Finance Committee Agenda and Packet 2023 12 14

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City of Louisville Audit Plan Goals of the audit program- 1) To close the compliance gap. The audit program will help to ensure the businesses are correctly charging and collecting the correct tax rate. 2) Keep the business environment on a level playing field. When auditing a local business, we will examine the purchases the business makes. This will help us to identify business that are outside the city who are not collecting tax. Once identified we will be able to bring them into compliance with future audits. This will help level the playing field with the local business who are charging tax on the same items. 3) Bring in revenue. In an ideal world most audits would be closed with no balance due. From a more realistic perspective, auditing businesses will lead to missed revenue being captured. Audit selection - When selecting companies to audit, the City of Louisville will use the following standard techniques (see references below). 1. We will look at businesses that are about 2 '/2 years old. When a company commences, they may incur use tax on the items they need to set up their business. The City proactively requests initial use tax returns from all of these businesses. Any company over two years without submitting the initial use tax will be considered for an audit. Note that the statute of limitation is three years, so commencing at the 2 '/2 year mark will allow a review of the use tax utilized to initiate the business and 30 months of sales and use data to verify they are operating correctly. 2. High or abnormal deductions. A hotel claiming a significant portion of its sales to government entities would require a deeper look. While this may be factual, examining the records and verifying their accuracy is better. If a retail store that sells only clothing claims a deduction for gasoline and cigarettes, it would require a deeper look into the business. 3. Specific industries that would either have a lot of use tax or have complexity that could allow errors. Industries like medical and industrial can utilize expensive equipment. It would raise a red flag if these industries show low or no use tax. Industries like software, restaurants, and hotels have complex exemption rules which can create errors. 4. Another audit triggered it. When auditing business A, they sometimes provide an invoice showing that business B charged them sales tax. If we cannot verify where the tax was remitted to us in our system, then we would want to commence an audit on business B. 5. When the filing history is irregular for the industry, if a restaurant does $50,000 in gross sales in June and $100,000 in gross sales in January it would at least initiate 10/30