Audit Report

OIG-04-028

REVENUE COLLECTION AND INDUSTRY REGULATION: Alcohol 

and Tobacco Export Controls Strengthened, But More Action Is 

Needed

February 26, 2004

Office of

Inspector General

Department of the Treasury

Contents

Alcohol and Tobacco Export Controls Strengthened, But More Action Is 

Needed (OIG-04-028) Page 1

Audit Report....................................................................................................... 3

Results in Brief.................................................................................................. 4

Background....................................................................................................... 7

Findings

Actions Were Taken To Improve Guidance, Training, and Supervision............. 8

Locating Records Was A Problem.................................................................. 9

Documentation Was Limited To Support Reviews Of Export Tracking Logs......11

More Could Have Been Done To Ensure Use of Third-Party Verifications .........14

Recommendations .............................................................................................15

Appendices

Appendix 1: Objective, Scope And Methodology............................................17

Appendix 2: Summary, Status, Action Taken, And OIG Evaluation

Of Prior Report Recommendations..............................................19

Appendix 3: Management Comments ............................................................26

Appendix 4: Major Contributors To This Report..............................................28

Appendix 5: Report Distribution.....................................................................29

Abbreviations

ATF Bureau of Alcohol, Tobacco and Firearms

CFR Code of Federal Regulations

CY Calendar Year

DSP Distilled Spirits Plant

FY Fiscal Year

JAMES Joint Audit Management Enterprise System

NPA Notice of Proposed Assessment

NPRM Notice of Proposed Rulemaking

NRC National Revenue Center
Contents

Alcohol and Tobacco Export Controls Strengthened, But More Action Is 

Needed (OIG-04-028) Page 2

OIG Office of Inspector General

TTB Alcohol and Tobacco Tax and Trade Bureau
OIG Audit

Report

The Department of the Treasury

Office of Inspector General

Alcohol and Tobacco Export Controls Strengthened, But More Action Is 

Needed (OIG-04-028) Page 3

February 26, 2004

Arthur J. Libertucci

Administrator

Alcohol and Tobacco Tax and Trade Bureau

We conducted a follow-up audit of the Alcohol and Tobacco Tax 

and Trade Bureau’s (TTB)1 controls over exported distilled spirits 

and tobacco. When exported, these products may be exempt from 

Federal excise tax. To ensure the tax exclusions are proper, TTB 

monitors distilled spirits plants (DSP), tobacco plants, and export 

warehouses through technical services and revenue inspections.

We conducted this follow-up audit as part of our Fiscal Year (FY) 

2002 Annual Plan. Our primary objective was to determine 

whether the former Bureau of Alcohol, Tobacco and Firearms (ATF) 

had taken corrective action to address recommendations contained 

in two previously issued reports: (1) Bureau of Alcohol, Tobacco 

and Firearms Controls Over Tax Free Spirit Exports (OIG-99-123, 

September 15, 1999), and (2) The Bureau of Alcohol, Tobacco and 

Firearms Needs to Improve its Controls Over Tax-Free Tobacco 

 

1 At the time of our fieldwork, the entity audited was the Alcohol and Tobacco Directorate under the 

Bureau of Alcohol, Tobacco and Firearms (ATF). On January 24, 2003, ATF was transferred from the 

Department of the Treasury to the Department of Justice; however, the Alcohol and Tobacco 

Directorate remained with Treasury and is now known as the Alcohol and Tobacco Tax and Trade 

Bureau (TTB). When referring to the prior reports or actions, we use ATF to identify the bureau. When 

referring to current issues, we refer to the bureau as TTB.
Alcohol and Tobacco Export Controls Strengthened, But More Action Is 

Needed (OIG-04-028) Page 4

Exports (OIG-01-019, November 13, 2000). These earlier audits 

had found:

• inadequate (or no) documentation to support the exportation 

and subsequent tax-free status of products;

• inadequate controls over export tracking logs that allowed a 

large number of shipments with substantial potential tax 

liability to remain open and unresolved for years; and 

• no routine third-party verifications either during on-site 

inspections or through off-site monitoring to ensure that 

shipments were actually exported.

Contributing to these control weaknesses were unclear regulatory 

guidance, resource constraints, and clerical unfamiliarity with 

export documents.

We conducted our audit fieldwork from April 2002 to April 2003 at 

TTB Headquarters in Washington, D.C., and the National Revenue 

Center (NRC) in Cincinnati, OH. A more detailed description of the 

audit objective, scope, and methodology is provided in Appendix 1.

Results in Brief

ATF took corrective actions to address several of the factors 

contributing to the problems of inadequate documentation and 

weak controls. ATF made changes to regulatory guidance, 

training, and supervision; drafted (but did not finalize) a proposed 

change to Section 27 of the Code of Federal Regulations (CFR) to 

require acceptable proof of export be received within 90 days of 

product exportation; finalized an industry circular that provides 

guidance on the documentation required to support exportation; 

held several training sessions; and increased supervisory review.

However, ATF did not completely address the problems with 

missing or incomplete records needed to support the tax-free status 

of alcohol and tobacco exports, controls over export tracking logs, 

and third-party verifications of exports.
Alcohol and Tobacco Export Controls Strengthened, But More Action Is 

Needed (OIG-04-028) Page 5

First, concerning the shipments for which documentation was 

inadequate or non-existent during our original audits, ATF reviewed 

the shipments and requested manufacturing companies to submit 

documentation to prove exportation occurred. This effort resulted 

in submission of many documents, but we continue to have 

concerns. For example, we had recommended that the ATF 

Director send tax assessment letters covering shipments for which 

the DSPs had not submitted any documents to support the claimed 

exports. Instead, an NRC official said DSPs had been notified of 

the need for documentation, and adequate proof of exportation had 

been received. We selected a sample of these distilled spirits and 

tobacco products records to review. NRC personnel were unable 

to locate 10 of 65 DSP records we originally requested and one 

record did not have adequate proof of exportation. NRC personnel 

said that the missing records might have been sent to imaging for 

electronic copying. For tobacco records, NRC was unable to locate 

5 of 34 records we requested. An NRC supervisor said the missing 

records were in the database in error. We recommend that TTB 

require the NRC to maintain better control of its alcohol and 

tobacco tax-free export records. We also recommend that TTB 

ensure adequate proof of exportation is obtained for all exports.

Second, we had recommended in the prior audits that ATF resolve 

the status of open shipments listed in export tracking logs.2 

Although ATF indicated these logs were reviewed, ATF’s NRC 

personnel were unable to provide sufficient data to support that all 

of the reviews were actually performed. Accordingly, we could not 

determine whether ATF fully addressed the intent of the associated 

recommendations. We performed limited testing of open export 

shipments for Calendar Year (CY) 2002 to determine whether ATF 

appropriately reviewed the export shipments for evidence of 

exportation and found open tobacco shipments without evidence of 

exportation received within 90 days of the claimed shipment date. 

In addition, ATF did not issue Notices of Proposed Assessment 

 

2 NRC specialists use export tracking logs to keep track of export shipments and to ensure shipment 

files remain open until adequate export evidence is received. Sometimes these logs are also referred to 

as “pending files.”
Alcohol and Tobacco Export Controls Strengthened, But More Action Is 

Needed (OIG-04-028) Page 6

(NPA) as required in ATF Order 5020.8B (a revised version of ATF 

Order 5020.8A).

As a result, we are recommending that TTB develop an automated 

tracking system to allow exporters to electronically submit

information on exports and allow TTB to better track the status of 

open shipments. An automated tracking system should help TTB 

avoid having shipments remain open for lengthy periods, such as a 

year or more that we found during prior audits.

Third, we had recommended that the ATF Director assess 

increasing the use of third-party verifications. We found that the 

use of third-party verification letters, initiated in response to 

recommendations in both audit reports, was tried but apparently 

terminated because ATF could not find a way to provide postage 

for return mail. Other means may be available to obtain such 

verification. We recommend that TTB find a way to re-assess the 

use of third-party verifications.

In response to our draft report, your office indicated that the best 

approach for handling the deficiencies we identified is a complete 

revision of the process for managing tax-free exports. Rather than 

having documents routinely submitted to the NRC, TTB would 

adopt a post-audit process in which exports would be validated at 

the manufacturers. TTB plans to develop post-audit procedures 

that require the manufacturers to maintain export documentation 

on premises for review by TTB auditors and investigators. If 

properly implemented, we believe this post-audit approach meets 

the intent of our recommendations. However, TTB did not provide 

its detailed plan and estimated completion date to finalize and 

implement the new post-audit procedures. Pursuant to Treasury 

Directive 40-01, Responsibilities of and to the Inspector General, 

we request that you provide this information to our office within 

30 days of the date of this report. TTB’s complete response is 

included as Appendix 3.
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Needed (OIG-04-028) Page 7

Background

On September 15, 1999, we issued a report entitled Bureau of 

Alcohol, Tobacco and Firearms Controls Over Tax Free Spirit 

Exports (OIG-99-123). The audit found that certain management 

controls over the tax-free exports of distilled spirits products 

needed greater attention. Specifically, adequate proof of 

exportation was missing in files or unavailable to ATF even though 

exportation was the basis for waiving millions of dollars in excise 

taxes. We estimated that ATF could assess at least $66.6 million 

of taxes on shipments that had improper or no exportation 

evidence. Also, we reported that ATF had not closed claimed 

export shipments with associated taxes of $560 million for 1996 

and 1997.

On November 13, 2000, we issued a second report entitled The 

Bureau of Alcohol, Tobacco and Firearms Needs to Improve its 

Controls Over Tax-Free Tobacco Exports (OIG-01-019). This audit 

reviewed the same issues as the report described above, only this 

time for tobacco products. The audit found that increased 

oversight was also needed over ATF’s processing of tax-free 

shipments of exported tobacco products. We estimated that ATF 

may be able to assess at least $86.9 million of taxes on shipments 

where export documentation was inadequate or nonexistent.

The audit reports contained 15 recommendations, including 7 for 

the DSP report and 8 for the tobacco report. ATF closed all 

recommendations except those related to 27 CFR and the 

automated system in the Joint Audit Management Enterprise 

System (JAMES). The open recommendations advised ATF to 

(1) amend 27 CFR to include specific time frames for DSPs to 

submit documents that support claimed exports and additional 

guidance defining adequate export evidence (the completion date 

for this recommendation was August 13, 2003), and (2) establish 

controls to ensure Tobacco Unit specialists properly monitor open 

shipments listed in the tracking logs (the completion date for this 

recommendation was October 1, 2003). As part of the second 
Alcohol and Tobacco Export Controls Strengthened, But More Action Is 

Needed (OIG-04-028) Page 8

recommendation, we recommended ATF consider automating the 

process for submitting and verifying export notifications.

Although these recommendations remain open in JAMES, ATF had 

planned actions that, if taken, would have closed out the 

recommendations. First, ATF proposed a regulation to include 

specific time frames for DSPs to submit export documents. TTB

needs to finalize the regulation. Second, although ATF developed 

controls to help ensure Tobacco Unit specialists monitored open 

tracking logs, the funding for an automated tracking system has 

not been available. We believe TTB should continue to pursue the 

development of an automated system.

Findings

Finding 1 Actions Were Taken To Improve Guidance,

Training, and Supervision

In our prior audits, we found that a combination of factors 

contributed to control weaknesses that allowed exportation of 

distilled spirits and tobacco products, and the waiving of excise 

taxes, without sufficient documentation on file to validate that 

exportation actually occurred. These factors included transitional 

effects, including resource constraints and records control,

associated with a reorganization of five regional technical services 

offices to the NRC in Cincinnati (which was recent at the time of 

those audits); unclear regulatory and internal guidance over specific 

documentation requirements; clerical staff unfamiliarity with 

requirements; and the lack of enforcement action and sanctions 

(i.e. ATF had not sent tax assessment letters when documentation 

was lacking).

During our follow-up audit, we found improvements in the 

following areas.

• ATF issued an industry circular in July 2002 to provide 

guidance on adequate proof of export. ATF also drafted a 
Alcohol and Tobacco Export Controls Strengthened, But More Action Is 

Needed (OIG-04-028) Page 9

regulatory change to 27 CFR in September 2002 that 

included a requirement for proof of export to be submitted 

within 90 days of export. At the time of our audit, however, 

this regulation still needed to be finalized.

• ATF issued ATF Order 5020.8B, a revision of ATF Order 

5020.8A, which provided guidance on processing exports.

• According to an NRC supervisor, the NRC held four training 

sessions for technical service clerks responsible for 

reviewing submitted documentation as evidence of 

exportation. Although we could not find documented 

evidence that these classes were held, an Office of Inspector 

General (OIG) auditor attended a later session and found it 

informative. In addition, an NRC supervisor said that 

supervisor and employee meetings were held to discuss 

proof of export documentation requirements, and 

newly-hired specialists were assigned to work with other 

specialists until they became proficient.

• The NRC took steps to ensure supervisory review of 

specialists’ work. This included annually sampling and 

reviewing specialists’ work, and including the findings in 

annual performance appraisals.

Despite these improvements, we found that records control and the 

lack of documentation continued to be a problem at the NRC in 

Cincinnati. We also found a need to more timely obtain and review 

documentation supporting exportation. This is discussed in detail 

in Findings 2 and 3 below.

Finding 2 Locating Records Was A Problem

Our previous audits of alcohol and tobacco exports found that ATF 

was unable to locate records to support the tax-free status of 

specific shipments. Although an NRC supervisor told us during our 

current audit that records were obtained for these exports, we 

found that in certain cases the records could not be located.
Alcohol and Tobacco Export Controls Strengthened, But More Action Is 

Needed (OIG-04-028) Page 10

• For the prior audit of DSPs, we found no documentation 

supporting 194 shipments with potential excise tax liability 

of $4.6 million. ATF personnel said documentation was 

received on all but one shipment. We selected a sample of 

20 shipments and NRC could not locate records for 5. We 

substituted 5 others and found that 17 shipments had 

adequate documentation and 3 did not.

• Again for the prior DSP audit, we found inadequate 

documentation supporting 449 shipments with a potential 

tax excise value of $62 million. ATF conducted an 

inspection to address 24 of the shipments and performed 

additional review for the remaining 425. An NRC official 

said adequate proof of export had been received for all 

shipments. During our follow-up audit, we selected 45 of 

the original 449 shipments for review, but NRC could not 

locate 5 of the records. When NRC could not locate these 

records, we substituted five others. We requested the 

documentation that supported the exportation to verify the 

adequacy of it. Although we verified the documentation for 

44 of the shipments, 1 shipment did not have adequate 

documentation.

• For the audit of tobacco shipments, we requested files for 

34 of 82 shipments previously lacking records to support the 

exportations. ATF could not locate 5 of the 34 files. The 

files were listed on ATF’s database under an export 

warehouse number that had been out of business since 

1961. The Tobacco Unit supervisor attributed this problem 

to a data error because the export shipments should have 

been entered under the permit number for the tobacco 

producer, rather than the export warehouse. When these 

records could not be located, we again substituted five 

others.

We believe that sound records management is an essential internal 

control. The Comptroller General’s Standards for Internal Control 

in the Federal Government requires organizations to establish 

effective internal controls to prevent and detect errors and possible 

fraud. The inability of ATF to properly retrieve records indicated a 
Alcohol and Tobacco Export Controls Strengthened, But More Action Is 

Needed (OIG-04-028) Page 11

weakness in the internal controls over essential government 

records.

In summary, of the original 65 DSP records we requested during 

our follow-up work, NRC could not locate 10. Also, for the 34 

tobacco shipment records we requested, NRC could not locate 5. 

We believe that the inability to locate these records, especially with 

possible tax liability at stake, is a problem that needs to be 

addressed. It also raises questions about whether (1) all 

appropriate documents supporting exportation were submitted and 

reviewed by ATF, and (2) all excise tax waivers claimed by 

manufacturers were appropriate.

Finding 3 Documentation Was Limited To Support Reviews

Of Export Tracking Logs

In our prior audit of DSP tax-free exports, we found 3,649 open 

export shipments in the export tracking logs that exceeded 

$560 million. We recommended that ATF reconcile these items to 

determine if the DSPs had submitted adequate export evidence. 

We further recommended that, if adequate export evidence had not 

been submitted, ATF should initiate action to assess and collect the 

taxes and any applicable interest and penalties before the 3-year 

statute of limitations expired. Similarly, in our prior audit of 

tax-free tobacco exports, we found 25,548 open shipments in the 

export tracking logs valued at $59 million. We recommended that 

ATF reconcile these items to determine if the tobacco 

manufacturers and export warehouses had submitted adequate 

evidence of exportation.

In response to the findings of our earlier audits, ATF told us they 

were working on the resolution of open shipments for both DSP 

and tobacco products. Although ATF informed us during our 

follow-up audit that reviews occurred, documentation was limited 

to support that action had been taken to account for and clear 

these open shipments. ATF provided only summary documents. 
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Needed (OIG-04-028) Page 12

ATF could not provide more detailed documentation showing the 

results of this work.

• For the DSP exports, ATF provided a summary document 

that indicated that 13 DSPs were issued NPAs for 107 

shipments. This document indicated that ATF collected 

$98,422 from 2 of the 13 DSPs and cleared the remaining 

11.

• For the tobacco exports, ATF provided a summary document 

in February 2003 that indicated ATF closed 20,100 of the 

25,548 open shipments. Of the 5,448 shipments still 

unresolved, 3,200 were for CY 1997 and 2,248 were for 

CY 1998. ATF did not issue NPAs for the shipments in 

1997 because the 3-year statute of limitations expired. An 

NRC supervisor said that NRC had sent inquiry letters 

requesting documentation and had received some 

documentary support. For the 1998 shipments, ATF 

processed NPAs; however, detailed documentation was not 

available to indicate how the NPAs were resolved.

As part of its Notice of Proposed Rulemaking (NPRM), ATF said it 

would include a provision for DSPs to maintain export 

documentation on-site, with a requirement that they submit 

monthly summaries of all export shipments outstanding and cleared 

during the month. Using these two summaries, TTB officials 

believe they would be able to determine which shipments were 

90 days old, and would then be able to initiate an NPA letter for 

those shipments over 90 days old.

In addition to recommending that the open shipments be 

reconciled, we also had recommended that the ATF Director 

identify ways to change the current tax-free exportation 

procedures. We had concluded ATF should explore ways to reduce 

its paper and manual procedures and automate the process for 

submitting and verifying export notifications. According to ATF’s 

Deputy Chief, Regulations Division, during the last three budget 

cycles, ATF did not obtain the funding needed for the development 
Alcohol and Tobacco Export Controls Strengthened, But More Action Is 

Needed (OIG-04-028) Page 13

of an automated system that would allow DSPs to electronically 

submit export documentation to NRC.

We continue to believe that an automated system would improve 

controls over the tax-free export process. During our prior audits, 

we found that ATF did not conduct timely reviews of 

documentation supporting distilled spirits and tobacco products 

exports. As part of our follow-up audit, we found that ATF’s 

reviews of open shipments were also not always timely.

For example, in the first quarter of CY 2003 we selected a sample 

of 28 open DSP exports from CY 2002 export shipments. We 

found that 14 of the 28 open DSP shipments had documentation 

on file to support the exportation. However, the NRC specialists 

did not close 11 of the 14 DSP shipments until 7 to 12 months 

later. Similarly, we also selected a sample of 28 open CY 2002

tobacco export shipments.3 We found that 11 of the 28 open 

shipments did not have adequate documentation, though we were 

told the specialists had requested the information from the 

manufacturers and export warehouses. These shipments had all 

occurred more than 90 days before our review.

As previously noted, ATF Order 5020.8B requires ATF to issue 

NPAs for the open tobacco shipments when evidence of 

exportation has not been received within 90 days of the claimed 

shipment date. However, although the open shipments we 

reviewed were over 90 days old, we found the NPAs were not 

issued.

We believe an automated export tracking system could help TTB 

track open shipment records and alert the specialists to shipments 

that still require documentation supporting the exportation.

 

3 The samples were judgmentally selected. We did not attempt to use statistically valid and projectable 

sample sizes. In addition, we also selected 28 DSP and 28 tobacco export closed shipments, but 

generally found documentation had been received. In one case, we found a DSP shipment closed that 

should have remained open because adequate documentation had not been received.
Alcohol and Tobacco Export Controls Strengthened, But More Action Is 

Needed (OIG-04-028) Page 14

Finding 4 More Could Have Been Done To Ensure Use Of

Third-Party Verifications

In our prior audits, we found very limited use of third-party 

verifications of exports. We concluded at the time that this was an 

important control that would help assure the authenticity of export 

documents and other pertinent information. In our DSP report, for 

example, we cited a diversion case that was only discovered when 

Canadian police informed ATF of suspicious distilled spirits 

products they had found in Canada. Export documents that ATF 

had on file were fraudulently prepared and an ATF review of the 

documents alone would not have identified the diversion.

In response to recommendations in both of our earlier audit reports 

concerning the need for this control, ATF agreed to use third-party 

verification letters. In January 2000, the NRC mailed three 

third-party verification letters to customers that purchased distilled 

spirits. Similarly, from September 2000 to March 2001, the NRC 

Tobacco Unit supervisor told us that NRC mailed four letters to 

purchasers of tobacco products. The letters provided the company 

name, date of shipment, product description, and quantity. The 

letters instructed the customers to answer questions concerning 

the shipments, including the quantity involved and the date 

received.

NRC supervisors said responses were received on two of the three 

distilled spirit letters, and two of the four tobacco letters. 

However, the NRC Chief said these letters were discontinued in 

March 2001 because ATF could not provide postage for return 

mail. No other letters were sent.

We believe TTB can do more to ensure the successful use of 

third-party verification. As we stated in an earlier report, 

third-party verifications can validate the authenticity of export 

documents and other information. These verifications may include 

such steps as contacting (1) foreign customers who purchased 

alcohol and tobacco from United States companies, (2) the 

steamship company to review carrier manifests, (3) the Customs 
Alcohol and Tobacco Export Controls Strengthened, But More Action Is 

Needed (OIG-04-028) Page 15

bonded warehouse or the foreign trade zone to authenticate signed 

5100.11 forms, or (4) the United States consulate to verify that 

the consignee name and address are legitimate.

Recommendations

Recommendation 1

We recommend the Administrator of the Alcohol and Tobacco Tax 

and Trade Bureau require NRC personnel to maintain better control 

over alcohol and tobacco tax-free export records, and ensure 

adequate proof of exportation is obtained for all exports.

Recommendation 2

We recommend the Administrator of the Alcohol and Tobacco Tax 

and Trade Bureau develop an automated system to allow 

companies to electronically submit required export documentation 

and to allow the bureau to track export documentation status.

Recommendation 3

We recommend the Administrator of the Alcohol and Tobacco Tax 

and Trade Bureau re-assess the use of third-party verification.

Management Comment

TTB plans a new approach to ensuring the tax-free status of 

alcohol and tobacco exports. TTB does not concur with 

implementing the above three recommendations. Since becoming a 

separate bureau, TTB has reviewed export verification and 

determined that it would be best to require manufacturers to 

maintain export records at their premises and rely on post-audit 

reviews to verify exportation. TTB’s Audit Division has been 

assigned the development of new post-audit procedures. These 

records will be available on-site for TTB auditors and investigators. 

As a result, manufacturers will no longer need to submit export 

documentation to TTB.
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Needed (OIG-04-028) Page 16

OIG Comment

We concur with TTB’s assessment that the current process of 

verifying tax-free exports has not been working. We believe the 

new approach could strengthen the verification process and 

addresses the intent of our recommendations. Accordingly, we 

consider these recommendations to have a management decision 

with final action not yet completed. However, we did not receive 

TTB’s targeted completion date for developing and implementing 

the post-audit review procedures. At a future date, we will verify 

that the new process has been implemented and assess how well it 

is working.

* * * * * *

We appreciate the courtesies and cooperation extended to our staff 

during the audit. If you have any questions, please contact me at 

(617) 223-8640. Major contributors to this report are listed in 

Appendix 4.

/s/

Donald P. Benson

Director

Eastern Field Audit Office
Appendix 1

Objective, Scope and Methodology

Alcohol and Tobacco Export Controls Strengthened, But More Action Is 

Needed (OIG-04-028) Page 17

The overall objective of our audit was to determine whether the 

former Bureau of Alcohol, Tobacco and Firearms (ATF) 

implemented corrective actions to address the recommendations 

contained in our prior audit reports entitled: Bureau of Alcohol, 

Tobacco and Firearms Controls Over Tax Free Spirit Exports

(OIG-99-123), issued September 15, 1999; and The Bureau of 

Alcohol, Tobacco and Firearms Needs to Improve its Controls Over 

Tax Free Tobacco Exports (OIG-01-019), issued 

November 13, 2000. Since the January 2003 transfer of most of 

ATF to the Department of Justice, Federal excise tax collection 

from alcohol and tobacco products has become the responsibility of 

the Treasury Alcohol and Tobacco Tax and Trade Bureau (TTB).

To ensure adequate proof of export was obtained, we judgmentally 

sampled both open and closed export shipments of distilled spirits 

and tobacco products. Similar to our initial audits, we examined 

export documents such as ocean bills of lading, certificates of 

receipt, and notices of removal. We also reviewed Notice of 

Proposed Assessment letters sent by the bureau to companies as a 

result of our initial audit.

We interviewed the Chief, National Revenue Center (NRC), located 

in Cincinnati, OH, and other program management staff to obtain 

background information and an overview of work performed on 

prior audit report recommendations. We interviewed the Chief, 

NRC; the Supervisors of the NRC’s Distilled Spirits Plant (DSP) and 

Tobacco Units; NRC Program Managers; and Policy Programs and 

Coordination staff in ATF (now TTB) Headquarters.

We contacted the Staff Chief, Office of Inspection, regarding the 

Staff Chief’s role in monitoring Office of Inspector General 

recommendations. We obtained and reviewed the information the 

Staff Chief maintained on the two prior audit reports. We also 

interviewed the Deputy Chief, Regulations Division, to obtain 

information about revisions to the Code of Federal Regulations 

(CFR) and plans to automate processes for submitting and tracking 

export notifications.
Appendix 1

Objective, Scope and Methodology

Alcohol and Tobacco Export Controls Strengthened, But More Action Is 

Needed (OIG-04-028) Page 18

We reviewed revisions to 27 CFR, Part 252, and ATF Order 

5020.8A (revised as ATF Order 5020.8B) to determine if the 

revised sections met requirements set forth in the prior audit’s 

recommendations. We also obtained and reviewed Joint Audit 

Management Enterprise System (JAMES) reports for the prior audit 

reports to determine the status (open or closed) of the 

recommendations.

In addition, we judgmentally selected, based on our available 

resources, a sample of 23 companies that had open tobacco 

shipments during our earlier audit. We then obtained from the NRC 

the tracking logs for those 23 companies as of March 18, 2003. 

The tracking logs are summary records of exported tobacco 

products that indicate whether the file is still open or has been 

closed. We compared the current tracking logs with the tracking 

logs we obtained during the initial audit to determine file status.

To determine if problems found in the original two audits were still 

occurring more than a year after the tobacco products report was 

issued, we performed limited testing of export shipments in 

CY 2002. We selected four DSPs, four tobacco plants, and four 

export warehouses. For the four DSPs, we examined 56 export 

alcohol shipments, of which 28 were open and 28 were closed. 

For the four tobacco plants and four export warehouses, we 

examined 56 export tobacco shipments, of which 28 were open 

and 28 were closed. For the closed shipments, we wanted to 

determine whether the proof of exportation was adequate. For the 

open shipments, we wanted to ensure that the specialists 

appropriately reviewed the open shipments. We examined ocean 

bills of lading, certificates of receipt, notices of removal, and other 

export documents.

We conducted our audit fieldwork between April 2002 and 

April 2003 in accordance with generally accepted government 

auditing standards.
Appendix 2

Summary, Status, Action Taken, And OIG Evaluation Of Prior Report 

Recommendations

Alcohol and Tobacco Export Controls Strengthened, But More Action Is 

Needed (OIG-04-028) Page 19

Report: Bureau of Alcohol, Tobacco and Firearms Controls Over Tax Free Spirit 

Exports (OIG-99-123, September 15, 1999).

The audit of tax-free spirit exports identified three deficiencies. First, because 

export shipments either had improper or no export evidence, we estimated that 

ATF could assess at least $66.6 million of taxes. Second, ATF had not closed 

claimed export shipments with associated taxes of $560 million. Third, we 

concluded that ATF needed to conduct more third-party verifications of 

exported shipments.4

For each of the prior audit’s recommendations, we assessed the corrective 

action taken and evaluated whether the action met the intent of our 

recommendation. The following table summarizes the status and action by 

recommendation.

Recommendation Summary Status Action Taken OIG Evaluation

1. (a) The ATF Director 

should send tax 

assessment letters for the 

$4.6 million, plus interest, 

covering the 194 shipments 

for which DSPs had not 

submitted any documents 

to support the claimed 

exports.

Closed ATF received documentation for 119 

of the 194 shipments. ATF took 

corrective action for the remaining 53, 

which included issuing NPAs in the 

amount of $746,232, plus interest.

We selected 20 of the 194 

shipments for review. ATF could 

not locate documentation for 5 

shipments. We selected an 

additional 5 shipments. We found 

17 of the 25 total records selected 

had adequate support.

 

4

 Third-party verifications may include such steps as contacting (1) companies in foreign countries who 

purchased alcohol and tobacco from United States companies, (2) the steamship company to review a 

carrier’s manifest, (3) the Customs bonded warehouse or the foreign trade zone to authenticate signed 

5100.11’s, or (4) United States consulates to verify that the consignee name and address are 

legitimate.
Appendix 2

Summary, Status, Action Taken, And OIG Evaluation Of Prior Report 

Recommendations

Alcohol and Tobacco Export Controls Strengthened, But More Action Is 

Needed (OIG-04-028) Page 20

Recommendation Summary Status Action Taken OIG Evaluation

1. (b) The ATF Director 

should send tax 

assessment letters for the 

$62 million, plus interest, 

covering the 449 shipments 

for which DSPs had 

submitted inadequate 

documentation.

Closed ATF inspected one DSP covering 24 of 

the 449 shipments. ATF issued NPA 

letters on the remaining 425 

shipments. ATF said adequate 

documentation was received for all 

but one shipment. ATF collected 

$4,146 on the one shipment.

We selected 45 of the 449 

shipments for review. ATF could 

not locate five records, so we 

substituted five others. We found 

that 44 had adequate support, 

while one shipment did not.

2. The ATF Director should 

reassess whether 113 

shipments with technical 

non-compliance 

documentation problems 

should also be subject to an 

assessment letter.

Closed ATF reviewed the 113 shipments and 

accepted the documentation available 

as adequate support for export.

We did not see evidence that ATF 

had reviewed the shipments, but 

accept that the issues may not be 

substantive, as ATF concluded.

3. (a) The ATF Director 

should amend 27 CFR to 

include specific time frames 

for DSPs to submit 

documents that support 

claimed exports.

Open ATF proposed amending 27 CFR to 

include a requirement that acceptable 

proof of export be submitted to ATF 

within 90 days of export.

An ATF official said that the 

Director signed the draft version of 

this change in September 2002, 

but the regulation had not been 

finalized.

3. (b) The ATF Director 

should amend 27 CFR to 

include additional guidance 

defining adequate export 

evidence.

Open ATF issued an industry circular in 

July 2000 to provide guidance on 

adequate proof of export.

The circular appears to adequately 

address the intent of the 

recommendation.

4. (a) The ATF Director 

should reassess the 

adequacy of ATF Order 

5020.8A, which includes 

information on the 

processing of exports.

Closed ATF has revised the Order dealing 

with export shipments. ATF said 

revised sections of the Order dealing 

with exports were provided to NRC 

specialists in July 2000.

The revision appears to adequately 

address the intent of the 

recommendation.

4. (b) The ATF Director 

should reassess training for 

the technical services clerks 

responsible for reviewing 

submitted documentation 

evidencing claimed exports.

Closed The NRC has held four training 

sessions since the OIG report was 

issued in September 1999.

NRC provided a list of attendees at 

the earlier training sessions. In 

June 2002, NRC held another 

training session. An OIG auditor 

attended the session and found it 

informative.
Appendix 2

Summary, Status, Action Taken, And OIG Evaluation Of Prior Report 

Recommendations

Alcohol and Tobacco Export Controls Strengthened, But More Action Is 

Needed (OIG-04-028) Page 21

Recommendation Summary Status Action Taken OIG Evaluation

5. The ATF Director should 

instruct the NRC to 

reconcile the $560 million 

in open items in the 

tax-free export logs to 

determine if the DSPs have 

submitted adequate 

evidence of export. If not, 

ATF should initiate action 

to assess the taxes before 

the 3-year statute of 

limitation expires, then 

collect taxes, interest, and 

penalties on the distilled 

spirits exports.

Closed ATF said the shipments were 

reviewed and NPA letters were 

issued. ATF collected $98,422 from 

two DSPs but said other DSPs 

provided adequate proof of export.

We obtained a schedule that 

showed ATF issued NPA letters to 

13 DSPs involving $88 million in 

potential tax liability. We did not 

find documentation to support 

review or additional 

documentation for the other 

shipments.

6. The ATF Director should 

identify ways to change 

the current tax-free export 

procedures. ATF needs to 

explore ways to reduce 

paper/manual export 

procedures and automate 

the process. The process 

should include an export 

tracking system that will 

age all open shipments so 

that the 3-year statute of 

limitation is met.

Open

(See 

tobacco 

report 

recommendation for 

Finding 2-2 

on p. 23 of 

this 

appendix.)

ATF did not obtain funding needed 

for an automated system. ATF was 

unsuccessful in FYs 2001, 2002, 

and 2003.

We believe TTB should develop an 

automated system to allow 

companies to electronically submit 

export documentation and to allow 

the bureau to track export 

documentation status.

7. (a) The ATF Director 

should assess increasing 

the use of third-party 

verifications.

7. (b) The ATF Director 

should assess the need to 

standardize the current 

tax-free export procedures 

to include specific work 

steps where third-party 

verifications are performed.

Closed ATF developed a letter to send to 

customers to verify that shipments 

were received. ATF tried the 

process for both DSP and tobacco 

product shipments but discontinued 

it due to concerns about postage 

payment.

We believe TTB needs to re-assess 

the use of third-party verification.
Appendix 2

Summary, Status, Action Taken, And OIG Evaluation Of Prior Report 

Recommendations

Alcohol and Tobacco Export Controls Strengthened, But More Action Is 

Needed (OIG-04-028) Page 22

Report: The Bureau of Alcohol, Tobacco and Firearms Needs to Improve its 

Controls Over Tax Free Tobacco Exports (OIG-01-019, November 13, 2000).

The report contained three findings. First, we estimated that ATF could have 

assessed at least $86.9 million of taxes because export shipments either had 

improper or no export evidence. Second, we found that ATF had not closed 

claimed export shipments with associated taxes of $59 million. Third, ATF had 

not conducted third-party verifications of exported shipments.

For each of the prior audit’s recommendations, we assessed the action taken by 

ATF and evaluated whether the action met the intent of our recommendation.

Recommendation Summary Status Action Taken OIG Evaluation

Finding 1-1. The ATF 

Director should resolve the 

problem with the missing 

records for the 149 

tobacco shipments with 

potential tax liability 

totaling $65.6 million, 

including contacting 

manufacturers or export 

warehouse proprietors, if 

necessary. If the NRC 

cannot obtain adequate 

proof of export, action 

should be taken to collect 

taxes due.

Closed ATF reviewed a sample of 82 closed 

cases and requested copies of missing 

documents. ATF said export 

documentation was obtained for all 

the shipments and no additional taxes 

were collected.

We selected 34 of the 82 

shipments for review. ATF could 

not locate documentation for five 

of these shipments. When these 

records could not be located,we 

substituted five others. We 

reviewed the 34 shipments and 

concluded they had adequate 

documentation to support the 

exportations.

Finding 1-2 (first part). The 

ATF Director should 

reopen, review, and obtain 

necessary proof of 

exportation for 34 tobacco 

shipments with potential 

tax liability of $3.7 million 

for which no evidence of 

exportation had been 

received. If the NRC 

cannot obtain adequate 

proof of exportation, action 

should be taken to collect 

taxes due.

Closed ATF reviewed a sample of 11 

shipments identified during the original 

audit as having no proof of 

exportation. ATF said documentation 

was received and no additional taxes 

were collected.

We reviewed the 11 shipments. 

We found that 9 of the 11 

shipments had adequate proof of 

export, but the other 2 were 

missing documentation. We 

believe TTB needs to resolve the 

other two shipments.
Appendix 2

Summary, Status, Action Taken, And OIG Evaluation Of Prior Report 

Recommendations

Alcohol and Tobacco Export Controls Strengthened, But More Action Is 

Needed (OIG-04-028) Page 23

Recommendation Summary Status Action Taken OIG Evaluation

Finding 1-2 (second part). 

The ATF Director should 

reopen, review, and obtain 

necessary proof of 

exportation for 124 

tobacco shipments with 

potential tax liability of 

$7.9 million for which 

inadequate evidence of 

exportation was not 

available. If the NRC 

cannot obtain adequate 

proof of export, action 

should be taken to collect 

taxes due.

Closed ATF reviewed a sample of 17 

shipments identified during the original 

audit as having no proof of 

exportation. ATF said documentation 

was received and no additional taxes 

were collected.

We reviewed the 17 shipments. 

We found that 16 of the 17 

shipments had adequate proof of 

export, but the remaining shipment 

was missing documentation. We 

believe TTB needs to resolve the 

other shipment.

Finding 1-3. The ATF 

Director should reassess 

whether the 192 shipments 

that did not meet ATF’s 

documentation 

requirements with potential 

tax liability of $9.7 million 

should also be the subject 

of an assessment letter.

Closed ATF selected a sample of 44 export 

shipments for review and obtained 

export documentation by contacting 

the companies.

We reviewed a sample of 16 of the 

44 shipments. We determined that 

the adequate documentation had 

been obtained for those shipments.

Finding 1-4. The ATF 

Director should provide 

Tobacco Unit specialists 

with the training needed to 

ensure proper proof of 

export is received on all 

tobacco shipments. At a 

minimum, the training 

should cover the proper 

completion of the 

certificate of receipt on the 

notice of removal.

Closed ATF provided the specialists and 

clerks at NRC with copies of new 

guidance (a revised ATF Order 

5020.8A and Circular 2000-2, issued 

July 2002, which provides information 

on exportations and acceptable forms 

of proof). An NRC supervisor said 

these documents were discussed at 

supervisor-employee meetings.

We reviewed the revised guidance. 

Based on this guidance and 

discussions ATF indicated occurred 

at supervisor-employee meetings, 

we believe ATF has addressed the 

intent of the recommendation.

Finding 1-5. The ATF 

Director should require the 

Tobacco Unit supervisor to 

periodically review a sample 

of closed tobacco 

shipments to ensure the 

tobacco specialists properly 

processed the notices of 

removal.

Closed ATF said supervisory review changes 

were made. The supervisor reviewed 

for one year a random sample of 50 

percent of the unit’s work. The 

supervisor also performed an annual 

review of the specialists’ work and 

reviewed each month’s activity to 

determine if shipments were audited 

as required. The supervisor’s findings 

were included in the annual 

performance appraisals. ATF plans to 

continue this process.

We believe that increased 

supervisory review addresses the 

intent of our recommendation.
Appendix 2

Summary, Status, Action Taken, And OIG Evaluation Of Prior Report 

Recommendations

Alcohol and Tobacco Export Controls Strengthened, But More Action Is 

Needed (OIG-04-028) Page 24

Recommendation Summary Status Action Taken OIG Evaluation

Finding 2-1. The ATF 

Director should follow -up 

on the 25,548 open 

tobacco shipments and 

determine whether tobacco 

manufacturers and export 

warehouse proprietors 

submitted adequate proof 

of exportation and initiate 

assessment against those 

shipments that have not 

been properly certified.

Closed ATF said the Tobacco Unit specialists 

performed a reviewed of the 25,548 

open shipments with an aggregate tax 

value of $59 million for 1997 and 

1998. ATF’s Completion Certificate 

for this recommendation stated that 

5,448 shipments remained unresolved. 

These include 3,200 from 1997 with 

a potential tax value of about 

$3 million, which are beyond the 

statute of limitations for collection, 

and 2,248 shipments from 1998, with 

a tax value of about $24 million. 

Documentation was obtained for 

1,755 of the 2,248, with a potential 

tax value of about $23.98 million, for 

which NPAs were in process. The 

remaining 493, with a tax value of 

$66,893, remains unresolved.

We judgmentally selected a sample 

of 23 companies (12 tobacco 

plants and 11 export warehouses) 

that had open tobacco shipments 

during the prior audit. The 

companies accounted for about 

$10.7 million of the $59 million in 

potential tax liability. We requested 

current tracking logs for these 

companies, which indicate whether 

the export is open or closed. We 

compared the current tracking logs 

with the logs from the prior audit to 

determine if previously open 

shipments had been reviewed and 

closed. We found that ATF had 

closed shipments representing 

about $10.4 million of the 

$11 million in our sample. 

However, due to limited 

documentation, we could not 

determine whether ATF fully 

addressed the intent of the 

recommendation.

Finding 2-2. The ATF 

Director should establish 

controls to ensure Tobacco 

Unit specialists properly 

monitor open notices of 

removal listed in the 

tracking logs. 

Consideration should be 

given to developing an 

automated tracking system 

that begins assessment 

action on all shipments not 

cleared within 90 days.

Open ATF’s Tobacco Unit requires 

specialists to maintain by company 

monthly export transactions the 

company processed during the month. 

Tobacco Unit supervisors review these 

spreadsheets to ensure specialists 

properly processed notices of removal. 

Controls include quarterly reports from 

the supervisor to specialists informing 

them of dates to conduct reviews, 

requirement that specialists work one 

day per week on exports, supervisory 

review, and quarterly reviews. ATF 

did not obtain funding for an 

automated system.

We believe TTB should develop an 

automated system to allow 

companies to electronically submit 

export documentation and to allow 

the bureau to track export 

documentation status.
Appendix 2

Summary, Status, Action Taken, And OIG Evaluation Of Prior Report 

Recommendations

Alcohol and Tobacco Export Controls Strengthened, But More Action Is 

Needed (OIG-04-028) Page 25

Recommendation Summary Status Action Taken OIG Evaluation

Finding 3-1. The ATF 

Director should ensure ATF 

conducts third-party 

verifications of tax-free 

tobacco exports.

Closed In September 2000, ATF initiated 

mailing of third-party verification 

letters. The procedure called for 

contacting the industry member 

should a discrepancy be found. 

Failure to resolve the discrepancy 

satisfactorily would result in 

assessment action. Although ATF 

developed a standard letter, ATF 

mailed only four letters before 

terminating the procedure. ATF had 

received confirmation on two of the 

four shipments. ATF was concerned 

about customers mailing letters at 

their own expense.

We believe TTB needs to revisit this 

recommendation and consider other 

options.

.
Appendix 3

Management Comments

Alcohol and Tobacco Export Controls Strengthened, But More Action Is 

Needed (OIG-04-028) Page 26
Appendix 3

Management Comments

Alcohol and Tobacco Export Controls Strengthened, But More Action Is 

Needed (OIG-04-028) Page 27
Appendix 4

Major Contributors To This Report

Alcohol and Tobacco Export Controls Strengthened, But More Action Is 

Needed (OIG-04-028) Page 28

Eastern Field Audit Office

Donald P. Benson, Director

Dennis F. Deely, Audit Manager

N. Randy Gettmann, Auditor
Appendix 5

Report Distribution

Alcohol and Tobacco Export Controls Strengthened, But More Action Is 

Needed (OIG-04-028) Page 29

Department of the Treasury

Office of Strategic Planning and Evaluations

Office of Accounting and Internal Controls 

Alcohol and Tobacco Tax and Trade Bureau 

Administrator

Assistant Administrator, Field Operations

Chief, National Revenue Center

Chief of Staff

Office of Management and Budget

OIG Budget Examiner