Cheating on taxes is getting a lot more difficult for Maryland liquor retailers.
The Comptroller of Maryland's alcohol audit project is drastically changing the way the state audits businesses. Liquor retailers are the first industry targeted by the new approach, and the program, implemented in 2002, has uncovered more than $27 million in unpaid taxes, including interest and penalties.
Only Worcester, Washington and Prince George counties, as well as the city of Baltimore, have been audited so far. Twenty more counties remain.
Collecting the Data
The 1998 election of William Schaefer as comptroller was the impetus for the alcohol audit project. His transition team recommended that an auditor be trained as a computer audit specialist, and Thomas Tartal -- field audit manager of the Comptroller's Office -- was tagged for the job. Tartal entered a six-month course at the University of North Texas to learn computerized auditing, programming and statistical analysis.
Management in the compliance division of the Comptroller's Office began brainstorming ways to utilize Tartal's new skills. He was called in for a meeting and told to find out if liquor wholesalers' deliveries reconciled with their customers' tax returns.
Tartal's job was to figure out a way to do it.
The Comptroller's Office persuaded all 74 liquor wholesalers in Maryland to hand over sales records of transactions done with retailers in the state. Auditors compared the wholesale records with the sales their customers reported in tax returns. Auditing software purchased from ACL Services was used to juxtapose the two sides, revealing underreported sales from some retailers.
"Thanks to cooperation from the alcoholic beverage industry, we can compare product deliveries to liquor stores and what they, in turn, report as sales," Schaefer said in a statement. "As a result, we have found outright fraud in nearly half the cases we've audited, with some businesses grossly underreporting sales taxes. We're constantly on the lookout, so we may be coming to a bar or liquor store near you."
Kevin Kane, media relations officer for the Comptroller's Office, said liquor wholesalers preferred to give delivery information one county at a time.
"There was a concern that if the information was provided for the whole state at one time, we might come back again at a later date and ask for the same information, and their programming personnel would be tied up a second time," Kane said.
Sorting Out the Mess
Liquor wholesalers submitted their delivery data to Tartal in the form of Excel files, report files and flat files. The latter two are used to deliver data free of format idiosyncrasies linked to the programs where they originated. Tartal compiled the data into one master Excel file.
Auditors deleted every punctuation mark and made all cells the same size. At this point, the data was ready to be loaded into auditing software.
There were more than 1,200 businesses in Baltimore, and each bought from more than one wholesaler. Tartal decided the easiest way to untangle the mess of businesses was to start with registration numbers. Each wholesaler had a registration number that, in theory, would match with the registration number reported by each retailer.
The problem was several retailers failed to include those registration numbers in their tax returns. The ones that did, Tartal matched up and saved to a file. For the remaining unmatched retailers, he used the wholesaler corporate names found on the retailers' tax returns to place them in the correct columns.
"I ultimately matched each business with the proper registration," Tartal said.
He added one more column to the setup, computing the difference between the wholesalers' deliveries and the sales reported by the retailers. Everything was in place, and it was finally time to find discrepancies.