Understanding and Preparing for TTB Audits
Although you'd love to spend all your time trying new varietals and thinking up ways to promote your winery to new customers, you can't ignore your compliance obligations. Collecting and remitting taxes, filling out reports, and other tasks are required by local, state, and federal laws.
In the United States, wineries also need to be prepared for audits from the Alcohol and Tax Trade Bureau (TTB), which can have a major impact on operations if you don't keep up with your compliance requirements. There are financial penalties which can vary based on the severity of violations.
Fortunately, the TTB follows well-established processes, making it possible to prepare for an audit well in advance. Find out what TTB audits are and why it's so important to plan ahead for each one.
What Is a TTB Audit?
The TTB regulates the trade of alcohol, tobacco, and firearms within the United States. Its most important duties include collecting taxes on regulated commodities and preventing illegal activity related to alcohol, tobacco, and firearms trading.
A TTB audit is a thorough review of your records by agents working with the TTB. The bureau devotes most of its time to entities with significant annual tax liabilities. However, the TTB also conducts random audits throughout the year, so it's important for businesses of all sizes to be prepared.
If you're selected for a TTB audit, you should expect questions about the following aspects of your business:
Inventory systems
General ledgers
Production systems
Automated data processing
Federal excise tax adjustments
Disaster recovery plans
IT/security procedures
Financial statements
The Purpose of a TTB Audit
The main purpose of a wine compliance audit is to ensure that your business complies with all pertinent regulations related to alcohol trading. TTB agents also use audits to determine if wineries are paying the correct amount of excise tax.
Common Triggers for TTB Audits
The TTB engages in regular monitoring, making it easier to identify wineries that might be out of compliance. Agents look for these red flags:
Late returns or reports. It doesn't matter how much you have going on in your life — you still need to submit required returns and reports on time. If you're late, or if you don't submit required paperwork at all, TTB agents are likely to wonder if there's anything else you're hiding.
Discrepancies in reports. The TTB doesn't just collect taxes on alcohol. It also regulates alcohol trading, so you must comply with all TTB requirements when selling wine or transporting it from one location to another. If the number of bottles or cases removed doesn't match your records, TTB agents may want to dig deeper into your operations.
Unsigned reports or signing discrepancies. The person who signs your reports must have signing authority for your business. If someone at the TTB notices a discrepancy, you could find yourself facing a TTB audit.
Significant changes in production volume. If you suddenly double or triple your production, the TTB may want to take a look at your records to ensure you're still complying with all relevant regulations.
Previous compliance issues. TTB agents are like elephants; they never quite forget about your past history with the bureau. If you've already had compliance issues, your winery may be subject to additional scrutiny.
How to Avoid a TTB Audit
Some TTB audits are completely random, so there's no way to completely eliminate the risk of receiving an audit notice. However, you can follow these tips to avoid sending up red flags that make TTB agents curious about your operations:
File all required reports and returns on time.
Before you close out a report, make sure it's signed by someone who has signing authority for your business.
Review reports carefully before signing them. If you notice any discrepancies, correct them immediately.
Make sure your bond is sufficient. The TTB requires all wineries to maintain bond coverage in an amount high enough to meet their excise tax obligations. If your production increases significantly, make sure you increase your bond coverage accordingly.
Update your Basic Permit and IRC Registration as required. You need to amend these documents when you make a major change in the business. For example, if you take on a partner, you need to update your registration to reflect a change in ownership.
File a claim with the TTB National Revenue Center if your bulk wine losses exceed the maximum threshold. If you report significant losses without filing a claim, you might capture the attention of TTB agents who want to learn more about your winery.
What to Expect During a TTB Audit
If you're selected for a wine compliance audit, don't panic. You'll receive a list of requested information to help you prepare. The auditor may ask for tax computation files, support for adjustments, general ledgers, financial statements, and other information to help determine if your records are in order.
When the auditor arrives on your premises, they'll ask for a tour and then get right down for business. The auditing process includes interviews with accounting and compliance personnel, an assessment of your internal controls, and a thorough review of your records. Before the auditor leaves, they'll let you know about any potential issues, but you won't receive the final audit report right away.
Preparing for a TTB Audit
Careful planning helps the audit process go smoothly, leaving you and your staff members a little less stressed. Here's what we recommend for TTB audit preparation:
Meet with your accounting and compliance departments to discuss the upcoming audit and ask employees to start gathering relevant records. You'll need tax computation files, supporting documents for claims and adjustments, general ledgers, financial statements, bank statements, sales and income tax returns, internal control procedures, and minutes from corporate meetings.
Organize records as you gather them. You may want to separate them based on topic (e.g., tax vs. general accounting records) or by date.
Make sure every piece of equipment in your winery has a label with the serial number and other important information affixed to it.
Check barrels to make sure they're not missing their required labels. If any labels are worn or missing, replace them immediately.
Train employees carefully. Although your employees have to comply with TTB requests, they don't have to volunteer information that could invite further scrutiny. Incorporate role-playing exercises into each training session to ensure employees feel confident responding to a variety of question types.
Tips for Organizing Records and Operations
If you're not already using digital records, we highly recommend converting your paper files into digital ones. AMS, Wine Management Systems, and other software packages let you search for records by date or keyword, making it easier to comply with TTB requests for information.
Just be sure to follow the same guidelines for digital records as you do for paper ones: check for discrepancies, make sure every report has the signature of an authorized person, and file all required reports on time. It's also helpful to use a digital calendar to keep track of reporting deadlines. Even the simplest reminder app can alert you when a deadline is approaching.
Ensuring a Successful TTB Audit
TTB audits are a normal part of working in the wine industry, but they can be a bit nerve-racking. If you don't comply with the TTB requirements, the bureau could levy significant financial penalties against your business. The good news is that you can take proactive steps to prepare for the auditing process.
If you need personalized services, contact Balanced Business Group as soon as possible. In the meantime, read more articles on the BBG website to learn how to make winery management a little easier.
