The Alcohol and Tobacco Tax and Trade Bureau’s (TTB) Office of Field Operations is responsible for ensuring industry members comply with the Federal Alcohol Administration Act, the Internal Revenue Code and all related regulations. It is divided into three groups: the Trade Investigations Division (TID), the Tax Audit Division (TAD) and the Intelligence Division.
Many industry members are most familiar with the TID, as it is comprised of investigators who are responsible for enforcing compliance with the trade practice laws and maintaining a level playing field. The TAD may be less familiar, however, as it is comprised of auditors who are responsible for ensuring payments of excise taxes and compliance with the laws and regulations in a manner that protects revenue and prevents unlawful activity in the commodities that the TTB regulates. The TAD works with other areas of the TTB and has the resources to assist in the investigations of underpayment of tax or other financial areas that relate to the laws and regulations enforced by the TTB. The TAD also performs random audits, which means that every industry member is susceptible to an audit.
Over the past year, the TAD has issued tax-related citations for failure to timely file and/or pay taxes, use of inappropriate tax rates (largely stemming from the improper use of reduced tax rates under the Craft Beverage Modernization Act (CBMA) and failure to maintain adequate records, among other violations. In 2023, the TTB resolved these violations by accepting offer-in-compromise (OIC) settlement payments from the targeted industry members, collectively, to the tune of approximately $850,000.
Based on a review of the OICs which are published on the TTB website, there were a wide range of tax-related violations last year, including:
- Failure to timely file and/or pay taxes and reports. These failures accounted for nearly 70% of all OIC violations. In these common infringements, the permittee submits their reports or taxes late. The causes for a violation can range from (1) a simple late submission, even 1-2 days late; (2) filing the tax return without paying the taxes; (3) late payments due to processing times; or (4) a change in filing frequency. It is important to ensure that industry members’ reports are filed on time (even a day late is sufficient to warrant a violation) and that the taxes are paid promptly.
- Use of inappropriate tax rates. There are two main categories of tax rate violations: (1) inappropriate use of reduced tax rates or credits, largely through improper use of the CBMA, and (2) inappropriate categorization of the product (commonly wine). An accurate determination of the product’s tax class is crucial to avoiding these violations, as is consideration of your eligibility (and continued eligibility) for CBMA-reduced rates or credits. We saw a significant increase in tax-related enforcement due to violations from acquisitions completed in the first half of 2023 which impacted eligibility of the reduced tax rates for the entity as a new member of a controlled group. See our prior posts on this topic.
- Operating without a permit. The TTB accepts an offer in compromise one to two times a year from entities performing certain operations without the appropriate permit. For example, manufacturing, aging, warehousing or bottling products on non-permitted premises or importing products without the appropriate licenses.
- Failure to maintain adequate records. This citation is frequently connected with removal of the product from the bonded premises without the appropriate records. The TTB has specific recordkeeping requirements for each commodity throughout the manufacturing, removal and distribution processes. Failure to maintain these records can result in financial penalties.
- Failure to report a timely change in ownership, management or control. Reporting changes after initial qualification for licensure is a very important compliance requirement. Last year, we saw an increase in the TTB’s enforcement against industry members that fail to report changes in control or changes in proprietorship within 30 days of the change. The statutory consequence for failing to report a change is the automatic termination of the federal basic permit; therefore, the timely reporting of new ownership changes and due diligence of any prior changes is critical. All changes should be filed in a timely manner to keep your records updated and in compliance.
- Failure to pay taxes via the appropriate method. The TTB requires that certain groups pay excise taxes through an electronic funds transfer. Occasionally, a change in ownership or in single taxpayer status can affect an entity’s required payment method. It is important to consider the impact that any organizational or operational changes may have on your entity’s payment requirements.
Maintaining compliance with the applicable laws and regulations is important in order to avoid high financial penalties and costly administrative actions that could potentially put business operations in jeopardy. The TTB will continue to maintain a strong focus on tax audits for the near future.
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