FOLLOW-UP AUDIT OF THE

BUREAU OF ALCOHOL, TOBACCO AND FIREARMS’

SPECIAL OCCUPATIONAL TAX PROGRAM

OIG-01-052 March 2, 2001

Office of Inspector General

*******

United States Department of the Treasury
March 2, 2001

MEMORANDUM FOR BRADLEY A. BUCKLES, DIRECTOR

BUREAU OF ALCOHOL, TOBACCO AND FIREARMS

FROM: Dennis S. Schindel /s/

Assistant Inspector General for Audit

SUBJECT: Follow-up Audit of the Bureau of

Alcohol, Tobacco and Firearms’ Special

Occupational Tax Program

This memorandum transmits the final report on our audit of the

Bureau of Alcohol, Tobacco and Firearms’ (ATF) Special

Occupational Tax Program (SOT). The report addresses ATF’s

efforts to administer the SOT for alcohol beverage retailers.

The objective of our audit was to assess the corrective

measures ATF implemented in response to our December 1996

audit report titled Audit of Alcohol, Tobacco, and Firearms

Special Occupational Tax Program (OIG-97-016). We conducted

the follow-up audit at ATF’s Headquarters in Washington, D.C.,

and at the National Revenue Center (NRC) in Cincinnati, Ohio.

We found ATF took insufficient corrective actions in response

to our previous audit report. ATF claimed it took actions to

increase its retailer compliance rate from 83 percent to

89 percent; however, various program officials were unable to

tell us what specific actions, if any, ATF had implemented. 

In addition, ATF’s calculated compliance rate represents only

the percentage of those retailers that are known to ATF by

previously filing and paying SOT. Thus, the rate may not

truly reflect the actual retailer compliance rate since the

database may not be complete.

In addition, ATF did not contact any states about adding

information such as Employer Identification Numbers to their

databases to facilitate ATF’s state matching program. 

Further, while ATF initiated a project in 1998 to determine

the feasibility of automating the matching of state retail

data with the SOT master file, ATF never followed through with

this project’s recommendations to determine whether automating

the state matching program would be effective.

Finally, we found that, beginning in July 1998, ATF ceased one

of its methods of ensuring SOT compliance -- performing

matching of ATF and state information on retailers. This

matching had been a cost-effective method of identifying and
Page 2

collecting additional SOT revenue, and generated about

$2.9 million from March 1995 to June 1998.

During our follow-up audit, we sampled 275 businesses in 11

states and found that 132, or 48 percent, were licensed by the

states but were not listed in ATF’s SOT master file. 

Accordingly, based on ATF’s results from 1995 to 1998 and our

testing of these businesses, we believe ATF may still be

losing significant SOT dollars each year from state-licensed

alcohol retailers who are not in ATF’s SOT master file and

subsequently are failing to pay the SOT. Because ATF’s

matching program consistently generated about $800,000 per

year in SOT revenue over several years, we believe this

matching program, if restarted, could continue to achieve

similar results.

In response to the draft report, you concurred with the

findings and recommendations. According to your response, in

May 2000, ATF assigned two data entry contract employees to

devote all of their time to matching new SOT payers against

the SOT database, as well as contacting the states to obtain

new lists for matching. These employees will match the SOT

database with the state listings. In addition, subsequent to

developing electronic filing capabilities for industry

members, ATF plans to work with the states to develop

compatible systems that will enhance its SOT collection

process. We believe the actions ATF has taken, and those it

plans to take in the future, are responsive to our

recommendations. Finally, your agreement to implement the

recommendations from this current review should address the

intent of the recommendations in our previous audit report. 

Therefore, no further action is required with respect to the

prior recommendations.

Please be advised that we are recording potential revenue

enhancements totaling $2.4 million in the Inventory, Tracking

and Closure system (ITC) for recommendation number 1. This

recommendation is identified in Appendix 2 of our draft

report. ATF will be responsible for recording the amount of

revenue actually collected for this recommendation in the ITC.

We appreciate the courtesies and cooperation provided to our

staff during the audit. Should you have any questions or

require further assistance, please call me at (202) 927-5400,

or a member of your staff may contact Donald Benson,

Regional Inspector General for Audit, at (617) 223-8640.

Attachment

cc: Richard Hankinson

Assistant Director, Office of Inspection
EXECUTIVE DIGEST

OIG-01-052 FOLLOW-UP AUDIT OF ATF’S SPECIAL

OCCUPATIONAL TAX PROGRAM

Page i

Overview

In July 1987, the Bureau of Alcohol, Tobacco and Firearms (ATF)

assumed responsibility for administering the alcohol Special

Occupational Tax (SOT) program from the Internal Revenue Service.

Anyone who sells beverage alcohol as a part of a business is required

to pay SOT. SOTs provide a source of revenue to offset the costs of

regulating the alcohol industry and also aid ATF in its efforts to

enforce the laws and regulations governing the alcohol industry. 

Alcohol SOTs have been the subject of reports by both us and the

U.S. General Accounting Office (GAO). In a report issued in June

1986, GAO estimated the retail alcohol SOT compliance rate was

about 60 percent.1

 At that time, ATF concurred the 40 percent

noncompliance found in GAO’s sample was probably representative

of noncompliance rates nationwide.

In December 1996, the OIG estimated the average compliance rate

from 1993 to 1995 to be about 83 percent. However, as stated in

another GAO report issued in August 1998, ATF estimated the

compliance rate had risen to 89 percent for alcohol retailers as of

April 3, 1998.2

We performed this follow-up audit of ATF’s SOT program in

accordance with our Office of Audit Annual Plan for Fiscal Year

2000.

Objectives, Scope and Methodology

The objective of our audit was to assess the corrective measures

ATF took in response to recommendations contained in our

 

1 Tax Administration: Compliance and Other Issues Associated with Occupational Excise Taxes

(GAO/GGD-86-49).

2 Alcohol Special Occupational Taxes: Administration and Compliance Issues (GAO/GGD-98-156). While

GAO cited this ATF estimate in its report, it stated that the OIG and ATF had used different data and methods

to compute the estimates and the data and methods left the accuracy of both estimates uncertain. GAO also

stated that the audit work needed to quantify the potential error in these estimates was beyond the scope of its

study.
EXECUTIVE DIGEST

OIG-01-052 FOLLOW-UP AUDIT OF ATF’S SPECIAL

OCCUPATIONAL TAX PROGRAM

Page ii

December 27, 1996, report titled Audit of Alcohol, Tobacco and

Firearms Special Occupational Tax Program (OIG-97-016). We

interviewed ATF program officials to determine what actions

ATF had taken to increase alcohol retail compliance rates

subsequent to this report. We also sampled retailers on recent

state alcohol retail lists to determine whether the alcohol

businesses licensed by the states were included in ATF's SOT

master file.

Audit Results

We could not determine what actions, if any, ATF took subsequent

to our previous report that caused the retail alcohol SOT compliance

rate to increase. Although ATF’s calculations show that the

compliance rate was higher, these calculations only take into account

those retailers known to ATF. These rates can be misleading

because ATF does not know the exact number of alcohol beverage

retailers that are in business. Additionally, ATF did not contact any

states to see whether they would be willing to modify their databases

to aid in ATF’s attempts to match its SOT master file with state

retailer information. Finally, because ATF reassigned the staff to

other priority work, it ceased performing one of its methods of

enforcing SOT compliance – matching state retail records with its

master file. In the past, this was a cost-effective means of identifying

potential new SOT taxpayers.

We performed limited matching of state licensed alcohol retailers to

ATF’s SOT master file and found about 48 percent of the businesses

licensed by the states were not in ATF’s SOT master file.

Accordingly, we believe ATF could continue to collect significant

SOT dollars annually through matching. Because this matching

program consistently generated about $800,000 per year in SOT

revenue over several years, we estimate ATF could collect about

$2.4 million over the next 3 years by restarting this program.

Recommendations

We recommended that ATF reinstate the state matching program at

the National Revenue Center (NRC) and, to further improve the

program, take steps where practical to automate the matching.
EXECUTIVE DIGEST

OIG-01-052 FOLLOW-UP AUDIT OF ATF’S SPECIAL

OCCUPATIONAL TAX PROGRAM

Page iii

Management Response and OIG Comment

ATF management agreed with the findings and recommendations. 

As of May 2000, ATF assigned two data entry contract employees to

match new SOT payers against the SOT database as well as contact

the states to obtain new lists for matching. As the new lists are

received at the NRC, these employees will match the SOT database

with the state listings. In addition, subsequent to developing

electronic filing capabilities for industry members, ATF plans to

work with the states to develop compatible systems that will enhance

its SOT collection process. We believe the actions ATF has taken,

and those it plans to take in the future, are responsive to the

recommendations from this review as well as the intent of the

recommendations from our prior review and will increase SOT

collection among retailers. The complete text of ATF’s response is

provided in Appendix 3.
TABLE OF CONTENTS

OIG-01-052 FOLLOW-UP AUDIT OF ATF’S SPECIAL

OCCUPATIONAL TAX PROGRAM

Page iv

EXECUTIVE DIGEST .......................................................................... i

BACKGROUND ................................................................................... 1

OBJECTIVES, SCOPE AND METHODOLOGY........................................ 4

AUDIT RESULTS

Finding 1. ATF Took Insufficient Corrective Actions to Improve

SOT Compliance ......................................................... 5

APPENDICES

Appendix 1. Abbreviations.............................................................. 14

Appendix 2. Schedule of Potential Revenue Enhancements from

Implementation of Audit Recommendations ......................... 15

Appendix 3. Management Response................................................... 16

Appendix 4. Major Contributors to this Report ..................................... 20

Appendix 5. Report Distribution ....................................................... 21
BACKGROUND

OIG-01-052 FOLLOW-UP AUDIT OF ATF’S SPECIAL

OCCUPATIONAL TAX PROGRAM

Page 1

Any person who engages in the business of selling beverage alcohol

is required to pay an annual SOT. ATF assumed the responsibility

for administering the alcohol SOT program from the Internal

Revenue Service in July 1987. ATF collected about $105 million in

SOT during Fiscal Year 1999. ATF estimated 90 percent of that

amount came from alcohol SOTs.

There are separate occupational taxes for alcohol producers,

wholesalers, and retailers. The tax is a fixed amount per business

location per year. The tax is $1,000 for large producers--those who

grossed more than $500,000 the previous year, and $500 for small

producers--those who grossed less than $500,000 the previous year. 

Wholesalers pay a $500 occupational tax for each location. 

Retailers, who make up the largest group of SOT taxpayers, are

required to pay $250 per year. 

Retailers include a wide variety of businesses such as liquor stores,

bars, restaurants, sports facilities, grocery stores, convenience stores,

airlines, caterers, and hotels. Federal law does not require retailers

to obtain Federal permits from ATF to operate (unlike producers and

wholesalers who must obtain permits from ATF). Retailers are,

however, licensed by the states and some local jurisdictions.

ATF maintains a SOT master file – a Federal database of businesses

that have paid SOTs in previous years or are otherwise known to

ATF. Each year, ATF sends these known alcohol businesses

registration and stamp renewal returns. ATF also uses several other

methods to enforce SOT compliance, such as (1) publicizing

occupational tax information, (2) licensing producers and

wholesalers, (3) assessing civil and criminal penalties and interest,

and (4) verifying SOT compliance during on-site inspections. 

As discussed in our December 1996 report, the Department of the

Treasury (Department) loses millions of dollars annually in SOT

revenue as a result of retail alcoholic beverage dealers who do not

pay the SOT tax. At that time, we estimated alcoholic beverage

retailers did not pay over $64 million of SOT during tax years 1993

to 1995.

ATF management disagreed with a recommendation in our previous

report that verification of SOT payment be devolved to the states

because it said this recommendation would be difficult to implement,
BACKGROUND

OIG-01-052 FOLLOW-UP AUDIT OF ATF’S SPECIAL

OCCUPATIONAL TAX PROGRAM

Page 2

and would require legislation at the Federal, state, and local levels. 

Since our December 1996 report, ATF claims it has taken other

actions which has enabled ATF to increase the SOT compliance rate

from 83 to 89 percent.

While ATF calculated that the retail compliance rate has

increased over the last few years, the amount of SOT dollars

collected by ATF has steadily declined, as shown in the following

chart.

Chart 1: SOT Revenues Fiscal Years 1990 and 1995 to 1999

$130.1

$111.0

$108.3 $106.7 $106.2 $104.7

$0.0

$20.0

$40.0

$60.0

$80.0

$100.0

$120.0

$140.0

Millions

1990 1995 1996 1997 1998 1999

Fiscal Year

SOT revenues have been decreasing over the years because ATF has

been collecting less delinquent SOT tax (tax owed for the prior year)

and penalties and interest (P&I).3

 ATF administered this program

since 1987, and has apparently caught up with many of the

delinquent or non-compliant retailers. 

For example, $0.9 million (less than 1 percent) of the total

$104.7 million SOT ATF collected in 1999 was related to P&I. In

contrast, $1.6 million (1.4 percent) of the total SOT collected in 1995

 

3 Failure to File and Failure to Pay Penalties
BACKGROUND

OIG-01-052 FOLLOW-UP AUDIT OF ATF’S SPECIAL

OCCUPATIONAL TAX PROGRAM

Page 3

was related to P&I. Of the total $130.1 million SOT that ATF

collected in 1990, $8.9 million (6.8 percent) was related to P&I, and

$8.7 million (6.7 percent) was related to delinquent tax.

Another reason SOT revenues are declining is because the number of

entities who paid SOT has also decreased over the past few years, as

shown in the following chart.

Chart 2: Number of Alcohol Retailers Entities Who

Paid SOT Fiscal Years 1995 to 1999

338.2

332.0 326.1

317.9

298.8

270

280

290

300

310

320

330

340

Thousands

1995 1996 1997 1998 1999

Fiscal Year

According to several ATF officials, the declining number of entities

who are paying SOT may be occurring for several reasons. First,

there is high turnover in the retail alcohol business, with estimates as

high as 20 percent turnover per year. Second, in 1988 the alcohol

SOT rate for retailers was raised to $250 by the Omnibus Budget

Reconciliation Act of 1987. The SOT rate had been $24 for retailers

selling only beer, and $54 for retailers selling wine or liquor. The

increase in the SOT apparently put a lot of “mom and pop”

businesses that sold relatively little alcohol out of the alcohol

business.
OBJECTIVES, SCOPE AND METHODOLOGY

OIG-01-052 FOLLOW-UP AUDIT OF ATF’S SPECIAL

OCCUPATIONAL TAX PROGRAM

Page 4

The audit objective was to assess the corrective measures ATF took

in response to recommendations contained in our December 1996

audit report on the SOT program. Specifically, we evaluated:

• actions ATF took to increase its retailer compliance rate from 83

percent (as reported in the December 1996 audit report) to

89 percent,

• whether ATF had worked with state governments to add

information such as Employee Identification Numbers (EIN) to

their retailer databases so as to facilitate matching programs with

ATF's SOT master file and the state databases, and 

• actions ATF took in states with historically low rates of retailer

compliance.

To accomplish our objective, we interviewed personnel in the

Revenue and Inspection Divisions at ATF Headquarters, and the

NRC in Cincinnati, Ohio. We also worked with NRC personnel to

perform matching of state alcohol retailer lists with ATF’s SOT

master file.

We performed our audit between September 1999 and March 2000 in

accordance with Government Auditing Standards issued by the

Comptroller General of the United States and included such audit

tests as we determined necessary.
AUDIT RESULTS

OIG-01-052 FOLLOW-UP AUDIT OF ATF’S SPECIAL

OCCUPATIONAL TAX PROGRAM

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Finding 1. ATF Took Insufficient Corrective

Actions to Improve SOT Compliance

ATF took insufficient corrective actions in response to all three of

the recommendations we made in the December 1996 audit report. 

Although ATF did not concur with our recommendation to devolve

SOT payment verification to the states, it claimed to have taken other

actions that increased the alcohol retailer compliance rate to 89

percent for 1998. However, we could not determine what these other

actions were. Also, the 89 percent compliance rate was calculated

based on only those retailers known to ATF. Additionally, ATF did

not contact any states regarding adding information to their retailer

databases to facilitate matching programs with ATF, nor did it

complete an alternate corrective action to this recommendation. 

Finally, ATF reassigned the resources that were devoted to targeting

states with historically low rates of SOT retailer compliance to

perform other priority work in July 1998. This targeting program

had, through matching of state and ATF data, resulted in collections

of $2.9 million in additional SOT from March 1995 through June

1998.

ATF believes it is not cost-effective to devote any additional

resources to enforce SOT compliance. We performed limited

matching of state alcohol retail records with ATF’s SOT master file.

Specifically, we randomly selected 275 retailers licensed by the states

and found 132, or 48 percent, were not listed in ATF’s SOT master

file. ATF subsequently sent each of these businesses a new business

package. As of May 18, 2000, 29 of these retailers paid

approximately $5,000 to ATF for SOT. Accordingly, we believe

ATF is still losing significant SOT dollars each year. Because ATF

consistently collected about $800,000 per year from matching state

and ATF records from 1995 to 1998, we estimate that ATF could

collect about $2.4 million in additional SOT over the next 3 years by

reinstating the matching program.
AUDIT RESULTS

OIG-01-052 FOLLOW-UP AUDIT OF ATF’S SPECIAL

OCCUPATIONAL TAX PROGRAM

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Recommendations:

The ATF Director should:

1. reinstate the state matching program at the National Revenue

Center;

2. take steps where practical to automate the state matching

program.

Management Response and OIG Comment

Recommendation 1

ATF management agreed with the recommendation. As of May

2000, ATF assigned two data entry contract employees to match new

SOT payers against the SOT database as well as to contact the states

to obtain new lists for matching. As the new lists are received at the

NRC, these employees will devote their time to matching the SOT

database with the state listings. In addition, ATF plans to hire at

least one summer employee to work full-time on this program.

The OIG believes the corrective actions taken or planned address the

intent of the recommendation.

Recommendation 2

ATF management agreed with the recommendation. ATF said it is

taking steps to automate the state-matching program by conversion of

the SOT database to an Oracle platform, developing electronic filing

capabilities, and initiating plans to engage in discussions with states

to develop compatible systems. In FY 2000, ATF converted all of its

major databases, including the SOT database, to an Oracle platform

in preparation for year 2000. Subsequent to developing electronic

filing capabilities for industry members, ATF plans to work with the

states to develop compatible systems that will enhance its SOT

collection process. 

The OIG believes the corrective actions taken or planned address the

intent of the recommendation.
AUDIT RESULTS

OIG-01-052 FOLLOW-UP AUDIT OF ATF’S SPECIAL

OCCUPATIONAL TAX PROGRAM

Page 7

Details

Prior Recommendation 1: Verification of SOT Payment

Should be Devolved to State or Local Licensing Activities

ATF Response and Proposed Corrective Action

ATF did not concur with this recommendation. ATF believed this

proposal would be very difficult to implement and would require

legislation at the Federal, state, and local levels. Furthermore, ATF

was not persuaded that handing over a specified percentage of the

total revenue collections to the states would have a neutral or positive

effect on revenue collections. ATF believed the projected net gains

to the revenue were speculative and would not justify such a major

legislative amendment. In accordance with Treasury Directive

40-01, ATF sent a memorandum to the Deputy Secretary of the

Treasury Department on March 26, 1997, further explaining ATF’s

reasons for non-concurrence with the recommendation.

This recommendation remained unresolved for a significant period of

time in the Department’s Inventory, Tracking and Closure (ITC)

system. In a memorandum dated March 31, 1999, we advised the

Department that ATF could close out the recommendation based on

an assertion by ATF that it had taken other actions as a result of the

audit that improved SOT compliance rates to 89 percent.

OIG Follow-up Evaluation of Corrective Action

ATF did not implement any new measures subsequent to our

December 1996 report. Additionally, ATF’s compliance rate

represents only the percentage of known retailers who paid the SOT.

Accordingly, we conclude ATF has taken insufficient corrective

action to our prior recommendation in this area.

During this follow-up audit, we attempted to determine what specific

measures ATF had taken subsequent to our previous audit to increase

the compliance rate to 89 percent. Based on discussions with the

Chief and the Assistant Chief, NRC, we found ATF had not

instituted any new enforcement methods since our December 1996

report. ATF's Assistant Director, Alcohol and Tobacco, told us that

he was reluctant to invest additional resources to SOT enforcement.
AUDIT RESULTS

OIG-01-052 FOLLOW-UP AUDIT OF ATF’S SPECIAL

OCCUPATIONAL TAX PROGRAM

Page 8

Although ATF had not implemented any new enforcement measures,

we evaluated the “improved” compliance rate. As discussed in the

December 1996 audit report, we estimated that the compliance rate

for Fiscal Years 1993 to 1995 was 83 percent. ATF estimated that as

of April 3, 1998, the retailer compliance rate was 89 percent. 

However, ATF’s definition of compliance was based on the

percentage of retailers known to ATF who filed timely returns and

paid the taxes due for Tax Year 1998.

Based on the above, we conclude ATF has taken insufficient

corrective action to our prior recommendation in this area. The

intent of the prior recommendation, however, was to increase the

compliance rate with SOT. If ATF fully implements the

recommendations in this current review, the intent of this prior

recommendation will be met. Accordingly, no further action is

required on the part of ATF with respect to the prior

recommendation.

Prior Recommendation 2: ATF Should Negotiate with Those States

Unable to Verify SOT Payment Prior to Issuing Licenses to

Identify Alternative Methods of Increasing Compliance

ATF Response and Proposed Corrective Action

ATF agreed that it would be very helpful if more states maintained

information such as EINs in their databases to facilitate matching

programs. ATF further said it had already worked with most states

on the matching programs; however, ATF would make this issue a

priority in its ongoing dialogue with the states regarding the state

matching program.

OIG Follow-up Evaluation of Corrective Action

We conclude ATF has taken insufficent corrective action in response

to this recommendation. First, a discussion with the Assistant Chief,

NRC, indicated ATF did not contact any states about adding EINs or

any other information to their databases to help facilitate the

matching process. Second, although ATF initiated another related

corrective measure, the action was not completed.
AUDIT RESULTS

OIG-01-052 FOLLOW-UP AUDIT OF ATF’S SPECIAL

OCCUPATIONAL TAX PROGRAM

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In January 1998, ATF hired a contractor to determine whether state

retail license records could be used, in a systematic method, to

increase ATF’s ability to collect SOT. According to the contractor's

June 1998 report, the goals of the project were to:

• analyze state and SOT data to determine whether there was a

valid basis for matching operations;

• develop a matching methodology which lends itself to

automation; and

• recommend an approach to increasing compliance in a report

which could be used as a foundation for increasing

compliance in the state matching program.

The contractor analyzed state retail alcohol license data from

California and Virginia and reported it had developed a logical,

repeatable process that validated the concept of implementing a

methodology for state matching. Further, the state matching analysis

produced lists of licensees who represented potential additional

revenue. In fact, the contractor reported the unmatched data file

derived from the California data by applying the matching algorithms

identified records with at least a 90 percent chance of containing

valid new sources of SOT revenue.

The contractor recommended contacting the list of 23,547 new

California licensees developed during the project and analyzing the

responses to validate the reliability of the matching algorithms and

estimate the response rate.4

 According to an ATF official in the

Headquarters Revenue Division, the lists of unmatched names were

sent to the NRC. However, an official at the NRC informed us that

it did not take any action regarding these lists. At the time the NRC

received these lists, ATF's Tax Processing Center was moving from

one location in Cincinnati to the Federal building where the NRC is

now located. About a year later, when NRC personnel had some

time to look at this information, they deemed it to be not current or

useful. By not following through timely on the contractor's analyses

and recommendations, the $296,000 of costs incurred by ATF for the

contractor's work was, in effect, wasted.

 

4 The contractor also developed a list of 15,678 businesses for the State of Virginia, but did not mention

Virginia in its recommendations.
AUDIT RESULTS

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OCCUPATIONAL TAX PROGRAM

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ATF closed-out this recommendation in the ITC and recorded

March 31, 1999, as the completion date. ATF apparently

erroneously used our March 31, 1999, memorandum to the

Department as its basis to close both Recommendation 1 and

Recommendation 2 in the ITC.

ATF's commitment to implement the recommendations from this

current review will sufficiently address the intent of this prior

recommendation. Specifically, ATF's plans to work with the states

to automate the state matching program would necessarily involve the

development of common identifiers, such as EINs. Accordingly, no

further action is required of ATF on the prior recommendation.

Prior Recommendation 3: ATF Should Identify States

with Historically Low SOT Compliance and Concentrate Efforts

on the Licensees in those States to Enhance Compliance

ATF Response and Proposed Corrective Action

ATF agreed with this recommendation and said it would dedicate

resources to implement increased efforts in targeting states with low

compliance rates. ATF stated information acquired by the audit team

in its survey of the states would be helpful in this effort since it had

provided ATF with a more solid data base reflecting the number of

retailers licensed in each state. 

OIG Follow-up Evaluation of Corrective Action

We conclude ATF has taken insufficent corrective action in response

to this recommendation. ATF obtained the OIG’s working papers,

identified the 10 states with the lowest compliance rates, and said it

would concentrate on these states when conducting its state matching

program. However, ATF stopped performing its state matching

program in July 1998, and reassigned its resources to other priority

work. ATF did not take any other corrective action in regard to the

recommendation.

One of the methods ATF used to ensure retailers complied with SOT

regulations was to perform matching of ATF’s SOT master file with

state information on retailers (state matching program). ATF’s state

matching program was a cost-effective method of identifying and
AUDIT RESULTS

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OCCUPATIONAL TAX PROGRAM

Page 11

collecting additional SOT revenue. ATF conducted the state

matching program at the NRC.

According to personnel at the NRC, the former Chief,

Revenue Division, ATF Headquarters, made the decision to

discontinue this work. The NRC contract personnel who were

performing the state matching were reassigned to perform other

higher priority work, such as updating industry statistics.

In the past, ATF received lists of alcohol retailers from all but five

states. Contract personnel at the NRC manually compared the names

and addresses of the businesses reported by the states as licensed

alcohol retailers with the names and addresses of retailers listed in

the SOT master file. According to NRC contract personnel, the data

entry clerks would query the ATF SOT master file with the business

name or the business address listed on the states’ lists of alcohol

retailers. For those businesses on the states’ lists that were not in

ATF’s database, the NRC would mail a new business package to

those retailers. ATF included a return envelope with a code in this

package that enabled ATF to track how much revenue each clerk’s

matching efforts were generating.

From March 1995 to June 1998, the state matching program

generated about $2.9 million in SOT revenue, or approximately

$800,000 per year over this period. We estimated it cost ATF about

$128,000, or about $.04 per dollar, to collect this money. The

following table shows the results of ATF’s state matching program.

Table 1: State Matching Program Results Fiscal Years 1995 to 1998

Fiscal

Year

Number

Hours

Matching

Performed

Contract

Hourly

Rate

Estimated

Matching

Costs

Number of

Businesses not

in ATF SOT

Master file

Number

SOT

Payments

Received

Percentage 

Paid

SOT Dollars

Collected by

State

Matching

1995 1,340.75 $15.73 $21,090 7,528 3,664 49% $ 883,196

1996 2,764.50 $15.73 $43,486 8,723 3,493 40% $ 874,567

1997 2,944.50 $16.52 $48,643 10,500 3,130 30% $ 777,553

1998 837.50 $17.35 $14,531 4,754 1,616 34% $ 405,975

Total 7,887.25 $127,750 31,505 11,903 38% $2,941,291
AUDIT RESULTS

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Although the costs to conduct the state matching program were

higher than costs to administer the alcohol and tobacco excise taxes

(usually less than $.01 per dollar), the matching program also

provided ATF with the names and addresses of alcohol retailers to

add to its database. Thus, the state matching program was beneficial

because it was a means to identify alcohol retail businesses that were

not previously known to ATF. Once added to its SOT master file,

ATF would annually mail renewal forms to these newly identified

businesses, generating further SOT revenue.

At the time of our audit field work, ATF was still receiving some

state retailer information at the NRC. We worked with NRC

personnel to do some limited testing to determine whether the state

matching program would still be a cost-effective way to identify

retailers who owed SOT.

During the week of February 28, 2000, we took a random sample of

alcohol retailers from states still sending retailer information to ATF.

Specifically, we randomly selected 275 state-licensed alcohol retailers

by selecting 25 businesses each from 11 states. We queried ATF’s

SOT master file to determine how many of these retailers were in

ATF’s database. Our query indicated 132 of the 275 retailers, or

48 percent, were not in ATF’s SOT database. This indicated these

businesses may owe SOT.

ATF subsequently sent packages to the 132 businesses advising them

of the SOT requirement. As of May 2000, 34 businesses responded

to ATF of which 29, or 85 percent, sent in SOT payments totaling

$4,834. For the other 98 businesses, either the businesses did not

respond (90 businesses) or ATF's package was returned as

undeliverable (8 businesses).

While we recognize the administrative costs of the SOTs are high

relative to the costs of administering alcohol excise taxes, the state

matching program serves an important purpose. First, it generates

additional SOT revenue to the Federal Government. Second, it puts

alcohol retail businesses on notice that they owe SOT, adds the

names of these businesses to ATF’s master file for future billings,

and advises the businesses of the fines and penalties associated with

failing to file or pay this tax. We conservatively estimate that ATF

could enhance revenues by about $800,000 per year, or $2.4 million
AUDIT RESULTS

OIG-01-052 FOLLOW-UP AUDIT OF ATF’S SPECIAL

OCCUPATIONAL TAX PROGRAM

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over the next 3 years, if it reinstated the state-matching program. If

ATF fully implements the recommendations in this current review,

the intent of this prior recommendation will be met. Accordingly, no

further action is required on the part of ATF with respect to the prior

recommendation.
Appendix 1

ABBREVIATIONS

OIG-01-052 FOLLOW-UP AUDIT OF ATF’S SPECIAL

OCCUPATIONAL TAX PROGRAM

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ATF Bureau of Alcohol, Tobacco and Firearms

EIN Employer Identification Number

GAO U.S. General Accounting Office

ITC Inventory, Tracking and Closure system

NRC National Revenue Center

P&I Principal and Interest

SOT Special Occupational Tax
Appendix 2

SCHEDULE OF POTENTIAL REVENUE

ENHANCEMENTS FROM IMPLEMENTATION

OF AUDIT RECOMMENDATIONS

OIG-01-052 FOLLOW-UP AUDIT OF ATF’S SPECIAL

OCCUPATIONAL TAX PROGRAM

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A revenue enhancement is an action recommended in an OIG audit report which would, if

implemented, enhance the General Fund receipts of the Federal Government, usually

without having any budgetary impact on any of the Department of the Treasury's

appropriations. The following potential revenue enhancements will be recorded in the

Inventory, Tracking and Closure system (ITC) upon issuance of our final report.

Recommendation Number

Potential Revenue

Enhancement

Amount

Finding 1 – Recommendation 1 $2,400,000

The recommendation relates to reinstating a state matching program of alcohol beverage

retailers to determine if they had paid the Special Occupational Tax (SOT). It is ATF

management’s responsibility to record the actual revenue enhancements realized in the ITC

for the collection of SOT assessments made as a result of the implementation of this

recommendation.
Appendix 3

MANAGEMENT RESPONSE

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OCCUPATIONAL TAX PROGRAM

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Appendix 3

MANAGEMENT RESPONSE

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OCCUPATIONAL TAX PROGRAM

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Appendix 3

MANAGEMENT RESPONSE

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OCCUPATIONAL TAX PROGRAM

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Appendix 3

MANAGEMENT RESPONSE

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OCCUPATIONAL TAX PROGRAM

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Appendix 4

MAJOR CONTRIBUTORS TO THIS REPORT

OIG-01-052 FOLLOW-UP AUDIT OF ATF’S SPECIAL

OCCUPATIONAL TAX PROGRAM

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Northeastern Region

Donald P. Benson, Regional Inspector General for Audit

Dennis F. Deely, Audit Manager

Robert E. Ferrara, Auditor

N. Randy Gettmann, Auditor
Appendix 5

REPORT DISTRIBUTION

OIG-01-052 FOLLOW-UP AUDIT OF ATF’S SPECIAL

OCCUPATIONAL TAX PROGRAM

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U.S. Department of the Treasury

Under Secretary of the Treasury for Enforcement

Office of Strategic Planning and Evaluations

Office of Accounting and Internal Control

Bureau of Alcohol, Tobacco and Firearms

Assistant Director (Alcohol and Tobacco)

Deputy Assistant Director (Alcohol and Tobacco)

Chief, Revenue Division

Chief, National Revenue Center

Assistant Director (Inspection)

Office of Management and Budget

OIG Budget Examiner