Legislature(2013 - 2014)HOUSE FINANCE 519

04/06/2013 04:30 PM House LEGISLATIVE BUDGET & AUDIT


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04:33:47 PM Start
04:34:29 PM Approval of Minutes
04:34:51 PM Executive Session
05:17:04 PM Release of Audits
05:17:30 PM Overview: Oil and Gas Production Tax Audits - Department of Revenue
06:09:32 PM Audit Request
06:19:31 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Time Change from 9:00 a.m. --
Audits - Executive Session
- Dept. of Transportation & Public Facilities,
Knik Arm Bridge & Toll Authority, Select Issues:
Final Release
+ Other Committee Business TELECONFERENCED
- Overview: Oil & Gas Production Tax Audits by
Dept. of Revenue
- Consideration of Audit Request by Sen. French
                    ALASKA STATE LEGISLATURE                                                                                  
             LEGISLATIVE BUDGET AND AUDIT COMMITTEE                                                                           
                         April 6, 2013                                                                                          
                           4:33 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Anna Fairclough, Chair                                                                                                  
Senator Kevin Meyer                                                                                                             
Senator Click Bishop                                                                                                            
Senator Cathy Giessel                                                                                                           
Senator Donald Olson                                                                                                            
                                                                                                                                
Representative Mike Hawker, Vice Chair                                                                                          
Representative Alan Austerman                                                                                                   
Representative Bob Herron                                                                                                       
Representative Kurt Olson                                                                                                       
Representative Andy Josephson                                                                                                   
Representative Scott Kawasaki (alternate)                                                                                       
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Mike Dunleavy (alternate)                                                                                               
Representative Bill Stoltze (alternate)                                                                                         
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Representative Les Gara                                                                                                         
Representative Mike Chenault                                                                                                    
Representative Chris Tuck                                                                                                       
Representative Beth Kerttula                                                                                                    
Representative Jonathan Kreiss-Tomkins                                                                                          
                                                                                                                                
Senator Bert Stedman                                                                                                            
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
APPROVAL OF MINUTES                                                                                                             
EXECUTIVE SESSION                                                                                                               
RELEASE OF AUDITS                                                                                                               
OVERVIEW:  OIL AND GAS PRODUCTION TAX AUDITS - DEPARTMENT OF                                                                    
REVENUE                                                                                                                         
AUDIT REQUEST                                                                                                                   
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to record                                                                                                    
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
BRUCE TANGEMAN, Deputy Commissioner                                                                                             
Office of the Commissioner                                                                                                      
Department of Revenue (DOR)                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:   Testified and answered  questions during an                                                             
overview on the oil and gas production tax process.                                                                             
                                                                                                                                
MATTHEW FONDER, Director                                                                                                        
Anchorage Office                                                                                                                
Tax Division                                                                                                                    
Department of Revenue (DOR)                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:   Testified and answered  questions during an                                                             
overview on the oil and gas production tax process.                                                                             
                                                                                                                                
LENNIE DEES, Audit Master                                                                                                       
Production Audit Group                                                                                                          
Tax Division                                                                                                                    
Department of Revenue (DOR)                                                                                                     
Anchorage, Alaska                                                                                                               
POSITION   STATEMENT:     Answered  questions   during  the   DOR                                                             
presentation.                                                                                                                   
                                                                                                                                
SENATOR HOLLIS FRENCH                                                                                                           
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION  STATEMENT:   Presented a  request for  an audit  to the                                                             
effectiveness  of   the  Department   of  Revenue  oil   and  gas                                                               
production tax audit process.                                                                                                   
                                                                                                                                
KRISTIN CURTIS                                                                                                                  
Legislative Auditor                                                                                                             
Legislative Audit Division                                                                                                      
Alaska State Legislature                                                                                                        
Juneau, Alaska                                                                                                                  
POSITION STATEMENT:  Provided information on the audit request.                                                               
                                                                                                                                
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
4:33:47 PM                                                                                                                    
                                                                                                                                
CHAIR  ANNA FAIRCLOUGH  called the  Legislative Budget  and Audit                                                             
Committee  meeting  to  order  at   4:33  p.m.    Representatives                                                               
Austerman, Herron,  Olson, Josephson,  Kawasaki, and  Hawker, and                                                               
Senators  Fairclough,  Meyer,  Bishop, Giessel,  and  Olson  were                                                               
present  at  the  call  to   order.    Also  in  attendance  were                                                               
Representatives Chenault,  Tuck, Gara, and Kerttula,  and Senator                                                               
Stedman.                                                                                                                        
                                                                                                                                
^Approval of Minutes                                                                                                          
                      Approval of Minutes                                                                                   
                                                                                                                              
4:34:29 PM                                                                                                                    
                                                                                                                                
CHAIR  FAIRCLOUGH  announced that  the  first  order of  business                                                               
would be the approval of the minutes.                                                                                           
                                                                                                                                
4:34:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER  made a  motion to  approve the  minutes of                                                               
March 28, 2013.   There being no objection, the  minutes from the                                                               
meeting of March 28, 2013 were approved.                                                                                        
                                                                                                                                
^Executive Session                                                                                                            
                       Executive Session                                                                                    
                                                                                                                              
4:34:51 PM                                                                                                                    
                                                                                                                                
CHAIR FAIRCLOUGH announced that the  next order of business would                                                               
be to move into Executive Session.                                                                                              
                                                                                                                                
4:34:56 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER made a motion  to move to executive session                                                               
for the  purpose of discussing  confidential audit  reports under                                                               
AS 24.20.301.  There being  no objection, the committee went into                                                               
executive session at 4:35 p.m.                                                                                                  
                                                                                                                                
4:35:13 PM                                                                                                                    
                                                                                                                                
The committee took an at-ease from 4:35 p.m. to 5:16 p.m.                                                                       
                                                                                                                                
5:16:19 PM                                                                                                                    
                                                                                                                                
CHAIR  FAIRCLOUGH brought  the committee  back to  order at  5:16                                                               
p.m.    Representatives   Austerman,  Herron,  Olson,  Josephson,                                                               
Kawasaki (alternate) and Hawker,  and Senators Fairclough, Meyer,                                                               
Bishop,  Giessel, and  Olson were  present  at the  call back  to                                                               
order.    Also in  attendance  were  Representatives Tuck,  Gara,                                                               
Kerttula, and Kreiss-Tomkins, and Senator Stedman.                                                                              
                                                                                                                                
5:16:51 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HAWKER  asked   to  clarify  that  Representative                                                               
Chenault  had left  prior to  the  meeting being  called back  to                                                               
order.                                                                                                                          
                                                                                                                                
^Release of Audits                                                                                                            
                       Release of Audits                                                                                    
                                                                                                                              
5:17:04 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER made  a motion for the final  audit for the                                                               
Department  of  Transportation  &  Public  Facilities,  Knik  Arm                                                               
Bridge  and  Toll Authority,  Knik  Arm  Crossing Project  to  be                                                               
released to the  public for response.  There  being no objection,                                                               
it was so ordered.                                                                                                              
                                                                                                                                
^Overview:   Oil and  Gas Production Tax  Audits -  Department of                                                             
Revenue                                                                                                                       
  Overview:  Oil and Gas Production Tax Audits - Department of                                                              
                            Revenue                                                                                         
                                                                                                                              
5:17:30 PM                                                                                                                    
                                                                                                                                
CHAIR FAIRCLOUGH announced that the  next order of business would                                                               
be  an Overview  on  Oil and  Gas Production  Tax  Audits by  the                                                               
Department of Revenue (DOR).                                                                                                    
                                                                                                                                
5:18:16 PM                                                                                                                    
                                                                                                                                
CHAIR FAIRCLOUGH  explained that, as  there was an  audit request                                                               
before  the  Legislative  Budget  and Audit  Committee,  she  was                                                               
extending this  opportunity to DOR  to explain its  processes and                                                               
"enlighten  the committee  why we  would or  would not"  continue                                                               
with this request.                                                                                                              
                                                                                                                                
5:18:33 PM                                                                                                                    
                                                                                                                                
BRUCE TANGEMAN, Deputy Commissioner,  Office of the Commissioner,                                                               
Department of  Revenue (DOR), declared  that there were a  lot of                                                               
misconceptions  and  confusions  regarding  the  definitions  for                                                               
financial and  performance audits.  He  explained that statements                                                               
regarding  the DOR  audits for  2007 gave  people the  impression                                                               
that DOR  had "absolutely  no clue what  happened in  2008, 2009,                                                               
2010, 11, and 12, and that  could not be further from the truth."                                                               
He  said there  was a  vast  amount of  tax information  received                                                               
monthly  by the  department  from the  oil  companies, which  had                                                               
given  DOR  a  great  amount  of information  from  2008  to  the                                                               
present.  He stated that the  information for the final audit was                                                               
"in-hand, has  been analyzed, and  we will proceed a  lot quicker                                                               
once we're  through 2007."  He  noted that the years  of 2008 and                                                               
2009 would  be combined, and  he offered to discuss  the internal                                                               
details  for  a  financial  audit, and  examine  the  differences                                                               
between a performance audit and a financial audit.                                                                              
                                                                                                                                
5:20:09 PM                                                                                                                    
                                                                                                                                
CHAIR FAIRCLOUGH  asked if  he would  address the  audit findings                                                               
from prior  years, as  there could be  questions.   She suggested                                                               
that  the  committee listen  to  the  presentation before  asking                                                               
questions.                                                                                                                      
                                                                                                                                
5:21:14 PM                                                                                                                    
                                                                                                                                
MATTHEW  FONDER,   Director,  Anchorage  Office,   Tax  Division,                                                               
Department  of Revenue  (DOR),  presented  a PowerPoint  entitled                                                               
"Production  Tax Audits."   [Included  in members'  packets]   He                                                               
reported that this would be a  step by step presentation to share                                                               
the  process  for  the  review  of oil  and  gas  production  tax                                                               
returns.    He  directed  attention  to slide  2,  "Oil  and  Gas                                                               
Production Tax Processes,"  which was an overview  of the monthly                                                               
process  for auditors.   He  read:   "Oil and  Gas Producers  are                                                               
required to make monthly installment  payments of estimated taxes                                                               
and surcharges to  the Department."  He said  that both explorers                                                               
and  producers  were  required   to  submit  monthly  information                                                               
reports to DOR in accordance  with statutes and regulations.  The                                                               
economic group  would then analyze this  monthly information, and                                                               
use this information  to answer any questions from  the public or                                                               
the  legislature.   He reported  that the  tax technicians  would                                                               
review and  document all  the monthly  tax payer  information and                                                               
would  assist the  accounting group  to  ensure the  oil and  gas                                                               
revenues were properly accounted for and recorded.                                                                              
                                                                                                                                
5:22:47 PM                                                                                                                    
                                                                                                                                
MR.  FONDER moved  on to  slide 3,  "Oil and  Gas Production  Tax                                                               
Processes  (continued)", and  spoke about  the annual  processes.                                                               
He noted that  by March 31, all  the oil and gas  tax returns and                                                               
other information  had to be received  by DOR.  He  declared that                                                               
this filing  was a  "true-up" of  the twelve  previously received                                                               
monthly payments.   He explained that the March  tax filings were                                                               
immediately reviewed  by oil and  gas production tax  auditors, a                                                               
process  which often  took many  months for  verification of  the                                                               
information.   He noted that a  full audit would take  place at a                                                               
later date.   He mentioned that the State of  Alaska did not have                                                               
to  pay any  interest on  overpayments of  estimated tax,  if the                                                               
overpayment was returned within ninety days.                                                                                    
                                                                                                                                
5:25:06 PM                                                                                                                    
                                                                                                                                
MR.    FONDER   pointed    to    slide    4,   "Production    Tax                                                               
Audits/Assessments."   He  explained that  production tax  audits                                                               
were not performance  audits, and were not  utilized to determine                                                               
if a  statute was "working,"  as this was not  a role of  the Tax                                                               
Division.   He  declared  that the  purpose of  the  oil and  gas                                                               
production tax  audit was to  ensure that the taxpayer  had filed                                                               
and paid the appropriate amount  of production tax as required by                                                               
the statutes  and regulations.  He  noted that the amount  of tax                                                               
must  be assessed  within  six  years after  the  tax return  was                                                               
filed.   He  reported that  DOR often  received amended  returns,                                                               
which would  then start the clock  for another six years  on that                                                               
specific issue.   He noted that amended returns for  the 2007 tax                                                               
returns had  been coming in until  December, 2010.  He  said that                                                               
taxpayers had  the right  of appeal to  an audit  assessment, and                                                               
that the process began in the  Tax Division.  He said, "generally                                                               
speaking, our oil and gas  production tax assessments have ranged                                                               
from a  refund of $5  million to  an assessment of  $82.5 million                                                               
over the last  five years.  For comparison purposes,  in the year                                                               
that we  assessed $82.5  million, FY 11,  we collected  over $4.5                                                               
billion in  production tax revenues.   The assessments for  FY 11                                                               
were less than  two percent of the total  production tax revenues                                                               
received for that year."                                                                                                        
                                                                                                                                
5:27:46 PM                                                                                                                    
                                                                                                                                
MR.    FONDER    introduced     slide    5,    "Production    Tax                                                               
Audits/Assessments (continued)."  He explained  that, due to high                                                               
interest  and  penalty provisions,  there  was  an incentive  for                                                               
taxpayers to  be accurate on  the estimated monthly  payments and                                                               
tax return filings.  He  clarified that the department most often                                                               
issued an  assessment because the  taxpayer and DOR  disagreed as                                                               
to  how the  statutes applied  to a  certain set  of facts.   The                                                               
assessment was then  subject to the appeals  process, which began                                                               
in the  Tax Division,  and could be  appealed through  the Alaska                                                               
Supreme Court, often taking months or years.                                                                                    
                                                                                                                                
5:28:38 PM                                                                                                                    
                                                                                                                                
MR. FONDER presented slide 6,  "Oil and Gas Production Tax Credit                                                               
Processes,"  and stated  that, as  there  was no  time frame  for                                                               
filing credit  applications, DOR  was working on  them throughout                                                               
the  year.   He declared  that  all the  tax credit  applications                                                               
underwent a  due diligence review  prior to granting  the credit.                                                               
He  emphasized that  these reviews  were often  as detailed  as a                                                               
full audit.   He noted that  all alternative credits for  oil and                                                               
gas exploration  underwent a  full audit  prior to  being issued.                                                               
He  observed that  expenditures which  supported credits  applied                                                               
against  a tax  liability were  audited at  the time  of the  tax                                                               
return.                                                                                                                         
                                                                                                                                
5:29:43 PM                                                                                                                    
                                                                                                                                
MR.  FONDER acknowledged  slide  7, "Confidentiality,"  declaring                                                               
that the Tax  Division was required to  hold taxpayer information                                                               
confidential, and was unable to  discuss any specific information                                                               
contained in any  given audit or assessment.  He  shared that any                                                               
statistical information aggregated among  three or more taxpayers                                                               
would be  released for  publication in  the Revenue  Sources Book                                                               
and the Annual Report.  However,  the Tax Division was allowed to                                                               
share   taxpayer  specific   information   with  legislators   in                                                               
executive  session  as  long  as  the  necessary  confidentiality                                                               
agreements were  signed.  He  offered his belief that  this offer                                                               
for discussion in executive session had never been requested.                                                                   
                                                                                                                                
5:30:47 PM                                                                                                                    
                                                                                                                                
MR. FONDER  reviewed slide 8,  "Audit Effectiveness,"  and stated                                                               
that the next slides addressed the  points in the request for the                                                               
audit of DOR.                                                                                                                   
                                                                                                                                
5:31:15 PM                                                                                                                    
                                                                                                                                
The committee took a brief at-ease.                                                                                             
                                                                                                                                
5:31:29 PM                                                                                                                    
                                                                                                                                
CHAIR FAIRCLOUGH brought the committee back to order.                                                                           
                                                                                                                                
5:31:36 PM                                                                                                                    
                                                                                                                                
MR. FONDER stated that this  slide addressed audit effectiveness,                                                               
noting  that the  Tax Division  conducted a  full audit  on every                                                               
production tax return filed with a  tax liability.  He noted that                                                               
a full  audit was  also performed on  all exploration  claims for                                                               
credit, before  the credit  certificate was  issued.   He offered                                                               
his belief that the timeliness for  ACES audits was not an issue,                                                               
as  DOR had  six years  to conduct  the audit,  and had  not ever                                                               
missed a  deadline.   He explained that,  in 2007,  taxpayers had                                                               
agreed to  extend the statute  of limitations for  the production                                                               
tax  audits  of  filings.     He  offered  his  belief  that  low                                                               
assessments were good, as it  signified a better understanding of                                                               
the tax system and better voluntary compliance by taxpayers.                                                                    
                                                                                                                                
5:33:07 PM                                                                                                                    
                                                                                                                                
MR. FONDER  explained slide 9, "Impediments  of ACES/PPT Audits,"                                                               
directing  attention to  the formula  and the  necessary data  to                                                               
arrive  at the  tax due  under  the economic  limit factor  (ELF)                                                               
taxation.   He ascertained that the  gross value at the  point of                                                               
production (GVPP)  was a result  of taxable volume  multiplied by                                                               
taxable value.   He noted that  the taxable value was  defined as                                                               
the destination  value after subtracting the  marine tanker cost,                                                               
pipeline tariffs,  and quality bank  adjustments.   The resulting                                                               
GVPP was  multiplied by the  ELF rate,  which was less  than one;                                                               
this result  was multiplied  by the tax  rate, which  equaled the                                                               
monthly production tax.   After the credits  were subtracted, and                                                               
the conservation surcharges were added,  the result was the total                                                               
tax due.                                                                                                                        
                                                                                                                                
5:34:11 PM                                                                                                                    
                                                                                                                                
MR.  FONDER  commented  on slide  10,  "Impediments  of  ACES/PPT                                                               
Audits,  (continued.)"   He  noted the  amount  of data  received                                                               
under Alaska's Clear & Equitable  Share (ACES), and explained the                                                               
tax calculation formula.  He explained  that the GVPP was again a                                                               
result  of  taxable volume  multiplied  by  taxable value.    The                                                               
taxable value  was now defined as  the volume of taxable  oil and                                                               
gas produced times the wellhead  value, which was the sales price                                                               
minus  the transportation  costs  and  quality bank  adjustments.                                                               
From the  resulting GVPP, one-twelfth  of the total  annual lease                                                               
expenditures,  the  combined   capital  expenditure  (CAPEX)  and                                                               
operating expenditure  (OPEX), was subtracted and  the result was                                                               
the monthly  production tax  value (PTV).   The  PTV was  used to                                                               
calculate the monthly progressivity tax  when the PTV was greater                                                               
than $30 per barrel.  The  monthly PTV was then multiplied by the                                                               
base tax rate  to equal the base tax.   The monthly progressivity                                                               
and the base  tax were added to equal the  monthly production tax                                                               
due.   Credits were  subtracted from  the monthly  production tax                                                               
due,  resulting  in  the  annual   tax  due.    The  conservation                                                               
surcharges were  then added  to the annual  tax due  resulting in                                                               
the total tax due under the ACES taxation system.                                                                               
                                                                                                                                
5:35:18 PM                                                                                                                    
                                                                                                                                
MR. FONDER  provided slide 11,  "Impediments of  ACES/PPT Audits,                                                               
(continued)" and  explained some  of the  data that  DOR received                                                               
for  review  during  an  ACES   audit.    He  stated  that  lease                                                               
expenditures contained much of the  information in an ACES audit,                                                               
and the  expenditures included  the Taxpayers  Accounting System,                                                               
as  all taxpayers  had accounting  systems where  the information                                                               
necessary to  file the tax  returns was maintained.   These lease                                                               
expenditures also included joint  interest billings (JIBs), which                                                               
were detailed  billings of all  monthly expenditures made  by the                                                               
unit operator  and sent to  each of the working  interest owners.                                                               
These  were also  submitted by  each  owner and  reviewed in  the                                                               
audit process.   He noted that  each JIB could exceed  300 pages,                                                               
dependent on the size of the project.                                                                                           
                                                                                                                                
5:36:47 PM                                                                                                                    
                                                                                                                                
MR. FONDER  addressed slide 12, "Impediments  of ACES/PPT Audits,                                                               
(continued)"   declaring   that   there   were   exclusions   and                                                               
adjustments  to  the  JIBs,  as  certain  expenditures  were  not                                                               
allowed as lease expenditures under  state statute.  Often, these                                                               
adjustments  to billed  expenditures were  made according  to the                                                               
taxpayer's interpretation of the statutes,  and, as these did not                                                               
always  include detailed  documentation for  the exclusions,  the                                                               
reconciliation could be a very time consuming process.                                                                          
                                                                                                                                
5:37:39 PM                                                                                                                    
                                                                                                                                
MR. FONDER  presented slide 13, "Impediments  of ACES/PPT Audits,                                                               
(continued),"  and  discussed  the Joint  Account  Data  Exchange                                                               
(JADE), which  could contain  millions of lines  of data  for one                                                               
unit.    He  reported  that  this  data  was  captured  and  sent                                                               
electronically  by the  unit operator  to  each working  interest                                                               
owner,  and it  contained references  to source  documents, which                                                               
were sometimes used  by the taxpayer in support  of claimed lease                                                               
expenditures.   He referred to the  Authorization for Expenditure                                                               
(AFE), sharing that  there could be hundreds  of these documents,                                                               
also  referred to  as  "Cost Center"  projects,  during an  audit                                                               
period.     He   explained  that   the  AFE's   provided  project                                                               
descriptions  and helped  the auditors  determine where  to focus                                                               
audit resources.                                                                                                                
                                                                                                                                
5:38:38 PM                                                                                                                    
                                                                                                                                
MR. FONDER  indicated slide 14, "Impediments  of ACES/PPT Audits,                                                               
(continued),"  and stated  that  invoices in  support of  claimed                                                               
expenditures, often  in excess of one  million transactions, were                                                               
examined to  identify whether lease expenditures  were allowable.                                                               
He confirmed  that data  was received  from other  state agencies                                                               
during  the audit  process, including  plans  of development  and                                                               
plans of operation, and that this data was also reviewed.                                                                       
                                                                                                                                
5:39:42 PM                                                                                                                    
                                                                                                                                
MR. FONDER  assessed slide 15,  "Impediments of  ACES/PPT Audits,                                                               
(continued),"  and  stated  that  information  from  other  state                                                               
agencies  was manually  incorporated into  the audit  work papers                                                               
and  used by  the auditors  for cost  and project  analysis.   He                                                               
noted that  volume data was  reported by  the Alaska Oil  and Gas                                                               
Conservation  Commission  (AOGCC)  which  would  show  swings  in                                                               
production that  would assist auditors in  identifying conditions                                                               
to cause changes in expenditures.                                                                                               
                                                                                                                                
5:40:20 PM                                                                                                                    
                                                                                                                                
MR.  FONDER  declared that  slide  16,  "Impediments of  ACES/PPT                                                               
Audits, (continued)"  listed the  complexity of  this new  tax in                                                               
2007, and  had required  training of the  auditors, as  there was                                                               
not any  institutional knowledge.   He pointed to the  changes in                                                               
the tax  laws since the  implementation of ACES, and  pointed out                                                               
that  the  audit  staff  also   had  additional  projects,  which                                                               
included:   desk reviews, credit reports,  due diligence reviews,                                                               
updates to processes, and support for annual legislative audits.                                                                
                                                                                                                                
MR. FONDER  introduced slide 17, "Audit  Staff Qualifications and                                                               
Experience,"  which  offered a  snapshot  of  the production  tax                                                               
audit  group:   19  employees,  with  3 supervisors,  8  auditors                                                               
dedicated  to  production tax  audits,  6  auditors dedicated  to                                                               
credit  audits, and  2 tax  technicians.   He  reported that  the                                                               
average  oil and  gas production  tax audit  experience for  this                                                               
group was 5.5 years for the  production group, and 4.25 years for                                                               
the credit  group, although many  of the auditors  had experience                                                               
outside of oil and gas production taxes.                                                                                        
                                                                                                                                
5:43:53 PM                                                                                                                    
                                                                                                                                
MR. FONDER  indicated slide 18,  "Audit Staff  Qualifications and                                                               
Experience (continued)," which  listed the minimum qualifications                                                               
for  an oil  and gas  revenue auditor  (OGRA) 1,  and included  a                                                               
bachelor's  degree  in  accounting  or finance,  or  a  certified                                                               
public accountant certificate.                                                                                                  
                                                                                                                                
5:44:26 PM                                                                                                                    
                                                                                                                                
MR. FONDER moved on to  slide 19, "Audit Staff Qualifications and                                                               
Experience (continued)"  which listed the  minimum qualifications                                                               
for an oil  and gas revenue auditor (OGRA) 4,  and he stated that                                                               
there was no  substitute for the required experience  of at least                                                               
two  years professional  experience auditing  and examining  data                                                               
specific to the oil and gas industry.                                                                                           
                                                                                                                                
5:45:17 PM                                                                                                                    
                                                                                                                                
MR. FONDER offered  a comparison to the audit group  when ELF was                                                               
the  tax  program,  slide 20,  "Audit  Staff  Qualifications  and                                                               
Experience (continued)."   He noted  that under ELF there  were 9                                                               
full  time employees,  with  1 supervisor  and  6 production  tax                                                               
auditors, no  credit auditors,  and 2 tax  technicians.   He said                                                               
that the  experience had been for  more than 18 years  of oil and                                                               
gas production tax audit experience.   He reported that, in 2006,                                                               
the production  tax audit group  had nearly 100  percent turnover                                                               
due to attrition, retirement, and transfers.                                                                                    
                                                                                                                                
5:46:12 PM                                                                                                                    
                                                                                                                                
MR. FONDER said that production  tax audit methodology under ACES                                                               
was  unique,  although it  did  bear  similarities to  the  audit                                                               
methodologies that  were utilized in  other tax types,  slide 21,                                                               
"Audit  Methodology."   He  explained the  process:   first,  the                                                               
auditors determined if producers  and explorers had complied with                                                               
the monthly and  annual reporting requirements for  the tax year;                                                               
second,  they  would  ensure  that   all  the  necessary  monthly                                                               
installment payments  were timely; third, they  would verify that                                                               
each  taxpayer liability  was properly  calculated; fourth,  they                                                               
would confirm  that documentation existed to  support claims made                                                               
on  the  tax  return;  and,   finally,  they  would  issue  audit                                                               
assessments  well  within  the  statute  of  limitations  and  in                                                               
accordance with the statutes and regulations.                                                                                   
                                                                                                                                
5:47:12 PM                                                                                                                    
                                                                                                                                
MR. FONDER  introduced slide 22,  "Status of Audits,"  and stated                                                               
that the Tax Division was finalizing  the audits for the 2007 oil                                                               
and  gas production  tax  returns.   He  pointed  out that  these                                                               
returns  had initially  been filed  on March  31, 2008,  and that                                                               
there  had  been  numerous  amended returns.    He  assessed  the                                                               
complexity as  only half of  that tax  year had been  under ACES.                                                               
He expressed anticipation  for the completion of  the 2007 audits                                                               
by late  summer or early  fall, 2013,  which was well  within the                                                               
statute of limitations, and he  reported that the staff had begun                                                               
work on  the 2008 and  2009 tax  years for those  taxpayers whose                                                               
2007 audits were complete.   He conveyed that, going forward, the                                                               
Tax  Division  would combine  two  tax  years  in one  audit  for                                                               
certain taxpayers.                                                                                                              
                                                                                                                                
5:48:22 PM                                                                                                                    
                                                                                                                                
MR.  FONDER concluded  the PowerPoint  with slide  23, "Summary,"                                                               
and declared  that, as  ACES was  a unique  and complex  tax type                                                               
that  consisted of  both  taxes and  credits,  the auditors  were                                                               
split into groups to audit the  tax and the credits.  He reported                                                               
that  the Tax  Division was  in  the process  of implementing  an                                                               
integrated   system,  as   everything   was  currently   reviewed                                                               
manually.     He  disclosed  that  the   Tax  Division  routinely                                                               
conducted in-house  training and workshops to  keep up-to-date on                                                               
the changes to the tax code.   He informed the committee that the                                                               
Tax  Division   continued  to  refine  its   audit  policies  and                                                               
procedures.                                                                                                                     
                                                                                                                                
5:49:49 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON asked if the March  31 true up was on time,                                                               
as referenced on slide 3.                                                                                                       
                                                                                                                                
5:50:02 PM                                                                                                                    
                                                                                                                                
MR. FONDER replied that it was on time.                                                                                         
                                                                                                                                
REPRESENTATIVE HERRON  asked if  the six years  currently allowed                                                               
for an audit to a tax  return, slide 4, should be reconsidered or                                                               
renewed.                                                                                                                        
                                                                                                                                
5:50:31 PM                                                                                                                    
                                                                                                                                
MR. TANGEMAN replied  that, although the six year  time frame was                                                               
comfortable,  a  new revenue  management  system  and more  staff                                                               
experience would speed up the process.                                                                                          
                                                                                                                                
5:50:53 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON  asked if the statutory  requirement should                                                               
be reconsidered and possibly lowered.                                                                                           
                                                                                                                                
MR.  TANGEMAN  suggested that  it  be  reviewed sometime  in  the                                                               
future.                                                                                                                         
                                                                                                                                
5:51:12 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON,  referencing slides  21 and  22, opined                                                               
that, currently,  the entire  six years  for an  audit assessment                                                               
were being used.                                                                                                                
                                                                                                                                
MR. FONDER  replied that  the 2007 tax  audits would  be finished                                                               
more than six months prior to  the six year deadline, in contrast                                                               
to  completion  of  the  audit assessments  during  the  ELF  tax                                                               
system, which often took longer than the statute of limitations.                                                                
                                                                                                                                
5:52:40 PM                                                                                                                    
                                                                                                                                
MR. TANGEMAN explained that the state  move from a gross tax to a                                                               
net tax  was "a  huge change  in the  way you  do business."   He                                                               
offered his belief  that it was impressive to  have completed the                                                               
audits within  the six  year deadline, as  the processes  had all                                                               
been manual;  he stated  that the  new revenue  management system                                                               
would make the  process much quicker.  He said  the process would                                                               
always take at least a year.                                                                                                    
                                                                                                                                
5:54:00 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON, reflecting  on the litigation, dispute,                                                               
and complicated hearings during ELF,  opined that the ELF returns                                                               
were not necessarily the easy route.                                                                                            
                                                                                                                                
5:54:28 PM                                                                                                                    
                                                                                                                                
MR. FONDER deferred to Mr. Lennie Dees.                                                                                         
                                                                                                                                
5:55:04 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   JOSEPHSON  asked   about   the  litigation   and                                                               
administrative hearings for ELF during  the time period from 1987                                                               
through  the mid-1990s,  offering his  belief that  it was  not a                                                               
"perfect streamlined auditing process."                                                                                         
                                                                                                                                
LENNIE DEES, Audit Master, Production  Audit Group, Tax Division,                                                               
Department of  Revenue (DOR), offered  his belief that  there was                                                               
disagreement  surrounding specific  issues for  tariff rates  and                                                               
the calculation of ELF.  He  said that ACES was much more complex                                                               
than ELF.   He compared that ACES stacked a  net tax component on                                                               
the ELF  system and,  with its  many moving  parts, added  to the                                                               
complexity  for the  issues which  could be  contested during  an                                                               
audit.                                                                                                                          
                                                                                                                                
5:57:09 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOSEPHSON asked  if  Mr.  Fonder was  comfortable                                                               
with the number of staff necessary to do the job.                                                                               
                                                                                                                                
MR. FONDNER  offered his  belief that  more staff  positions were                                                               
proposed in the governor's budget for FY14.                                                                                     
                                                                                                                                
MR. TANGEMAN elaborated  that an additional audit  master, an oil                                                               
and gas  auditor, and  five part-time  positions for  revenue and                                                               
capital budget were in the budget request.                                                                                      
                                                                                                                                
MR. TANGEMAN,  in response  to Chair  Fairclough, said  that they                                                               
were not  yet funded equally on  both sides, so that  it could be                                                               
an issue for the conference committee to discuss.                                                                               
                                                                                                                                
5:59:17 PM                                                                                                                    
                                                                                                                                
SENATOR BISHOP,  expressing his understanding for  the difficulty                                                               
of maintaining staff,  pointed out that funding  for auditors had                                                               
been increased  and asked if  this would  work to keep  the staff                                                               
longer.                                                                                                                         
                                                                                                                                
MR. FONDER  expressed his hope  for staff longevity,  noting that                                                               
staff  did leave  for different  reasons.   He noted  that "state                                                               
government is often the training grounds for private industry."                                                                 
                                                                                                                                
MR. TANGEMAN  added that the  division was now fully  staffed for                                                               
the first time in quite a while.                                                                                                
                                                                                                                                
6:01:27 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HAWKER declared  that  the  state auditor,  while                                                               
conducting  the  Statewide  Single Audit,  had  identified  that,                                                               
since  FY08,  the internal  accounting  and  audit controls  over                                                               
production  taxes  in DOR  had  been  identified for  significant                                                               
deficiencies.    He allowed  that  turnover  "is usually  a  huge                                                               
indicator of  larger systemic problems."   He  directed attention                                                               
to  recommendation #5  of the  Statewide Single  Audit for  2013,                                                               
which reflected  DOR agreement with the  legislative audit report                                                               
of a need for implementation  of controls to improve auditing oil                                                               
and gas severance tax revenues.                                                                                                 
                                                                                                                                
MR. TANGEMAN replied that he did concur with that assessment.                                                                   
                                                                                                                                
REPRESENTATIVE  HAWKER,  noting  that his  interest  in  auditing                                                               
procedures and  the DOR were  "probably 180 degrees  from Senator                                                               
French's," declared that he had  "personal, serious concerns with                                                               
both  what it  appears to  be technical  areas of,  perhaps, less                                                               
than  appropriate   audit  procedures."     He  cited   that  the                                                               
assessment of  related audit files had  revealed that supervisory                                                               
reviews  by the  audit tax  master were  not documented,  and the                                                               
supervisor  review check  list was  consistently incomplete.   He                                                               
declared this to  be a fundamental process and  procedure for the                                                               
foundation of an  audit process, and he expressed,  "I have great                                                               
concerns."   He  asked if  the audit  team was  peer reviewed  by                                                               
other than the state auditor during the statewide single audit.                                                                 
                                                                                                                                
MR. FONDER  offered his belief that  there was not a  peer review                                                               
by  anyone outside  of the  Legislative Audit  Division; however,                                                               
this review was conducted annually.                                                                                             
                                                                                                                                
REPRESENTATIVE  HAWKER  recalled  hearing absolute  assurance  in                                                               
2007, from the director of  the Tax Division and the commissioner                                                               
of DOR  at that time,  that there was not  a problem to  meet the                                                               
obligations  for writing  regulations  and  completing audits  on                                                               
schedule  for ACES.   He  allowed that,  although Mr.  Fonder had                                                               
"inherited  the job,"  the deficiencies  had  been identified  as                                                               
ongoing for  years and  there was  still not a  peer review.   He                                                               
expressed  his  concern for  the  inaccurate  responses from  DOR                                                               
auditors during a recent meeting  of the House Resources Standing                                                               
Committee,  and  for   the  interpretation,  implementation,  and                                                               
utilization of JIBs in the audit  process.  He shared his concern                                                               
for   the    implementation   of   DOR    regulations   regarding                                                               
transportation  costs in  determining  "wellhead net  back."   He                                                               
pointed  to a  lack  of peer  review, beyond  that  of the  state                                                               
auditor,  and  the  consistent  problems   in  the  agency.    He                                                               
questioned whether a peer review should, indeed, be conducted.                                                                  
                                                                                                                                
MR.  TANGEMAN directed  attention  "to the  massive changes  that                                                               
this state  and this  department undertook  starting in  2006 and                                                               
2007 when we went from a gross tax  to a net tax."  He noted that                                                               
this had been  a complete change for the process,  and there were                                                               
not any  regulations in place and  the staff had never  worked in                                                               
this system.   He chronicled that, since that time,  more than 70                                                               
regulations  had been  implemented,  reports  had been  submitted                                                               
within the statutory window, and  improvements had been made.  He                                                               
questioned  the  expectation  for   corrections  within  a  year,                                                               
pointing to the "huge strides"  performed during that time frame.                                                               
He noted that  this had all been accomplished  while using manual                                                               
systems.   He  stated his  acceptance of  the recent  analysis of                                                               
issues listed by  the Legislative Audit Division,  but he pointed                                                               
to  the  "light at  the  end  of  the  tunnel" generated  by  the                                                               
automated  revenue management  system, which  would alleviate  "a                                                               
lot of these issues" with the millions of lines of data.                                                                        
                                                                                                                                
REPRESENTATIVE HAWKER offered his belief  that the issue was with                                                               
audit  procedures, resulting  from high  turnover and  a lack  of                                                               
staff experience.   He stated "any business that is  afraid of an                                                               
audit, quite frankly, probably needs to be audited."                                                                            
                                                                                                                                
6:09:01 PM                                                                                                                    
                                                                                                                                
CHAIR  FAIRCLOUGH  summarized that  DOR  was  in the  process  of                                                               
moving  forward   with  the   implementation  of   new  automated                                                               
technology, although there were still concerns.                                                                                 
                                                                                                                                
^Audit Request                                                                                                                
                         Audit Request                                                                                      
                                                                                                                                
6:09:32 PM                                                                                                                    
                                                                                                                                
CHAIR  FAIRCLOUGH  announced that  the  final  order of  business                                                               
would be  consideration of  an audit  request by  Senator French.                                                               
She  referenced  the  February   13,  2013  letter  [Included  in                                                               
members' packets] in  which Senator French asked  for approval of                                                               
an  audit   to  the  effectiveness  for   timeliness,  levels  of                                                               
assessment,  and coverage  from the  audit function  of DOR  when                                                               
compared to the audit function under  the ELF tax structure.  She                                                               
pointed out  that Senator French  had also asked to  identify the                                                               
impediments to  the audit  process of returns  from ACES  and the                                                               
petroleum   production  tax   (PPT),  with   recommendations  for                                                               
improvement.   Senator  French requested  an  examination of  the                                                               
professional qualifications and experience  levels of DOR's audit                                                               
staff,  while determining  if the  resources  were sufficient  to                                                               
fulfill  the   audit  requirements.     Lastly,   Senator  French                                                               
requested an  examination of the  Tax Division's  methodology for                                                               
conducting  audits, and  a determination  whether the  agency was                                                               
following  "industry  best  practices."     She  asked  that  the                                                               
committee members identify  any of these requests  which remain a                                                               
concern.                                                                                                                        
                                                                                                                                
6:10:49 PM                                                                                                                    
                                                                                                                                
SENATOR HOLLIS FRENCH, Alaska State  Legislature, opined that the                                                               
Tax Division "looks  forward to an audit with the  same degree of                                                               
enthusiasm that  anyone of  us would if  we were  being audited."                                                               
He declared that  he did not have any suspicion  or animosity for                                                               
the  Tax  Division,  as  the   employees  in  the  division  were                                                               
"literally worth  their weight  in gold.   They perform  a hugely                                                               
important  function,  they  serve  as the  nerve  center  of  the                                                               
state's resources and revenues... ."   He expressed his agreement                                                               
with the assessment by Representative  Hawker that there had been                                                               
significant  deficiencies in  the division  for quite  some time.                                                               
He  offered his  belief  that improvement  could be  accomplished                                                               
with  peer  reviews  and  recommendations   by  the  Division  of                                                               
Legislative  Audit.   He  pointed to  an  $82 million  assessment                                                               
adjustment as an example.  He  reminded the committee that he was                                                               
assisted  by Kris  Curtis, Legislative  Auditor, in  writing this                                                               
request, in  order to target the  report for the accuracy  of the                                                               
process.                                                                                                                        
                                                                                                                                
6:13:24 PM                                                                                                                    
                                                                                                                                
SENATOR FRENCH,  in response to Representative  Hawker, confirmed                                                               
that he had worked with Ms.  Curtis to develop the objectives for                                                               
the proposed audit.  He shared  that the idea to consult with Ms.                                                               
Curtis had resulted from an  earlier Legislative Budget and Audit                                                               
Committee meeting he  had attended in which it  was revealed that                                                               
she had helped with another audit request.                                                                                      
                                                                                                                                
6:14:14 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON commented that it  was a good point for the                                                               
auditor  to  review  joint  interest  billings  (JIB),  as  other                                                               
legislators were also concerned.                                                                                                
                                                                                                                                
6:14:59 PM                                                                                                                    
                                                                                                                                
CHAIR  FAIRCLOUGH asked  if the  Legislative  Audit Division  was                                                               
currently  able to  accept this  project, and  how long  it would                                                               
take to complete.                                                                                                               
                                                                                                                                
KRISTIN CURTIS, Legislative  Auditor, Legislative Audit Division,                                                               
Alaska  State  Legislature,  explained  that,  as  the  Statewide                                                               
Single Audit would be assigned to  staff in the upcoming week, it                                                               
would  be  most  efficient  to   conduct  this  proposed  special                                                               
performance audit  simultaneously.  She  was not sure if  she had                                                               
the staff available, but would be able to report within a week.                                                                 
                                                                                                                                
CHAIR FAIRCLOUGH asked  if the proposed audit  could be completed                                                               
by February, 2014.                                                                                                              
                                                                                                                                
MS.  CURTIS, in  response, stated  that it  would be  possible to                                                               
present the  proposed performance audit  at the beginning  of the                                                               
next session,  if it could  be performed simultaneously  with the                                                               
Statewide Single Audit.                                                                                                         
                                                                                                                                
CHAIR FAIRCLOUGH  asked if  the committee  wanted to  approve the                                                               
proposed audit request.                                                                                                         
                                                                                                                                
6:16:58 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER  made a  motion to  approve the  request by                                                               
Senator French for the performance  audit on the effectiveness of                                                               
the  Department of  Revenue's oil  and gas  production tax  audit                                                               
process in accordance with the  accompanying letter outlining the                                                               
audit objectives.                                                                                                               
                                                                                                                                
CHAIR FAIRCLOUGH objected.                                                                                                      
                                                                                                                                
MS.  CURTIS  asked  for  more direction  from  the  committee  to                                                               
officially  add the  request to  review  joint interest  billings                                                               
(JIB).                                                                                                                          
                                                                                                                                
6:17:43 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HAWKER shared that this  would be included under a                                                               
review  of "best  audit practices."   He  asked that  there be  a                                                               
review of the DOR policies  and procedures for the utilization of                                                               
joint  interest   billings  in  accordance  with   statute.    He                                                               
questioned  whether the  agency was  "overstepping its  bounds in                                                               
its interpretation of their responsibilities under statute."                                                                    
                                                                                                                                
6:18:45 PM                                                                                                                    
                                                                                                                                
SENATOR FRENCH,  in response to  Chair Fairclough,  expressed his                                                               
agreement that this request by  Representative Hawker would be in                                                               
addition to his proposed audit request.                                                                                         
                                                                                                                                
6:19:02 PM                                                                                                                    
                                                                                                                                
CHAIR FAIRCLOUGH  declared that  the amendment  by Representative                                                               
Hawker  would  be  included  with the  original  proposal.    She                                                               
removed her objection, and there  being no further objection, the                                                               
motion, as amended, was adopted.                                                                                                
                                                                                                                                
6:19:31 PM                                                                                                                    
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There  being  no  further  business  before  the  committee,  the                                                               
Legislative Budget  and Audit Committee meeting  was adjourned at                                                               
6:19 p.m.                                                                                                                       

Document Name Date/Time Subjects
LB&A Agenda 4.6.13.pdf JBUD 4/6/2013 4:30:00 PM
LB&A Meeting Minutes 3.28.13.pdf JBUD 4/6/2013 4:30:00 PM
Sen. French Audit Request 2.13.13.pdf JBUD 4/6/2013 4:30:00 PM
LB&A Presentation (4.6.13 Updated).pdf JBUD 4/6/2013 4:30:00 PM