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 BUD COMMITTEE -1- April 6, 2013 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 BUD COMMITTEE -2- April 6, 2013 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 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 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 BUD COMMITTEE -3- April 6, 2013 REPRESENTATIVE HAWKER asked to clarify that Representative Chenault had left prior to the meeting being called back to order. 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 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 BUD COMMITTEE -4- April 6, 2013 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. BUD COMMITTEE -5- April 6, 2013 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.