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Common Compliance Issues in a TTB Bonded Wine Premises (BWP) AuditIf you are selected for a TTB excise tax audit, don’t panic. A representative from TTB’s Tax Audit Division will call you and explain the audit process in detail so that you can prepare your premises for TTB’s site visit. Additionally, TTB will send you a letter that explains what records and reports will be reviewed by TTB during the audit. To expedite the audit process, TTB suggests that you get all the requested materials together as soon as possible. If you do not have all the documents identified in the letter, contact the Auditor-in-Charge identified in TTB’s letter and determine whether there are any other records available that contain the information needed for the audit. Please feel free to discuss any items noted during a TTB audit with the audit team performing the work. TTB encourages open communication with the taxpayer throughout the audit engagement. We researched TTB records for the most common compliance and tax issues encountered over the past few years by Bonded Wineries (BWN) and Bonded Wine Cellars (BWC), and give them to you here. We grouped these issues into four logical areas: (A) Records, (B) Inventory, (C) Reporting, and (D) Basic Permit, Registration and Bond. Within each of these areas we listed the common audit issues in order from the most frequent issue (numbered ‘1’) followed by the second most frequent issue (2), etc. The Tax Audit Division works directly with taxpayers that are being audited. If you have a general question regarding excise tax or other compliance information please contact the National Revenue Center at 1-877-882-3277 or e-mail at: ttbquestions@ttb.treas.gov. Or you may visit our Frequently Asked Questions page. Using This Tutorial This interactive tutorial gives you details about the common issues, discusses how you can avoid problems and links you to the applicable TTB regulation (CFR) and the necessary TTB forms. Common TTB Forms used in this tutorial Most Common Compliance Issues The most common compliance or tax issues fall into four broad categories: records, inventories, reporting, and permits/bonds. Below we discuss each in the order of its frequency of occurrence. How to avoid problems with… Records Inventory Reporting Basic Permit, Registration and Bond
Most Common Compliance and Tax Issues Now we will discuss in detail each of the common errors. The most common issue found by TTB was that documentation in support of the Report of Wine Premises Operations (TTB F.5120.17) was either non-existent or inadequate. All of this is discussed in Regulation 27 CFR 24.300. The most frequent problems of documentation in support of the Report of Wine Premises Operations (TTB F.5120.17) are: (i.) The number one documentation failing is lack of written recovery procedures for the accounting system, production and other critical applications in the event of a disaster. Although this is not specifically required by regulations, it is an internal control that is necessary to “protect the tax revenue”. It will also prevent unusually costly problems in the event of a disaster. (ii.) Lack of required breakage reports or records of incidents of breakage. (iii) It is required that all source documents be on premises and accessible to the TTB. The inability of the BWP to locate source documentation such as bills of lading, invoices, pick slips, export documentation, inventory documentation, lab results, etc. will result in a violation. What is required on these source documents is specifically detailed in the regulations. How can you avoid problems caused by poor general records?
There is a detailed list of information that should appear on transfer in bond records (e.g. a bill of lading). BWPs frequently do not have all the information required on their transfer source documents. According to regulation 27 CFR 24.309, the transfer record must show: (a) The name, address and registry number of the proprietor; (b) The name, address and registry number of the consignee; (c) The shipping date; (d) The kind of wine (class and type); (e) The alcohol content or the tax class; (f) The number containers larger than four liters and cases; (g) The serial numbers of cases (if any) or containers larger than four liters; (h) Any bulk container identification marks; (i) The volume shipped in gallons or liters; (j) The serial number of any seal used; (k) For unlabeled bottled or packed wine, the registry number of the bottler or packer; (l) Information necessary for compliance with 27 CFR 24.315, e.g., the varietal, vintage, appellation of origin designation of the wine or any other information that may be stated on the label; and (m) Information as to any added substance or cellar treatment for which a label declaration is required for the finished product, or any other cellar treatment for which limitations are prescribed in this part, e.g., amount of decolorizing material used and kind and quantity of acid used. The most frequent omission of information is the kind of wine (class and type) and the alcohol content. How can you make sure bond transfer documents are complete?When you are setting up the format for your bills of lading and the inventory numbers for the wine, be careful to consult the above list, making sure everything that is requested by the regulation is included. Remember, this is information required for bills of lading when wine is removed from bond to bond.
Some BWPs do not include all of the required information on the shipping documents (e.g. a bills of lading, customer invoices) when they remove wine for consumption or sale (tax paid removal). The regulation 27 CFR 24.310 says that the record of that shipment will show:
The volume of wine removed tax paid must be summarized daily by tax class in wine gallons to the nearest tenth. How do you make sure your removal records meet TTB regulations?When you are setting up the format for your shipping bills of lading and customer invoices, make sure that they are dated, have the name and address of the customer, list the volume sold, class and type of wine and the alcohol content of the wine.
Exports of wine are not taxable provided that proof of export is obtained as required within 90 days of shipment. It is this documentation that frequently causes problems for proprietors. Regulations 27 CFR 24.292 and 27 CFR 28.121 both allow the removal of wine without payment of tax for export, for use on vessels and aircraft, and for transfer to a Customs Bonded Warehouse or Foreign Trade Zone for exportation, or storage pending exportation. Regulation 27 CFR 28.122 requires that the exporter file a TTB Form 5100.11, Withdrawal of Spirits, Specially Denatured Spirits, Or Wines for Exportation. Regulations 27 CFR 28.250 to 27 CFR.253 explain the required proof of export, including bills of lading showing the wine left the country. The proof of exportation is documentation that indicates the wine either exited the country or was deposited into a Free Trade Zone or Custom Bonded Warehouse. TTB Industry Circular 2004-3 says that proof of export for products are a “Withdrawal of Spirits, Specially Denatured Spirits, Or Wines for Exportation” form, TTB Form 5100.11 certified by a U.S. Customs and Border Protection (CBP) official in parts V, VI and VII or a certificate of receipt executed under the penalties of perjury by the master of the vessel. It also says that exports to a non-contiguous foreign country, including the Virgin Islands, consists of either a certificate from the export carrier executed under penalties of perjury, a certificate of receipt from an official of the foreign country, or an export bill of lading signed by both the manufacturer and the carrier. Regulation 27 CFR 28.250, “Bills of Lading Required”, makes necessary a copy of the export bill of lading (transportation from the port of export to the foreign destination), or a copy of the bill of lading to the foreign destination indicating the acceptance of the shipment by a carrier. For wines shipped for deposit in a foreign-trade zone, the proprietor has to have a bond, Form TTB F 5100.11 “Withdrawal of Spirits, Specially Denatured Spirits, Or Wines for Exportation”, and a copy of the transportation bill of lading covering the shipment. TTB Industry Circular 2004-3 requires sending export documentation to TTB’s National Revenue Center (NRC) in Cincinnati unless the BWP gets a variance allowing it to keep the documentation on the premises. Bills of lading must be signed by the carrier or by an agent of the carrier and contain the following minimum information:
The details of export documentation are spelled out in Industry Circular 2004-3, Alcohol and Tobacco Export Documentation Procedures, at http://www.ttb.gov/industry_circulars/archives/2004/04-03.html . Frequently asked questions (FAQ) about exporting wine are available at http://www.ttb.gov/industry_circulars/archives/2004/04-03-faqs.html. Occasionally the TTB F 5100.11 is not properly filled in. Some common errors are:
Exports should be reconciled to the Report of Wine Premises Operation TTB F 5120.17. Typical problems are incorrectly completed TTB F 5100.11s, wine gallons incorrectly calculated, wine gallons not listed, incorrect wine type, or wrong shipping date. The proprietor may fail to report export removals on the appropriate line (Part I, Section B, Line 12 – “Removed for Export”) of the Report of Wine Premises Operation TTB F 5120.17. How can assure that you have the proper export documentation?
The second most frequent compliance issue BWPs experience is inventory timing. Notification of TTB is required if inventory is taken other than on June 30. Also included in this category is lack of or poor inventory records (especially a management representative signing the inventory summaries under “penalties of perjury.”). Many industry people are unaware that if the annual inventory is performed at a time other than June 30, notification to TTB is required. A copy of the notification must be maintained on premises. If you have monthly inventories, notification is not required. Inventory is required to be taken at least annually. Proprietors frequently are unaware of inventory record keeping requirements of TTB. Here are some examples:
The most frequent inventory record issue is lack of signature and an “under penalties of perjury” statement on the inventory summary. The proprietor's cased goods and bulk wine inventory summaries must contain the required statement that it is signed “under penalties of perjury” (see below), and it must be signed and dated by an authorized representative. Federal regulations are: 27 CFR 24.313(e) Inventory Record. All inventory pages will be numbered consecutively and the last inventory page will be dated and signed after the statement, "Under penalties of perjury, I declare that I have examined this inventory record and to the best of my knowledge and belief, it is a true, correct and complete record of all wine and spirits require to be inventoried." How can you avoid inventory record and timing problems?
Inventory loss issues are primarily about two concerns: (1) when reporting bulk wine loss, what percentage must be reported as a claim for allowance for loss to TTB and (2) non payment of tax on bottled inventory shortages. On the Report of Wine Premises Operations TTB form 5120.17 (found at http://www.ttb.gov/forms/f512017.pdf,) line 30 in Part I, Section A (bulk inventory). See “Inventory Losses.” That number represents losses due to spillage, leakage, soakage, evaporation, and other losses normally occurring from racking and filtering since the previous physical inventory. If the number on line 30 of the Report of Wine Premises Operations exceeds 3 percent of wine on hand or 6 percent of wine produced by fermentation, a claim for allowance of loss must be sent to TTB’s National Revenue Center (NRC). The claim form is TTB F 5620.8 Claim- Alcohol, Tobacco and Firearms Taxes. Information on filing claims is at: http://www.ttb.gov/forms_tutorials/f56208b/faq_instructions2.html. The claim process is also given in 27 CFR 24.65. The regulations state (in (27 CFR 24.266) that the physical inventory of bulk wine will determine losses due to spillage, leakage, soakage, evaporation, and other losses normally occurring from racking and filtering since the previous physical inventory required by this section. A claim for allowance of loss is required within 30 days of the discovery of loss for inventory losses in production or storage where: (A) There are circumstances indicating that all or a part of the wine reported lost was unlawfully removed, or (B) The loss on bonded wine premises during the annual period exceeds three percent (3%) of the aggregate volume of wine on-hand at the beginning of the annual period and the volume of wine received in bond during the annual period; or the loss exceeds six percent (6%) of the still wine produced by fermentation; or the loss exceeds six percent (6%) of the sparkling wine produced by fermentation in bottles; or the loss exceeds three percent (3%) of special natural wine; or the loss exceeds three percent (3%) of the artificially carbonated wine produced; or the loss exceeds three percent (3%) of the bulk process sparkling wine produced. The percentage applicable to each tax class of wine should be calculated separately. Any time there is a shortage of bottled inventory, TTB will determine if cased goods were removed, and whether tax is owed. A common error here is when cased good wine shortages are reported on the Reports of Wine Premises Operations, TTB F 5120.17 (Part I, Section B, Line 19), but the associated tax as required by 27 CFR 24.266 (c) was not paid How can you avoid problems with inventory losses and reporting?
The records necessary for bottling, packing, or receiving wine may be incomplete or improperly attributed according to Regulation 27 CFR 24.308. If you bottle or receive bottled wine in bond you must maintain a record, by tax class, including the date, kind of wine, the number and size of the container filled, and volume of wine bottled. This data is required whenever bottled wine is received, returned to, or removed tax paid from bond. The same data requirement applies to wine destroyed, breakage, used for tasting, or dumped to bulk. Other requirements are:
Often, records of packaged and bottled wine don’t exist or are incomplete. For instance, the BWP is not able to provide source documents, such as work orders for bottled wine record or label information record. Bottling records may not contain information such as: the date wine was bottled, wine alcohol content, labels used on bottled wine, the size or number of bottles and proof and fill test results being conducted for each bottling run as required. Another frequent issue is putting the wrong information on the TTB F 5120.17 Report of Wine Premises Operations. Segregating and reporting breakages and testing and tasting from “Inventory Losses” (Part I, Section A, Line 30) or “Losses Other than Inventory” (Part I, Section A, Line 29) are an example. Breakages should be reported on Part I, Section B, Line 18. Wine used for testing goes on "Used for Testing” (Part I, Section B, Line 14). Wine tasted within the bonded area is entered under “Used for Tasting" (Part I, Section B, Line 11). If the tasting is done in a tasting room not on the bonded premises, the wine volume is not entered on Line 11, but is considered removed and tax must be paid on it (enter in Part I, Section B, Line 4 along with the tax paid for other removals). How do I make sure bottled and packed wine records are complete?
Reporting (Tax Issues)– Issue 1 - The BWP does not timely file the Report of Wine Premises Operations (TTB F 5120.17) nor is the form properly completed.The most common issue with reporting on the Report of Wine Premises Operations (TTB F.5120.17) is late filing. The second most common issue is incorrect information. The Report of Wine Premises Operations (TTB F.5120.17) should be filed monthly in most cases. However, for smaller BWPs it might be quarterly or annually based on criteria described in Regulation 27 CFR 24.300 (g) as follows “F 5120.17, Report of Bonded Wine Premises Operations. A proprietor who conducts bonded wine premises operations must complete and submit an F 5120.17 in accordance with the instructions on the form.” The instructions on the F 5120.17 say that no matter your reporting period, the form TTB F 5120.17, Report of Wine Premises Operations must be submitted on or before the 15th day of the month after end of the reporting period (month, quarter or year). Although not indicated on the form, the reporting period may be by quarter. Sometimes the Report of Wine Premises Operations (TTB F.5120.17) is not properly completed. The Form TTB F.5120.17 may not be correct because of 1) clerical errors; 2) data omissions; 3) inaccurate reporting of the carry forward amounts from one month to next; 4) dollar values reported instead of the wine gallons; 5) inaccurate transcription of data from source reports to the wine operations report; or 6) data fields inaccurately populated by reporting it on incorrect lines. A tutorial on how to fill out the Report of Wine Premises Operations, form TTB F 5120.17 is at http://www.ttb.gov/forms/index.shtml. Click Form 5120.17 under “Form Tutorials.” How do I make sure the TTB F 5120.177 form is complete and filed on time?
Reporting (Tax Issues) – Issue 2 - Tax is paid in an inaccurate amount or tax reports don’t reconcileThe tax issue that most frequently causes penalties and interest for BWPs is the incorrect calculation of tax. The discussion below illustrates the calculations that TTB will use in every audit and TTB’s National Revenue Center may use in a desk audit. There are two potential reasons that the Excise Tax Return is being incorrectly completed: (1) a result of the underlying data being incorrect and (2) the Report of Wine Premises Operations and the Excise Tax Return do not reconcile. The regulations state that the tax on wine is determined when the wine is removed from the bonded wine premises for consumption or sale. Section 5041 of title 26, United States Code, imposes an excise tax, at the rates prescribed, on all wine (including imitation, substandard or artificial wine, and compounds sold as wine, which contain 24 percent or less of alcohol by volume) produced in or imported into the United States. Here are three basic facts that you need to understand before you calculate taxes owed:
How can you make sure that the tax is properly calculated and recorded?
On the July 2009 Report of Wine Premises Operations (TTB F 5120.17), 2,000 wine gallons were shown as “Removed Taxpaid” on Part I, Section B, line 8, column 1 (not over 14 percent). That July TTB F 5120.17 also shows 1,000 wine gallons “Removed Taxpaid” on Part I, Section B, line 8, column 2 (over 14 to 21 percent). The tax liability for the month of July 2009 would be (2,000 wine gallons x $1.07) + (1,000 wine gallons x $1.57) = $3,710. The two Excise Tax Returns (TTB F 5000.24) for July 2009 are: July 1 to July 15, 2009, (line 10) is $1,541 and July 16 to 31, 2009 (line 10) is $2,169. Adding the two Excise Tax Return liabilities together we get $1,541 + $2,169 = $3,710, which agrees with the amount we would get multiplying the gallonage reported as removed times the tax rate.
Reporting (Tax Issues) – Issue 3 – Correctly Reporting claims for wine or spirits lost or destroyed in bond.BWPs are required to immediately notify TTB and may be required to file a claim for allowance of loss on wine for loss or destruction in bond of wine including: (a) in transit, (b) by fire or other casualty, or (c) any other extraordinary or unusual losses, including a loss by theft or bulk inventory losses over 3% of wine on hand or 6% of fermentation. If there is a claim for allowance due to any of the above listed losses, the proprietor must file a tax remission claim with TTB’s National Revenue Center (NRC) within 30 days of discovery of the loss. The most common failures to file a claim for allowance of loss to the NRC is for transit losses exceeding 1% of shipment, bulk inventory losses exceeding 3% loss of bulk wine on hand plus received in bond, or 6% of fermentation. (See Inventory – Issue 2.) One major issue found in audits is required information is incomplete. A claim for allowance of losses must be attached to, and submitted with, the TTB F 5120.17, Report of Wine Premises Operations, for the reporting period. The claim should contain this information: (A) The original volume of wine which sustained the loss, the tax class, the quantity of wine lost, and the percentage of wine lost; (B) Where the claim covers losses sustained at bonded wine premises during the tax year, the claim must state: (i) The quantities of wine on hand at the beginning of the tax year, received in bond during the tax year, and produced during the tax year; (ii) Where the percentage of loss is calculated separately by tax class, the volume of wine by tax class; and (iii) If effervescent wine is produced, the volume of wine produced by fermentation in bottles, by artificial carbonation, and by bulk processing; and (C) Claims covering losses of wine during transit in bond should show the volume lost from each container, the serial number, if any, and the volume shipped. Claims for remission of tax on spirits or claims for an abatement of an assessment, or credit or refund of tax which has been paid or determined are described in 27 CFR 24.65. How do you properly complete claims for losses or destruction of wine?
Reporting (Tax Issues) – Issue 4 – Timely tax payment and filing requirements for TTB F 5000.24, Excise Tax Returns.The Excise Tax Return, TTB F 5000.24, must be filed on time - within 14 days after the end of the tax period with one exception (September 16th through 25th is filed by September 29th). The Excise Tax Return for annual filers must be postmarked no later than the 30th day after the close of the calendar year. The Excise Tax Return for quarterly filers must be postmarked no later than the 14th day after close of the calendar quarter. Returns and payments must be postmarked no later than the due date. There are penalties and interest costs for filing late. If the due date falls on a Saturday, Sunday, or a holiday, the return must be filed on the prior business day. A listing of the due dates is at http://www.ttb.gov/tax_audit/fed_ex_tax_due.shtml Some of the larger BWPs are required to pay taxes via electronic funds transfer (EFT). Taxpayers who are liable during any calendar year for $5 million or more in excise tax imposed on wine are required to pay such tax during the following year by EFT. An electronic fund transfer is an account to account, transfer of funds from your bank to Fedwire, the Treasury's Account at the Federal Reserve Bank (FRB) of New York. For instructions on how to file EFT, see http://www.ttb.gov/procedures/91-1.shtml . (See 27CFR 24.272.) How can you ensure your tax is timely paid?
You must file a TTB F 5000.8, Power of Attorney form for almost everyone in your organization who is authorized to sign or to act on your behalf for documentation sent to TTB. You need not file a form TTB F 5000.8 for the owners specified in the Application to Establish and Operate Wine Premises. A common issue found by TTB is that unauthorized individuals sign the Reports of Wine Premises Operations or the Excise Tax Returns. When there is employee turnover, the proprietor often neglects to notify TTB that the power of attorney of former employees is no longer applicable. A TTB F 5000.8 must be filed for new employees. How can you register the necessary power of attorney for your people?
Basic Permit, Registration and Bond –Issue 1 – When structural, ownership, or other changes occur at the company facilities, an amended application may be requiredIf a BWP is growing, lots of things are changing – equipment, buildings, perhaps alternating proprietors using the premises, officers, and maybe even ownership. Each time you make ownership changes or changes to the business, you must file an amended TTB F 5120.25, Application to Establish and Operate Wine Premises) and Basic Permit TTB F 5100.18, Application for Amended Basic Permit under the Federal Alcohol Administration Act). Each time you make major changes to the BWP buildings (doors, walls, and infrastructure) or add buildings or make changes in the use of any portion of the premises, a notice must be sent to the National Revenue Center in Cincinnati describing the change in detail. Code of Federal Regulation 27 CFR 24.120 states that where there is a change in any of the information included in the last approved application (TTB F 120.25, Application to Establish and Operate Wine Premises), the proprietor must submit an amended application within 30 days of the change. If the change affects only pages or parts of pages of the current application, only the correcting pages need be submitted. Regulation 27 CFR 24.131 states that before making a change in building construction and use of premises, the proprietor shall notify TTB. The proprietor shall include the change covered by the notice in an amended TTB F 5120.25. How do you make sure that your Application to Establish and Operate Wine Premises and Application for Basic Permit under the Federal Alcohol Administration Act are current?
Basic Permit, Registration and Bond – Issue 2 - Bonds must be kept current and in line with changes in removalsAs wine production and / or the value of the product on hand, and / or taxable removals grow, many BWP owners or management may neglect to update their bond. If your sales have been growing (unless your sales are primarily non-taxable), chances are good that you need to secure additional bond coverage. Unless the Bonded Wine Premises posts a cash bond, all Bonded Wine Premises are required to post a bond, including Bonded Wine Cellars and Bonded Wineries. The cash deposit or bond amount must comply with the statute. There are three kinds of bonds and two kinds of bond coverage. The three kinds of bonds (and boxes to check on the Wine Bond form TTB F 5120.36) are: original, strengthening and superseding. The original bond is submitted only by new establishments or change of ownership. This box on the Wine Bond Form, for most BWPs, is checked only on the first application. A strengthening bond increases existing coverage–this is the box you will check in most cases when increasing your bond for increased coverage. A superseding bond replaces the existing coverage. To determine if you need a strengthening bond or a superseding bond, you could talk to a Wine Specialist at TTB’s National Revenue Center. There are two kinds of bond coverage –a wine operations bond and a tax deferral bond. The wine operations bond should be equal to the tax value of all untaxpaid wine on the bonded premises, in transit to the bonded premises and unaccounted for at any given time. This may be determined using a “Bond Worksheet” (at http://www.ttb.gov/forms/f512036worksheet.pdf ). The maximum operations bond is $100,000. The tax deferral bond must be equal to or greater than the taxes due but not yet paid on wine removed from the bonded premises for consumption or sale. The maximum deferral bond is $250,000. 27 CFR 24.146(a) requires a bond be given on form TTB F 5120.36, Wine Bond, to cover the liability for excise tax imposed by the Internal Revenue Code of 1986. The bond applies to wine in transit to and on bonded wine premises. and to the operations of the bonded wine premises. If the BWP removes wine from bonded wine premises for consumption or sale, and the tax due is more than $500, the BWP must also furnish a tax deferral bond. The bond amounts are provided in regulation 27 CFR 24.148. It states that operations coverage must be “not less than the tax on all wine or spirits possessed, in transit, or unaccounted for at any one time, taking into account the appropriate small producer wine tax credit.” Tax deferral coverage where the unpaid tax amounts to more than $500, is calculated as “not less than the amount of tax which, at any one time, has been determined but not paid”, except you can allocate $1,000 of the wine operations coverage to cover the amount of tax determined but not paid, if the total operations coverage is $2,000 or more. You may calculate the deferral bond amount required using a worksheet for wine operations bond and some ‘rules of thumb’, discussed below, for the tax deferral bond. A worksheet for determining the operations bond may be found at http://www.ttb.gov/forms/f512036worksheet.pdf . For bond forms and instructions see http://www.ttb.gov/forms/bond_form.shtml. How can you make sure that your bonds are adequate for your business?
To calculate the tax deferral bond, you can add all your taxable removals for the tax period and apply the appropriate tax rates. So, for a taxpayer filing bi-weekly, you would take the product (tax rate times quantity of removals) for the year, or 26 times the bi-weekly Excise Tax Return filing, 4 times the quarterly Excise Tax Return filing, and your total deferral bond amount would be this amount, up to the maximum bond required of $250,000. Another rule of thumb method for determining the tax deferral bond is to look at last year’s tax paid and determine your highest month (if you file bi-weekly), highest quarter (for quarterly filings) or highest year (for annual filings). Taking bi-weekly filings as an example, to determine if you tax deferral bond coverage is sufficient, compare your current deferral bond coverage to the maximum amount of excise tax you estimate will be due in this year. This determination requires estimating what will be due, but not paid during a typical semi-monthly tax period and during the 14 days to follow, until the tax is paid. Example using last year (2008) taxable removals for guidance
Liabilities were the highest for April 1-27, so the bond should be no less than $10,000.
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