, and other similar data. If it can be proven that the taxpayer consistently applies the same margin, particularly applicable to retailers of a limited range of goods, it will be difficult for the taxpayer to refute computations b
47、ased on this methodology . Unit and volume method provides for the determination or verification of gross receipts by applying price and profit figures to the known or ascertainable volume of business done by the taxpayer. This method is feasible when the auditor can ascertain the number of units ha
48、ndled by the taxpayer and also knows the price or profit charged per unit. The number of units or volume of business done by the taxpayer may be determined in certain circumstances from the taxpayers books, as the records may be adequate as to purchases or expenses, but only inadequate as to sales.
49、In other cases the determination of units or volume handled may come from third party sources or subsidiary records. Using analytical and investigative techniques and accessing subsidiary records an auditor will often be able to ascertain the number of units of production or volume of work performed that Box 4. Example of Percentage mark-up method to determine gross receipts. Bar Cost of liquor 200,000 Cost of beer 150,000 Cost of food 50,000 Cost of SalesLiquor (% of selling price) 33!/3% Cost of SalesBeer (% of selling price) 6
