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Audit Procedures for Insurance Tax Table of Contents

Table of Contents
Chapter 1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The History of Insurance Taxation in Texas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Additional Insurance Taxes and Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
General Audit Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Chapter 2 Pre-Audit Research. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3


Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Audit Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Agency Work Manager (AWM) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Audit Questionnaire. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Records Request . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Computer/System Inquiries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Prior Audits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Taxability Research. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Company Type and Filing Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Chapter 3 Life and Accident & Health Companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8


Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Premiums Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Gross Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Miscellaneous Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Rollovers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Deductible Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Returned Premiums. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Annuities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Reinsurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Non-Taxable Life and A & H Premiums. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Audit Activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Premium Reconciliation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Test of Internal Controls. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Policy Testing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Tax Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Other Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Chapter 4 Property & Casualty Companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12


Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Property & Casualty Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Policy Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Retrospectively Rated Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Reinsurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Stop Loss Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Umbrella Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Non-taxable Premiums. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

September 2008 Texas Comptroller of Public Accounts • Audit Division i


Table of Contents Audit Procedures for Insurance Tax

Audit Activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Premium Reconciliation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Test of Internal Controls. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Policy Testing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Tax Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Accident & Health Premiums. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Other Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Chapter 5 Health Maintenance Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14


Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Taxable Premiums. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Non-taxable premiums:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Audit Activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Premium Reconciliation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Verify Non-Taxable Premiums. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Policy Testing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Tax Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Other Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Chapter 6 Title Insurance Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16


Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Audit Activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Premium Reconciliation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Test of Internal Controls. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Policy Testing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Tax Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Other Issues and Considerations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Other Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Chapter 7 Reinsurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Reinsurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Chapter 8 Annual Statement Filing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19


Annual Statement Filing Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Chapter 9 Premium Tax Credits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20


Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Credits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Examination Fee and Overhead Assessment Credits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Valuation Fee Credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Texas Department of Health Examination Fee Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Assessment Credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
CAPCO Credits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Audit Adjustments/Verification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Chapter 10 Retaliatory Tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22


Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Audit Activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

ii Texas Comptroller of Public Accounts • Audit Division September 2008


Audit Procedures for Insurance Tax Table of Contents

Preliminary Activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Fees and Credits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Compute the Premium Tax Base. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Determine the Correct Tax Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Other Considerations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Adjustments to Texas Maintenance Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Title Company Premiums. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Chapter 11 New York Retaliatory Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24


Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Audit Activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Other Considerations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Chapter 12 Maintenance Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28


Property & Casualty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Exemptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Other Issues/Workers’ Compensation Deductible Credits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Life/Accident & Health. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Health Maintenance Organizations (HMO). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Title. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Other Considerations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Chapter 13 Third Party Administration Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31


Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Audit Activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Premium Reconciliation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Non-Taxable Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Chapter 14 OPIC Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32


Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Property & Casualty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Life/Accident & Health. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Health Maintenance Organizations (HMO). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Title. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Other Considerations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Source Documents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Chapter 15 Surplus Lines Agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33


Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Audit Activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Tax Basis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Chapter 16 Unauthorized Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35


Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Audit Activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Problem Areas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Unlicensed Agents/Brokers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Unauthorized Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Tax Basis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

September 2008 Texas Comptroller of Public Accounts • Audit Division iii


Table of Contents Audit Procedures for Insurance Tax

Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Applicability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Exceptions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Other Considerations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Penalty and Interest Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Statute of Limitations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Chapter 17 Independently Procured Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38


Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Audit Activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Independently Procured Criteria. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Inquiries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Reporting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Tax Rate and Basis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Due Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Other Considerations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Current Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Chapter 18 Audit Write-Up. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40


General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Assembly Checklist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
CD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Audit Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Write Up Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
CATS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Penalty and Interest Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Calculation of Error Percentage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Penalty Waiver Over $10,000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Cover Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Audit Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Audit Adjustment Reports (AAR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Audit Adjustment Workpapers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Audit Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Other Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
NAIC Group Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Labeling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Planning and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Credit Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Exit Conference. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Listing of Events. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Amended Audits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
P & I Waiver Worksheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Amended Index to Working Papers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Amended Audit Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Audits Amended to Zero. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
No Change Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Imaging. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

iv Texas Comptroller of Public Accounts • Audit Division September 2008


Audit Procedures for Insurance Tax Chapter 1: Introduction

Chapter 1
Introduction
The History of Insurance now contained under Subtitles A and B, Title 2, Tax Code
and apply to all taxes, fees and assessments due. Addition-
Taxation in Texas ally, tax disputes or disagreements with the Comptroller of
The state of Texas has assessed a tax on insurance compa- Public Accounts now fall under Title 34, Texas Administra-
nies for over 100 years. The first tax levied on insurance tive Code § 1.1 – 1.42, the Rules of Practice and Procedures.
companies in Texas was an annual fee of $50 in 1862. The Insurance tax audits and assessments are subject to the same
current basis for taxation as a percentage of gross premium administrative procedures as all other state taxes adminis-
receipts was adopted in 1893. tered by the Comptroller.

In 1907, the enactment of the Robertson Law required all com- The Texas Department of Insurance is still responsible for
panies to maintain 75 percent of their legal reserves in Texas licensing of companies and agents. The Department of In-
investments for Texas business. Companies achieving this surance, through its Financial Analysis Division performs
requirement qualified for a lower tax rate. In the past, insurance examinations of insurance companies domiciled in Texas for
taxation allowed some companies to qualify for a lower tax rate regulatory and financial solvency purposes.
if the company met certain Texas investment requirements.
Additional Insurance Taxes and Fees
In Texas, the tax statutes on rates and investment criteria for
life and accident and health companies were revised in 1984 In addition to taxes based on gross premiums, insurance
so that both foreign and domestic insurers had the same rate companies pay maintenance taxes and fees to support the
schedule. Over the years the variances in the tiered rates di- operation of the Texas Department of Insurance, the Work-
minished. Beginning in 1995, a flat tax rate was imposed on ers’ Compensation Commission, and until September 1,
life and accident and health companies. These companies no 2003 the Research and Oversight Council on Workers’
longer have an option to meet Texas investment provisions Compensation. Effective September 1, 2003 the Research
and qualify for a lower tax rate. A tiered rate system was and Oversight Council on Workers’ Compensation functions
in use by property and casualty insurers and title insurance were moved to the Texas Department of Insurance. Then
companies through the 1999 reporting period. Beginning effective September 1, 2005 the Texas Workers’ Compensa-
in 2000, property and casualty insurers and title insurance tion Commission was abolished and replaced by the Divi-
companies have a flat rate. sion of Workers’ Compensation and the Office of Injured
Employee Counsel, within the Texas Department of Insur-
After a Sunset Commission review, House Bill 1461 was ance. These divisions will still be funded by maintenance
passed during the 73rd Legislative Session. That bill trans- taxes. Retaliatory taxes, designed in an attempt to ensure
ferred the collection, reporting and administration of taxes that Texas domestic insurers achieve tax parity in other
and certain fees and assessments from the Texas Department states, may be due from foreign insurers.
of Insurance to the Comptroller of Public Accounts effective
September 1, 1993. Maintenance tax rates are set annually by the Texas Depart-
ment of Insurance based on expected funding needs and
Some of the changes made include a requirement for semi- a projected premium tax base. The rates are adopted dur-
annual prepayments and annual reporting for all types of insur- ing the fall of each year for use by the Comptroller for the
ance companies. The returns were consolidated into one report March reports.
for all company types. Reported information and available
guaranty fund credits are maintained on the CICS database. General Audit Procedures
The penalty and interest provisions under Articles 4.13 and The procedures applicable to audits of insurance companies
4.14 of the Texas Insurance Code were repealed and are are much the same as those for any tax audit performed by

September 2008 Texas Comptroller of Public Accounts • Audit Division 1


Chapter 1: Introduction Audit Procedures for Insurance Tax

the Comptroller. Specific procedures for the various types apply and the audit period could cover any period of time.
of companies are found in later chapters. Generally audit periods are extended to cover a total of sev-
en years and approval from Audit Headquarters is required
As with other audits a “Record of Audit Planning, Activities, when such an exception exists.
and Audit Results” or audit plan is prepared for the assign-
ment. This document covers both the premium tax (tax type In addition to pre-audit research, the entrance conference
71) and the maintenance tax (tax type 72) if applicable. The is one of the most important tools in gathering information
audit plan is used to document planned procedures, actual to plan for and conduct an audit. The entrance conference
procedures performed and the results of these activities for should include a discussion of the following:
each area examined in the audit. The listing of events section
is used to document important dates, communication with the • The taxpayer(s) to be audited, the audit period, and
taxpayer and other pertinent phone calls or correspondence. which taxes are being audited.
The audit plan should be updated on a daily basis. Refer to • The taxpayer’s interpretation of laws and rules.
the chapter on Audit Write-Up in this manual for more detail. • The taxpayer’s business operations, accounting systems
and reporting procedures.
Audit periods generally cover a four-year period unless an • Historical data as obtained from the various system
exception to the statute of limitations applies. The limitation inquiries.
and exception provisions are found in Title 2, Chapter 111 • How the taxpayer handles potential problem areas, such
of the Tax Code. The most common exceptions for insur- as allocation of umbrella policies, group policies, and
ance audits occur when no returns have been filed or when retaliatory tax.
the reported tax contains a gross error. Gross error means • The extent of data readily available. Refer to the writ-
that, after correction of the error, the amount of tax due and ten records request if one was provided and use it as a
payable exceeds the amount initially reported by at least 25 checklist. If no written list was previously sent, discuss
percent. In either instance, the statute of limitations does not the records required to perform the audit.

2 Texas Comptroller of Public Accounts • Audit Division September 2008


Audit Procedures for Insurance Tax Chapter 2: Pre-Audit Research

Chapter 2
Pre-Audit Research
Introduction • Determine the companies within the NAIC group on
which audit assignments should be generated. Research
The auditor becomes familiar with the taxpayer’s account in this each company on the fee system and determine whether
phase of the audit process. The auditor should review certain in- it is currently filing premium and maintenance tax re-
formation about the account and the business type to be audited turns. It is not necessary to generate an audit assignment
before the taxpayer is contacted. Additional research can be ac- on every company that is set up on the fee system. The
complished through taxpayer contact and preliminary testing. auditor will determine the need for a current audit using
the on-line NAIC web based system and searching for
Information for review is available from various sources: Texas premiums that have not been reported to Texas.
prior audit files, taxability memos, division requests, expe- Only those companies that have incorrectly reported or
rienced audit office personnel, fee system and Agency Work those that have some area of interest will be generated.
Manager (AWM) inquiries. Other resources include refer-
ence manuals, materials available in office or on-line, Audit
Memos (AM), Audit Procedure (AP) memos, Audit Direc-
Agency Work Manager (AWM)
tive (AD) memos, State Tax Automated Research System An assignment is generated from the Agency Work Manager
(STARS), and Internet Web sites for the company or group system. AWM is a management tool that monitors the cur-
of companies. This information should aid the auditor in: rent status, location and results of an audit assignment. The
system also provides management reports compiled from
• Learning more about the taxpayer’s reporting methods data synched by the auditors or entered to the system by
and business operations. field office and headquarters personnel.
• Understanding the taxpayer’s account background and
history of reporting. The Agency Work Manager system is generally unavailable
• Establishing preliminary objectives for the audit plan. for updating by the auditor. The CATS system has replaced
• Identifying and researching possible company type AWM for the auditor and all relevant assignment informa-
problem areas. tion now resides on the auditor’s laptop. The information in
the CATS system is synched with AWM. Taxpayer contact
Audit Assignment information addresses should match XISUMM address

When an audit is generated, a file is set up and the account


is assigned to an auditor. It is Audit Division policy to re-
Audit Questionnaire
search all insurance companies within the same insurance The Audit Questionnaire and the Notice of Routine Audit
group designated by the National Association of Insurance Letter are mailed automatically to the taxpayer when an
Commissioners (NAIC) without exception. Therefore, the audit is assigned in the local audit office. The questionnaire
auditor’s first step should be to use the NAIC Web site or provides information on the taxpayer’s authorized represen-
most current company listing in conjunction with the group tatives, business activity, and computer system. It becomes
listing from the TDI site to determine the current list of part of the completed audit package. A total of two Audit
companies within a particular group: Questionnaires are required for audit purposes, one for pre-
mium tax and another for maintenance taxes/fee.
• Determine the group name and obtain the listing of all
insurance companies within that group. Obtain the most The auditor should mail the questionnaire and letter to the
recent NAIC group listing of companies that have been taxpayer if they have not been mailed previously. Be sure to
downloaded generally in February of each year. This Excel include a questionnaire for each company to be audited and
file resides on the office’s common drive and is considered to list these companies in the letter. Obtain a new question-
the best source for determining the group composition. naire if changes occur prior to audit completion. Update

September 2008 Texas Comptroller of Public Accounts • Audit Division 3


Chapter 2: Pre-Audit Research Audit Procedures for Insurance Tax

all applicable windows in Agency Work Manager for these • copy of corporate annual report
activities. • copy of any merger or acquisition documents which
occurred during the audit period. Be alert to possible
The Audit Questionnaire provides: mergers or acquisitions which might have terminated
this taxpayer as a separate legal entity. The auditor can
• The name and title of the individual(s) to contact to still audit the period for which the taxpayer did exist
schedule an entrance conference. as a separate legal entity. Contact the new parent or the
• The name and title of the individual(s) authorized to acquiring company to schedule the appointment.
enter into written agreements and to accept the notifica- • other records as deemed necessary by the auditor.
tion of sampling procedures.
• The location of the taxpayer records.
• A general description of the taxpayer’s business activities. Computer/System Inquiries
• Audit Division has adopted an overall policy for mak- • Fee System Inquiries
ing taxpayer contact within 10 working days once the
audit has been assigned to an auditor. Refer to the Audit The following is a list of some commonly used inquiry
Division Operating Plan for details. codes and some of their uses:
XIRPTS Used to order premium and maintenance tax
Records Request histories by tax type.
XISUMM Gives general information for the taxpayer by tax
After the questionnaire is received, the auditor and the taxpayer type. Data available includes taxpayer master mailing
should agree upon an initial appointment date for beginning address, contact telephone number, etc.
fieldwork. This is the appropriate time to request records the
XISTAT Gives information for all automated taxes
taxpayer should send in advance of the audit appointment. Or administered by the agency for which the taxpayer is
These records will serve as the basis for the pre-audit research, MTSUMM responsible.
preliminary review and preparation for fieldwork.
XIADDR Gives alternate mailing information (addresses) for
any tax types.
Typically, an auditor might request copies of returns and
back up worksheets, Annual Statements and the Texas State XIDATA Gives reported amounts by report period and tax type.
It is useful for history updates and to check postmark
page. dates on returns filed. It also will note the return type
(regular, amended, estimated).
When requesting records; remain general in the description
XIPMTS Can be accessed through the XIDATA function and
of particular records because record terminology may vary shows payments made for that report period.
from taxpayer to taxpayer. The taxpayer should be provided
with a written list of documentation to be made available XIAMAX Gives the amounts for assessment credits (guaranty
fund credits) that the taxpayer is allowed to take for a
for the audit. Written requests help avoid confusion between given report period.
what has been requested and what has been received, and
provide documentation for the file. XICOLL Gives all open and closed collection records (option
2). The auditor should be aware of any open collection
records within the audit period prior to starting the
Following is a general list of records the auditor may request: audit. The auditor must verify if they are valid. The
taxpayer should be notified that valid open collection
• Annual Statements, although this is accessible via com- records are billed or refunded separately from an audit.
puter Invalid records must be closed prior to submitting an
audit. If an open collection record is due to a non-filer
• chart of accounts period, the return must be filed and the record closed
• general ledger prior to sending the audit to the RPC.
• policy journal XIBARS Can be accessed through the XICOLL function. Useful
• duplicate state tax returns with working papers (Texas for tracing payments to open collection records,
and state of incorporation) particularly audit payments.
• Texas State pages for all years under audit NAMNUM Used to find taxpayer numbers when you only have
• copy of domicile state’s most recent financial examina- the name. The ITS (Integrated Tax System) TPR is a
tion report more reliable source of finding a taxpayer number.
• copy of audited financial statements as prepared by out- XIXINS Provides a cross-reference for taxpayer numbers, TDI
side CPA firm number, and NAIC number.

4 Texas Comptroller of Public Accounts • Audit Division September 2008


Audit Procedures for Insurance Tax Chapter 2: Pre-Audit Research

The “PF” keys are helpful and allow the user to navigate prior audit plan may also be helpful in estimating the
through several inquiries at once. The PF11 trail, followed time required for current assignment completion. Also,
by comments, may give additional information such as note whether there has been a change in the taxpayer
refund, credit or amended return comments or comments contact. A change may indicate policy or reporting pro-
regarding prior audit adjustments. cedure changes in the current audit period.
• A prior audit is not a blueprint for the current audit.
• Agency Work Manager (AWM) Changes in tax law and business operations subsequent
• The global search query will show if a taxpayer has to prior audits are important areas to cover. The prior
been audited or if an audit is in progress. It is useful in audit can be used to enhance the current auditor’s use
checking if an entity has been audited prior to setting of time by identifying records examined, the difficulties
up audit leads, or verifying that amounts were set up in of certain audit methods and areas where no errors were
another audit. found that may require less emphasis in the current audit.
• National Association of Insurance Commissioners
(NAIC) Inquiries Global search in AWM will show if the prior audit is avail-
• The taxpayer’s annual statement information can be able on the imaging system. Requests for archived copies of
accessed through this system. NAIC group information microfilmed audits can also be made through the imaging
is also available. See specific procedures for this system system.
available in your office.
• Texas Department of Insurance (TDI) Inquiries Taxability Research
• The information provided by these inquires includes
company history, company details, licensing informa- Through examination of the history, audit questionnaire and
tion, operating status and lines of coverage. See specific other information, the auditor will know the type of insurer
procedures for this system available in your office. to be audited.
• Internet Inquiries
• Information for a specific company or insurance group The following information can be used in researching vari-
may be available on the Web site for that company. ous issues:
References for other states can be accessed from the
Internet usually by entering www.state.xx.us where the • Texas Insurance Code
xx represents the two letter state abbreviation. • Rules promulgated by the Comptroller of Public Ac-
counts
Prior Audits • Administrative Hearings Decisions – available through
STARS system
The auditor can determine if there has been a prior audit by • Taxability responses and interpretive letters to both tax-
accessing Global Search in Agency Work Manager and by payers and auditors
reviewing the results and comments screens. • Agency Publications such as Tax Bulletins, Tax Policy
News, etc.
If there has been a prior audit: • Attorney General Opinions
• District Court Cases
• Note the prior audit period to avoid over-lapping audit • Other sources of information such as the Directory of
periods. Corporate Affiliations, NAIC Listing of Companies,
• Look for errors and exceptions noted in the prior audit Internet Web sites, etc.
and discuss them with the taxpayer to determine if cor-
rective action has been taken. Document this informa- Company Type and Filing Requirements
tion in the audit plan, even if corrections were made.
Often there is a period early in the audit, prior to the This table provides a description of the type of insurance
change, where current audit adjustments may be neces- company and which report forms they are required to file.
sary. For those companies filing the premium tax report, it shows
• If the taxpayer disagreed with the audit, follow the audit which sections of the form the company may be required to
through the hearings process to see how hearings deci- complete.
sions affected the audit.
• Study the prior audit plan, procedures, and notes to be- The company type designation is the type assigned by the
come familiar with the type of records maintained. The Texas Department of Insurance.

September 2008 Texas Comptroller of Public Accounts • Audit Division 5


Chapter 2: Pre-Audit Research Audit Procedures for Insurance Tax

THE 2 DIGIT COMPANY TYPE DESIGNATION SHOWS ON THE


XISUMM INQUIRY AS PROCESS TYPE CODE
NOT SURE ABOUT CHANGES TO THIS SECTION – LD, 10.29.07
Premium Maintenance ABTPA
TDI
Type of Tax Statute Report Report Type 76
CO DESCRIPTION
Company or chapter Sections Tax Type 72 Forms 25-106
TYPE
Tax Type 71* (Form 25-102) & 25-107
L/A&H 222 01 Domestic Life I, II Yes No
L/A&H 222 02 Foreign Life I, II Yes No
P&C/A&H 221 & 222 03 Domestic Stock Fire II, III Yes Yes
P&C/A&H 221 & 222 04 Foreign Stock Fire II, III Yes Yes
P&C/A&H 221 & 222 05 Domestic Mutual Fire &/or II, III Yes Yes
Casualty
P&C/A&H 221 & 222 06 Foreign Mutual Fire &/or II, III Yes Yes
Casualty
P&C/A&H 221 & 222 07 Domestic Stock Fire and II, III Yes Yes
Casualty
P&C/A&H 221 & 222 08 Foreign Stock Fire and Casualty II, III Yes Yes
P&C/A&H 221 09 Domestic Stock Casualty II, III Yes Yes
P&C/A&H 221 & 222 10 Foreign Stock Casualty II, III Yes Yes
P&C 984 11 Mexican Casualty III Yes Yes, as of
11/12/98
P&C/A&H 221 & 222 12 Domestic Lloyds II, III Yes Yes
P&C/A&H 221 & 222 13 Foreign Lloyds II, III Yes Yes
P&C/A&H 221 & 222 14 Domestic Reciprocals II, III Yes Yes
P&C/A&H 221 222 & 224 15 Foreign Reciprocals II, III Yes Yes
Life/A&H 885.003 16 Domestic Fraternal Benefit EXEMPT EXEMPT EXEMPT
Societies
Life/A&H 885.003 17 Foreign Fraternal Benefit EXEMPT EXEMPT EXEMPT
Societies
TITLE 223 18 Domestic Title III Yes No
TITLE 223 19 Foreign Title III Yes No
L/A&H 884/222 20 Stipulated Premium I, II Yes No
P&C 260 23 Domestic Non-Profit Legal ---- Yes No
Services (Prepaid Legal)
961.212
HMO 222/258 28 Domestic Health Maintenance I Yes No
Organization (HMO)
HMO 222/258 29 Foreign Health Maintenance I Yes No
Organization (HMO)
TPA 259/4151 30 Domestic Third Party ---- Yes No
Administrators (TPA)
TPA 259/4151 31 Foreign Third Party ---- Yes No
Administrators (TPA)

6 Texas Comptroller of Public Accounts • Audit Division September 2008


Audit Procedures for Insurance Tax Chapter 2: Pre-Audit Research

Premium Maintenance ABTPA


TDI
Type of Tax Statute Report Report Type 76
CO DESCRIPTION
Company or chapter Sections Tax Type 72 Forms 25-106
TYPE
Tax Type 71* (Form 25-102) & 25-107
P&C 21.54/221 40 Domestic Risk Retention Group III Yes Yes
P&C 21.54/221 41 Foreign Risk Retention Group III Yes Yes
P&C 21.54/2201 45 Risk Purchasing Group 25-104 No No
L/A&H 881/222 51 Statewide Mutual Assessment I, II Yes No
for Life Health & Acc
L/A&H 886/222 52 Local Mutual Aid (LMA) ---- Yes No
Life 888 53 Burial Associations ---- Yes** No
  13 54 Exempt Companies ---- ---- ----
L/A&H 882/222 55 Non-Profit Corporations for I, II Yes No
Group Hospital Services
P&C 912/221 56 County Mutual III Yes Yes
P&C 911/221 57 Farm Mutual III Yes No
L/A&H 982 & 841  75 Foreign Life Companies under I, II No No
Articles 982.114 & 841.104
  101/226 97 Unauthorized Insurance 25-108 No No
  225 98 Surplus Lines 25-104 No No
  101/226 99 Independently Procured 25-103 No No
* Premium report sections refer to form 25-100 unless otherwise noted.
** These companies pay filing fees only on 25-102.
*** CSIs reported WC Surcharge only. Surcharge no longer applicable.

September 2008 Texas Comptroller of Public Accounts • Audit Division 7


Chapter 3: Life and Accident & Health Companies Audit Procedures for Insurance Tax

Chapter 3
Life and Accident & Health Companies
Introduction the cash value and purchases a new policy from a different
insurance company. External rollovers are subject to pre-
Every insurance carrier receiving premiums from the busi- mium and maintenance tax.
ness of life insurance, including variable life insurance, and
credit life insurance for profit or otherwise, or for mutual Deductible Dividends
benefit or protection, in this state, shall pay to the Comptrol- If the company declares dividends to its policyholders and
ler a tax upon its gross premiums. takes this amount as a deduction, verify that the amount
of dividends used to purchase paid-up additions or shorten
Every insurance carrier receiving premium from the busi- the premium paying or endowment period is not deducted
ness of accident, health, life & accident, life & health, credit twice on the annual tax return. The Texas state page and
accident, and health for profit or otherwise shall pay to the the Schedule T amounts should already be net of dividends.
Comptroller a tax upon its gross premiums. Verify that the taxpayer has not claimed these twice by
showing these amounts again on the return.
There are no Accident & Health companies. Accident &
Health (A&H) premiums can be written by both life and
property & casualty companies. Life companies write the
Returned Premiums
Returned premiums are a portion of the premium returned to
majority of A&H premiums.
a policy owner as a result of cancellation, rate adjustment, or
a calculation that an advance premium was in excess of the
Premiums Definitions actual premium. Verify that the returned premium amount
was not reported in Gross Premiums as taxable.
Gross Premiums
Gross premiums are defined as the total gross amount of all
premiums, membership fees, assessments, dues, and any
Annuities
An annuity is an agreement by an insurer to make fixed or
other considerations for insurance received during the tax-
variable periodic payments from a stated or contingent date.
able year on each and every kind of insurance policy or con-
Payments continue for a specified period, such as for a num-
tract covering persons located in the State of Texas. Gross
ber of years or for life. Annuities are not subject to premium
premiums do not include dividends applied to purchase
tax. Annuities are subject to maintenance tax but only at the
paid-up additions or to shorten the endowment or premium
time that funds are applied to purchase an annuity contract.
payment period, premiums received from other insurance
carriers for reinsurance or returned premiums.
Reinsurance
See Chapter on Reinsurance.
Miscellaneous Fees
These include any membership fees; assessments, dues or
other consideration for insurance received and included on Non-Taxable Life and A & H Premiums
the insurance policy and should be included in the taxable These are listed on the Computation of Non-Taxable Premi-
premiums reported to the Comptroller. ums (form 25-205) and include the following:

• Premiums from the United States Treasury or the Texas


Rollovers
Treasury for the purpose of providing welfare benefits
Certain types of life policies build up a cash value. If the
or for insurance contracted for by the state or federal
insured surrenders the existing policy and instructs the in-
government in accordance with or furtherance of the
surer to apply the cash value to a new policy it is considered
provisions of Title 2, Human Resources Code or the
a rollover of premiums. Internal rollovers occur when the
Federal Social Security Act.
insured purchases a new policy with the same insurance
company. External rollovers occur when the insured takes

8 Texas Comptroller of Public Accounts • Audit Division September 2008


Audit Procedures for Insurance Tax Chapter 3: Life and Accident & Health Companies

• Premiums from Medicare or Medicaid under the provi- tirees (formerly Art. 3.50-4, TIC). Prior to a statutory
sions of Title 2, Human Resources Code or the Federal change effective 9/1/2002, article 3.50-4 covered both
Social Security Act. The definition of accident and active and retired employees. After the 2001 Legisla-
health insurance premiums and HMO revenues received tive session, Article 3.50-4 contained two titles for the
under Section 222 – 257 and 258, Texas Insurance article and the titles clouded the issue of exemption
Code were amended effective September 1, 2003. The for active employees. The 2003 Legislative session re-
changes makes premiums received by insurers from the solved the conflict between Articles 3.50-4 and 3.50-7
state treasury for insurance under the Medicaid and the regarding taxability of premiums for active employees.
Children’s Health Insurance Program (CHIPs), subject Effective September 1, 2003.
to both premium and maintenance taxes. The removal • Premiums under the Texas 65 Health Insurance Plans
of the exemption is effective September 1, 2003. This Chapter 1505 (formerly Art. 3.71,) TIC. A sample copy
change also applies to Federal funds that flow through of the policy as issued must support the exemption.
the state treasury and are then used to pay premiums for • Premiums received under the Federal Employees
Medicaid and CHIPs programs. Health Benefits Program are preempted from taxation
• Premiums for group policies from a single nonprofit by § 8909, Title 5, United States Code. However, pre-
trust established to provide coverage for employees miums from federal government employee groups such
of municipalities or counties. Effective January 1, as the Federal Reserve Bank or the FNMA are taxable.
2000 employees of hospital districts and employees of • Company contributions to an employee health benefit
county or municipal hospitals in Texas are also exempt plan are exempt. An insurer’s contribution for life insur-
(Section 222). Premiums must be paid from a “single ance for its own employees is an expense of the com-
nonprofit trust” and not just paid by a city or county in pany and not revenue. If this deduction is taken, verify
order to be exempt. The insurance carrier must maintain that the company’s contribution is added back in or is
a copy of the trust agreement. All members of the Texas included in Gross Premiums.
Association of Counties are covered by a single non- • Employee contributions made from employees’ salaries
profit trust, in order for the premiums to be exempt they by insurance carriers for premiums on, or participation
must be bought and paid for through the Texas Associa- in, insurance benefits underwritten by the insurance car-
tion of Counties. House Bill 2424 clarifies that group rier constitute taxable premiums and must be reported
accident and health premiums primarily for employees as a taxable premium.
of municipalities, counties, hospital districts and county
and municipal hospital districts, paid from a single non- Audit Activities
profit trust, are exempt from maintenance taxation.
• Premiums under (Chapter 1551, TIC) formerly the Premium Reconciliation
Texas Employees Uniform Group Insurance Act (Art. • Reconcile Texas premiums from the Texas Page and
3.50-2, TIC). Effective September 1, 2003. House Bill Schedule T to the premium tax return for both life and
725 provided for insurance benefits for community A&H premiums. Accident & Health premiums written
supervision and corrections department employees, by property and casualty companies are listed as a sepa-
dependents, and retired employees to be administered rate line item on the Texas Page.
by the Employees Retirement System (ERS). Premiums • Verify that deductible dividends are not taken twice.
for state employees’ insurance benefits are administered • Identify premium income accounts in the General Led-
under Chapter 1551 (formerly Article 3.50-2), TIC. ger or Trial Balance and reconcile to company-wide
Since Chapter 1551 provides an exemption from premi- premiums on Schedule T.
um and maintenance taxes and other fees, community • Review the General Ledger or Trial Balance for miscel-
supervision and corrections department employees’ pre- laneous income accounts that might be considered pre-
miums that were not previously exempt from insurance mium or other revenue accounts with Texas activity that
taxation became exempt. might be subject to sales tax, such as appraisal services.
• Premiums under the Uniform Insurance Benefits Act • Review the Underwriting and Investment Exhibit/State-
for Employees of the University of Texas System and ment of Income in the Annual Statement for miscella-
the Texas A&M University System (Chapter 1601, TIC) neous income. If there is miscellaneous income, it will
formerly (Art. 3.50-3, TIC). Effective September 1, be noted in the aggregate write-in section.
2003. • Review the most recent Financial Examination Report
• Premiums under the Texas Public School Employees or Summary and the most recent financial statements
Group Benefits Act (Chapter 1575, TIC) covering re-

September 2008 Texas Comptroller of Public Accounts • Audit Division 9


Chapter 3: Life and Accident & Health Companies Audit Procedures for Insurance Tax

prepared by outside CPA’s for indications of potential membership is less than the specified base amount. Com-
reporting problems. monly the bases are 100, 200, or even 500 lives.
• Review the Annual Statement Summary of Operations
for reported miscellaneous income. If material, request Another potential area of misallocation is company owned or
detail to identify the source and determine taxability. bank owned life insurance coverage. These policies are often
referred to as COLI or BOLI policies and frequently are misal-
Test of Internal Controls located to the state where the company, bank or trust account
The test of internal controls is conducted in conjunction is located. Evaluation of the coverage and examination of the
with the policies selected for review. policy file is necessary to determine if there is any Texas risk.

Verify that the total amount of the policy premium and any Verify the method of allocating both individual and group life
related taxable line items are carried to the taxpayer’s pre- premiums. At the bottom of the annual statement Schedule T
mium income accounts. Confirm that the premiums are not there is usually a statement regarding premiums allocations
reported at a net amount, e.g., net of commissions. methods, however this might be incorrect. Verification of how
the insurance carrier is allocating premiums can be conducted
If the premium is allocated to an account that does not tie to during testing of internal controls and the review of policies.
company-wide premiums on Schedule T, question the tax- The taxpayer may allocate the entire group premium to the
payer about the nature of the account. Determine if it should state from which the premium is paid, even though all the
be included as a taxable account. individuals in the group may not reside in the same state.

Policy Testing For example, a drilling company might have its headquar-
The purpose of the policy testing is to verify the allocation ters in Louisiana. The covered employees may reside in both
of premiums to the various states as noted on Schedule T. Louisiana and Texas. The group policy premium should be
The Texas statute says that premiums should be based on the allocated to both Louisiana and Texas based on some rea-
location of the insured. However, some companies may use sonable allocation method for the specific policy.
other methods, such as the billing address for the policy, to
allocate the premium. In order to confirm the allocation of group business, the
auditor should request detailed data files for company-wide
The first step in the policy testing is to determine the taxpay- group life and health business for each year. The data should
er’s method for allocating policy premiums. If the taxpayer be provided in a format compatible with Excel or Access.
states that premiums are allocated based on the location of the The auditor’s laptop should have sufficient memory and
insured, randomly select some policies and review the origi- hard drive space to accommodate the largest of files. After
nal policy application to determine the risk state. Verify that the file totals are verified against a control total, the files
the taxpayer’s policy system is allocating the premium to the will allow the auditor to examine the group policy details, to
location of the insured. If the preliminary review shows that set materiality levels and to determine whether the policies
the taxpayer is allocating premiums based on the location of have been properly allocated to the correct states.
the insured, the policy testing can be discontinued.
During the 2007 session, the Texas Legislature clarified the
The findings may show that the taxpayer is not allocating taxation of life, health and accident policies and coverage by
the premiums based on the risk state or the taxpayer may Health Maintenance Organizations. Section 2 of HB 3315
inform you that the premiums are allocated based on some amended § 222.002 (b) of the Insurance Code to state that
method other than by the location of the insured. If this is taxpayers:
the case; target the review to those areas where the potential
for allocation errors exists. “. . . shall include the total gross amounts of
premiums, membership fees, assessments, dues,
One area where life and A&H premiums may be misallo- revenues, and other considerations received by
cated is group policies. Texas law mandates that allocations the insurer or health maintenance organization in
be based on the location of the insured. The NAIC allows a calendar year from any kind of health mainte-
insurers to allocate premiums using accepted industry stan- nance organization certificate or contract or insur-
dards. These standards are based upon the address of the ance policy or contract covering risks on individu-
individual policyholder or the group address if the group als or groups located in this state . . .”

10 Texas Comptroller of Public Accounts • Audit Division September 2008


Audit Procedures for Insurance Tax Chapter 3: Life and Accident & Health Companies

Designing testing procedures are left to the auditor’s judg-


ment. Often the level of confidence the auditor has in the
internal controls of the taxpayer will determine the proce-
dures needed.

Tax Rate
Beginning with the 1995 tax year, the tax rate for life and
A&H premiums is fixed at 1.75 percent.

Other Areas
Reinsurance: See Reinsurance, Chapter 7
Tax Credits: See Premium Tax Credits, Chapter 9
Retaliatory Tax: See Retaliatory Tax, Chapter 10
Maintenance Tax: See Maintenance Taxes, Chapter 12
OPIC Assessment: See OPIC Assessment, Chapter 14
Statutory Reference: Chapter 222 (TIC)

September 2008 Texas Comptroller of Public Accounts • Audit Division 11


Chapter 4: Property & Casualty Companies Audit Procedures for Insurance Tax

Chapter 4
Property & Casualty Companies
Introduction bases. These types of policies are generally workers’ com-
pensation policies, although other lines of business may be
Property and casualty insurance companies include every subject to retrospective rating.
insurance carrier, including Lloyd’s and reciprocal exchang-
es and any other organization or concern receiving gross Reinsurance
premiums from the business of fire, marine, marine inland, See Chapter 7 – Reinsurance.
accident, credit livestock, fidelity, guaranty, surety, casualty,
workers’ compensation, employers’ liability, or any other
kind or character of insurance in this state.
Stop Loss Policies
This is insurance coverage purchased to limit exposure or
to cut off losses at a given point. Typically these are excess
Excluded from this classification are fraternal benefit as-
medical liability plans. Refer also to Chapter 7 – Reinsurance.
sociations, purely cooperative or mutual fire insurance com-
panies carried on by the members – solely for the protection
of their own property, life, accident and health insurance Umbrella Policies
companies, and title insurance. This is excess liability coverage purchased above the limits
of a basic liability insurance policy. If the taxpayer writes
this coverage, there can be multi-state exposure and the
Definitions auditor will need to verify the state allocation of these pre-
miums to the location of the risk. Refer to the policy sample
Property & Casualty Premiums
section for more information.
These premiums are defined as the total gross amount of pre-
miums actually written during the taxable year on each and
every kind of insurance or risk written upon property or risks Non-taxable Premiums
located in the State of Texas, except premiums actually written These are listed on the “Computation of Non-Taxable Pre-
by other licensed companies for reinsurance, return premiums, miums” worksheet and include the following:
and dividends paid policyholders. Effective June 15, 2007,
Chapter 221.002 of the Texas Insurance Code was amended to Returned premium
include home warranty premiums in the definition of taxable • Dividends paid policyholders
premiums written by property and casualty insurers. • FCIC multi-peril crop preemption
• Art. 5.35-3, TIC, Property Protection Program for Un-
derserved Areas
Policy Fees
These are defined as any other charges listed on the face of
Chapter 222 is not applicable to certain types of businesses.
the policy application and paid by the insured and are con-
sidered to be taxable premiums.
Audit Activities
Retrospectively Rated Policies
The insurer estimates the initial premium on these types of
Premium Reconciliation
• Reconcile Texas premiums from the Texas Page and
policies. At some point during the policy period or follow-
Schedule T to the premium tax return.
ing the policy period, the insured’s activities are audited by
• Verify procedures for umbrella policy allocations, in-
the insurer/agent and the premium is adjusted either up or
ternal controls, stop loss policies, retrospectively rated
down depending on the results of the audit. Any increases or
policies, reinsurance assumed and any source of miscel-
decreases MUST be booked to the premium income account
laneous income.
and the auditor must verify that the premium adjustments
• Verify that the return premium has not been previously net-
were correctly reported. Changes in premiums are required
ted from gross premiums before claiming the deduction on
to be reported in both the premium and maintenance tax

12 Texas Comptroller of Public Accounts • Audit Division September 2008


Audit Procedures for Insurance Tax Chapter 4: Property & Casualty Companies

the return. It is important to remember that a situation may risks. Examine the reports and select some test policies with
be encountered where total returned premiums, dividends, potential Texas risk. Sources for determining potential loca-
etc., may be greater than premiums written, resulting in tions in Texas include CICS inquiries, company Internet
negative premiums written. The statute does not contain a Web sites and the Directory of Corporate Affiliates.
provision allowing taxable amounts less than zero.
• Verify that deductible dividends are not taken twice. Review the policy application, policy file and other source
For example, any deduction claimed must have been documents such as endorsements to determine the risk state.
included in the “gross” amount to begin with. Verify that the taxpayer’s policy system is allocating the
• Identify premium income accounts in the General Led- premium to the location of the risk to test the reliability of
ger or Trial Balance and reconcile to company-wide the system. If this preliminary review shows that the taxpay-
premiums on Schedule T. er is allocating premiums based on the location of the risk,
• Review the General Ledger or Trial Balance for miscella- the policy sample can be discontinued.
neous income accounts that might be premium accounts.
• Review the Underwriting and Investment Exhibit/State- The findings may show that the taxpayer is not allocating
ment of Income in the Annual Statement for miscella- the premiums based on the risk state or the taxpayer may
neous income. If there is miscellaneous income, it will inform you that the premiums are allocated based on some
be noted in the aggregate write-in section. method other than the location of the risk. If this is the case;
• Review the most recent Financial Examination Report target the sample to those areas where the potential for al-
or Summary and the most recent financial statements location errors exists.
prepared by outside CPA’s for indications of potential
reporting problems. One area where property & casualty premiums may be mis-
allocated is umbrella policies. Other lines such as commer-
Test of Internal Controls cial automobile, commercial multi-peril for property and/or
The test of internal controls is conducted in conjunction liability, product liability and excess liability policies could
with the policies selected for review. have multi-state risks. Other liability coverage, such as of-
ficer and director policies could also have multi-state risks.
Verify that the total amount of the policy premium and any
related taxable line items are carried to the taxpayer’s pre- Designing testing procedures decisions are left to the audi-
mium income accounts. Confirm that the premiums are not tor’s judgment. Often the level of confidence the auditor has
reported at a net amount, for example net of commissions. in the internal controls of the taxpayer will determine proce-
dures needed.
If the premium is allocated to an account that does not tie to
company-wide premiums on Schedule T, question the tax- Tax Rate
payer about the nature of the account. Determine if it should Beginning with tax year 2000, the tax rate for property and
be included as a taxable account. casualty premiums is fixed at 1.6 percent.

Policy Testing Miscellaneous


The purpose of policy testing is to verify the allocation of
premiums to the various states as noted on Schedule T. The Accident & Health Premiums
Texas statute says that premiums should be based on the lo- Property and Casualty companies can write Accident &
cation of the risk. However, some companies may use other Health premiums. See the Life Chapter for a discussion of
methods, such as the billing address for the policy or the loca- Accident & Health audit procedures.
tion of the corporate headquarters, to allocate the premium.
Other Areas
The first step in policy testing is to determine the taxpayer’s
method for allocating premiums. Determine whether the Reinsurance: See Reinsurance, Chapter 7
taxpayer writes any type of policies with multiple state risk Tax Credits: See Premium Tax Credits, Chapter 9
coverage. Verify that the allocation of premiums is based on Retaliatory Tax: See Retaliatory Tax, Chapter 10
the location of the risk.
Maintenance Tax: See Maintenance Taxes, Chapter 12
Ask the taxpayer to provide documentation or reports show- OPIC Assessment: See OPIC Assessment, Chapter 14
ing the allocation state for policies with potential multi-state Statutory Reference: Chapter 221 (TIC)

September 2008 Texas Comptroller of Public Accounts • Audit Division 13


Chapter 5: Health Maintenance Organizations Audit Procedures for Insurance Tax

Chapter 5
Health Maintenance Organizations
Introduction (Section 222). Premiums must be paid from a “single
nonprofit trust” and not just paid by a city or county in
A Health Maintenance Organization (HMO) is an entity that order to be exempt. The insurance carrier must maintain
provides or arranges health care services for enrollees on a a copy of the trust agreement. All members of the Texas
prepaid basis. Basically, an HMO is taxed in the same man- Association of Counties are covered by a single non-
ner as a Life insurer. profit trust, in order for the premiums to be exempt they
must be bought and paid for through the Texas Associa-
Definitions tion of Counties. House Bill 2424 clarifies that group
accident and health premiums primarily for employees
Taxable Premiums of municipalities, counties, hospital districts and county
These are defined as the gross revenues collected for the and municipal hospital districts, paid from a single non-
issuance of HMO certificates or contracts. profit trust, are exempt from maintenance taxation.
• Premiums under (Chapter 1551, TIC) formerly the Texas
Non-taxable premiums: Employees Uniform Group Insurance Act (Art. 3.50-2,
I added the following bullet points from the life & health TIC). Effective September 1, 2003. House Bill 725 pro-
chapter and deleted the box below this with 1-7. These are vided for insurance benefits for community supervision
listed on the Computation of Non-Taxable Premiums (form and corrections department employees, dependents, and
25-205) and include the following: retired employees to be administered by the Employees
Retirement System (ERS) effective September 1, 2003.
• Premiums from the United States Treasury or the Texas Premiums for state employees’ insurance benefits are ad-
Treasury for the purpose of providing welfare benefits ministered under Chapter 1551 (formerly Article 3.50-2),
or for insurance contracted for by the state or federal TIC. Since Chapter 1551 provides an exemption from
government in accordance with or furtherance of the premium and maintenance taxes and other fees, commu-
provisions of Title 2, Human Resources Code or the nity supervision and corrections department employees’
Federal Social Security Act. premiums that were not previously exempt from insur-
• Premiums from Medicare or Medicaid under the provi- ance taxation became exempt.
sions of Title 2, Human Resources Code or the Federal • Premiums under the Uniform Insurance Benefits Act for
Social Security Act. The definition of accident and Employees of the University of Texas System and the
health insurance premiums and HMO revenues received Texas A&M University System (Chapter 1601, TIC) (for-
under Section 222, 257 and 258, Texas Insurance merly (Art. 3.50-3, TIC). Effective September 1, 2003.
Code were amended effective September 1, 2003. The • Premiums under the Texas Public School Employees
changes makes premiums received by insurers from the Group Benefits Act (Chapter 1575, TIC) covering re-
state treasury for insurance under the Medicaid and the tirees and (formerly the (Art. 3.50-4, TIC). Prior to a
Children’s Health Insurance Program (CHIPs), subject statutory change effective 9/1/2002, article 3.50-4 cov-
to both premium and maintenance taxes. The removal ered both active and retired employees. After the 2001
of the exemption is effective September 1, 2003. This Legislative session, Article 3.50-4 contained two titles
change also applies to Federal funds that flow through for the article and the titles clouded the issue of exemp-
the state treasury and are then used to pay premiums for tion for active employees. The 2003 Legislative session
Medicaid and CHIPs programs. resolved the conflict between Articles 3.50-4 and 3.50-7
• Premiums for group policies from a single nonprofit regarding taxability of premiums for active employees.
trust established to provide coverage for employees Effective September 1, 2003.
of municipalities or counties. Effective January 1, • Premiums under the Texas 65 Health Insurance Plans
2000 employees of hospital districts and employees of Chapter 1505 (formerly Art. 3.71,) TIC. A sample copy
county or municipal hospitals in Texas are also exempt of the policy as issued must support the exemption.

14 Texas Comptroller of Public Accounts • Audit Division September 2008


Audit Procedures for Insurance Tax Chapter 5: Health Maintenance Organizations

• Premiums received under the Federal Employees • Determine what documents the taxpayer uses to obtain
Health Benefits Program are preempted from taxation the amounts reported on the tax return. If Annual State-
by § 8909, Title 5, United States Code. However, pre- ment amounts are used, tie the amounts to the audited
miums from federal government employee groups such financial statements.
as the Federal Reserve Bank or the FNMA are taxable. • Determine if the premiums received can be cross-
• Company contributions to an employee health benefit checked to a receivable. Verify that payments received
plan are exempt. A contribution by an HMO for health match amounts invoiced to customers.
coverage for its own employees through the HMO is an • Determine if the HMO maintains adequate records to
expense of the company and is not revenue. If this de- support the method of reporting premiums received.
duction is taken, verify that the company’s contribution • Determine if there are other sources of revenue. Fees-
is added back in or is included in Gross Premiums. for-service and co-payments are amounts an HMO or
• Employee contributions made from employees’ salaries provider will collect for services that are not covered
by insurance carriers for premiums on, or participation under the contract. The fees are paid out by the HMO
in, insurance benefits underwritten by the insurance car- to the providers rather than retained as revenues. If the
rier constitute taxable premiums and must be reported HMO retains any part of the fees or co-payments, they
as a taxable premium. are subject to tax.
• Determine the reliability of the records provided by
During the 2007 session, the Texas Legislature clarified the testing internal controls as appropriate. Trace revenues
taxation of life, health and accident policies and coverage by received from source documents to the billing journals
Health Maintenance Organizations. Section 2 of HB 3315 and through the accounting system. Perform other tests
amended § 222.002 (b) of the Insurance Code to state that as needed.
taxpayers:
Verify Non-Taxable Premiums
“. . . shall include the total gross amounts of • Determine what documents the taxpayer uses to obtain the
premiums, membership fees, assessments, dues, non-taxable premium amounts reported on the tax return.
revenues, and other considerations received by • Determine if the non-taxable premiums received can be
the insurer or health maintenance organization in traced to a receivable. Verify that non-taxable payments
a calendar year from any kind of health mainte- received match amounts invoiced to customers.
nance organization certificate or contract or insur-
ance policy or contract covering risks on individu- Policy Testing
als or groups located in this state . . .” Generally, HMOs market to groups within a single state. As
with policy testing conducted on other types of companies,
Audit Activities verify that the premiums are allocated to the states where
the group members reside.
Premium Reconciliation
The HMO’s Annual Statement contains schedules and ex-
hibits listing gross premiums written, collected, receivable, Tax Rate
earned and unearned. Beginning with the 1995 tax year the tax rate for HMO pre-
miums is fixed at 1.75 percent. (The first $450,000 in premi-
• Schedule T – this will usually list the premiums as writ- ums is taxed at 1/2 of the fixed rate.)
ten. The basis for reporting is checked at the bottom of
Schedule T.
• Premiums, Enrollment and Utilization Table – this re- Other Areas
port lists premiums collected, receivable, unearned and
Tax Credits: See Premium Tax Credits, Chapter 9
earned. Effective with the 2004 Annual Statement, this
table no longer shows the collected premium. Another Retaliatory Tax: See Retaliatory Tax, Chapter 10
source for collected premiums would be the Cash Flow Maintenance Tax: See Maintenance Taxes, Chapter 12
statement.
OPIC Assessment: See OPIC Assessment, Chapter 14
• Income Statement – these reports also show premiums
amounts. Statutory Reference: Chapters 843/225/258 (TIC)

September 2008 Texas Comptroller of Public Accounts • Audit Division 15


Chapter 6: Title Insurance Companies Audit Procedures for Insurance Tax

Chapter 6
Title Insurance Companies
Introduction • Identify premium income accounts in the General Led-
ger or Trial Balance and reconcile to company-wide
Title Insurance means insuring, guaranteeing or indemnifying premiums on Schedule T.
owners of real property or others interested therein against loss • Review the General Ledger or Trial Balance for miscella-
or damage suffered from a defect in the property’s title. Pos- neous income accounts that might be premium accounts.
sible title defects include, but are not limited to: errors in deeds, • Review the Underwriting and Investment Exhibit/State-
mistakes made in examining records, forgery, undisclosed heirs, ment of Income in the Annual Statement for miscella-
missing heirs, liens for unpaid taxes and liens by contractors. neous income. If there is miscellaneous income, it will
be noted in the aggregate write-in section.
Definitions • Review the most recent Financial Examination Report
or Summary and the most recent financial statements
Premium tax is levied on all the amounts defined to be pre- prepared by outside CPA’s for indications of potential
miums, whether paid to the Title Insurance Company or re- reporting problems.
tained by the Title Insurance Agent. See Chapter 223 (TIC)
Test of Internal Controls
Title premiums are defined as the total amount of premiums The test of internal controls is conducted in conjunction
received for the taxable year on title insurance written on with the policies selected for review.
property located in Texas, except premiums received from
other licensed title insurance companies for reinsurance, less If the premium is allocated to an account that does not tie to
return premiums paid policyholders with no deduction for company-wide premiums on Schedule T, question the tax-
premiums paid for reinsurance. The charges for title exami- payer about the nature of the account. Determine if it should
nation, for closing the transaction and for issuance of the be included as a taxable account.
policy are included in taxable premiums. For Texas, these
are the all inclusive premiums shown on Schedule T.
Policy Testing
The purpose of policy testing is to verify the allocation of pre-
The State of Texas facilitates the collection of the premium
miums to the various states as noted on Schedule T. The Texas
tax on the portion of the premium retained by the agent by
statute says that premiums should be allocated based on the
setting the division of the premium between insurer and
location of the risk. Title insurance premiums should be allo-
agent so that the insurer receives the premium tax due on
cated to the state where the property being insured is located.
the agent’s portion of the premium and remits it to the State.
Currently the agent is required to remit 15 percent of the
The auditor should determine how the premiums are allocated
premium collected to the insurer and retains 85 percent.
among the states and then perform tests to insure that the meth-
od is correct. Generally in the case of title companies, alloca-
Premium tax is levied on all the amounts defined to be
tions are not an issue since the location of the property controls
premiums, whether paid to the Title Insurance Company or
all aspects of the title company’s business. This includes all
retained by the Title Insurance Agent. See Chapter 223.
activities performed on behalf of the buyer and seller prior to
closing. The settlement statement includes charges to each par-
There are no non-taxable title premiums.
ty, such as payment of school district and other local taxes, in
addition to real estate commissions and miscellaneous charges.
Audit Activities
Designing testing procedures are left to the auditor’s judg-
Premium Reconciliation ment. Often the level of confidence the auditor has in the
• Reconcile Texas premiums from the Texas Page and internal controls of the taxpayer will determine the proce-
Schedule T to the premium tax return. dures needed.

16 Texas Comptroller of Public Accounts • Audit Division September 2008


Audit Procedures for Insurance Tax Chapter 6: Title Insurance Companies

Tax Rate Other Areas


Beginning with tax year 2000, the tax rate for title premiums
is fixed at 1.35 percent. Tax Credits: See Premium Tax Credits, Chapter 9
Retaliatory Tax: See Retaliatory Tax, Chapter 10
Other Issues and Considerations Maintenance Tax: See Maintenance Taxes, Chapter 12
A title holding company that controls one or more domestic
title insurance companies is entitled to a credit against its OPIC Assessment: See OPIC Assessment, Chapter 14
Franchise Tax. The credit is based on the premium tax paid Statutory Reference: Chapter 223 (TIC)
by the domestic title insurance company. This issue is the
responsibility of the Franchise Tax auditor.

September 2008 Texas Comptroller of Public Accounts • Audit Division 17


Chapter 7: Reinsurance Audit Procedures for Insurance Tax

Chapter 7
Reinsurance
Reinsurance If the reinsurance was not reported as ceded, review the
reinsurance treaty to determine if the transaction represents
Reinsurance is a transaction that involves the acceptance by the sale/purchase of a block of business.
an insurer (the reinsurer) of all or part of the risk on a policy
written by another authorized insurer (the ceding company). If a sale/purchase of a block of business occurs, the com-
It is a way for the ceding company to spread out the risk pany assuming the premiums is responsible for reporting the
on large or catastrophic policies. In order to be classified premium tax. The auditor will need to determine how much
as reinsurance, a contractual agreement or treaty must exist of the assumed premiums relate to Texas risks.
between the two insurance companies.
If an insurance company purchases coverage for its own use
Premium tax on reinsurance premiums is the responsibility from another insurance company, e.g., employees’ group
of the ceding company. health plan, the premiums are subject to premium tax and
are reportable by the company issuing the coverage.
Reinsurance assumed and ceded is reported on Schedule S
of the Annual Statement for life companies and Schedule F Examples of taxable direct premiums misclassified as rein-
of the Annual Statement for property & casualty companies. surance assumed include:
Examine these schedules for names other than insurance
companies because we often find that stop loss policies are • Stop Loss Insurance written on a self-funded employer
considered reinsurance by the insurer. plan to cover excess losses or benefits. In this situation,
the ceding company is likely to be a non-insurer.
Review the assumed schedule of the company that you are • Premiums assumed from a Multiple Employee Welfare
auditing to determine the dollar amount of the reinsurance Arrangements (MEWA). See Tax Policy Response
assumed. Use the NAIC system to verify that the other com- dated January 17, 1997.
pany reported the premiums on their ceded schedule.

18 Texas Comptroller of Public Accounts • Audit Division September 2008


Audit Procedures for Insurance Tax Chapter 8: Annual Statement Filing Fees

Chapter 8
Annual Statement Filing Fees
Annual Statement Filing Fees
Chapter 202 sets the maximum filing fee at $500 for a com-
pany writing a class of business governed by Chapter 841 of
the Insurance Code (life, accident & health business). The
actual fee is determined by rule and is currently set at $250.
The statute also states that companies subject to fees under
Chapter 202 with less than $450,000 in premium pay one-
half of the actual amount of the filing fee.

Typically the fees are $20 or $250; Lloyd’s insurers are exempt
from the filing fee. These filings fees are not audited; however
the Insurance section of Revenue Accounting often corrects the
reported filing fees when the returns are filed in March.

September 2008 Texas Comptroller of Public Accounts • Audit Division 19


Chapter 9: Premium Tax Credits Audit Procedures for Insurance Tax

Chapter 9
Premium Tax Credits
Introduction Credit Type P&C Life/A&H HMO Title
There are two types of credits reported on the premium tax Examination Fee Credits Y Y Y Y
return. These are credits and assessment (guaranty fund) Overhead Assessment
credits. The sources used to verify credits do not vary by
Y Y Y Y
Credits
company types. Valuation Fee Credits N Y N N
Texas Dept. of Health
Credits Exam. Fee Credit
N N Y N

Credits include examination, overhead, valuation and Texas


Examination fee, overhead assessment, valuation fee, and
Department of Health examination fees paid by the insurer.
Texas Department of Health examination fee credits in ex-
cess of the tax for the year cannot be carried over to future
Examination Fee and years. These credits are used before any assessment credit is
Overhead Assessment Credits claimed.
The Examination Fee credits apply only to insurers located
in Texas, either foreign or domestic. The amount of credit Statutory Reference: Chapter 803 (TIC)
allowed is limited to the examiner’s salary applicable to
work performed in Texas. The Overhead Assessment applies Other Reference: Comptroller of Public Accounts Rule 3.831
only to insurers that are incorporated in Texas. Both of these
credits are found on the Excel spreadsheets that are provided Assessment Credit
to the Comptroller by the Texas Department of Insurance.
Our Insurance section in Revenue Accounting in Austin re- The assessment credit consists only of the taxpayer’s Guar-
views these credits each year and will amend the taxpayers’ anty Fund credits. The assessment credit is preprinted on the
returns to make any necessary corrections. taxpayer’s return. This preprinted amount ties to the assess-
ment credit amount listed on the XIAMAX inquiry for each
report year.
Valuation Fee Credit
Applies only to domestic life insurers. The credit available
Examination fee, overhead assessment, valuation fee, and
for any report year is the amount of the valuation fee paid
Texas Department of Health examination fee credits are
on the prior year’s maintenance tax return. Run XIDATA
used before any assessment credit is claimed. Then, if there
inquiry for tax code 72 to verify the amount available. Ef-
is not enough premium tax to absorb the assessment credit
fective September 1, 2007, the valuation fee as well as the
available for a report year, the unused assessment credit is
premium tax credit were repealed by HB 3315.
carried forward for use in future report years.
Texas Department of There is no Guaranty Association for Health Maintenance
Health Examination Fee Credit Organizations (HMO) in Texas. Therefore, assessment cred-
Applies only to Health Maintenance Organizations. The its will not be applicable to HMOs.
credit available for any report year is the amount paid to the
Texas Department of Health during that year. Refer to the
Statutory Reference: Article 21.28-C (TIC) (property & casualty)
invoices from the Texas Department of Health and canceled Article 21.28-D (TIC) (life/accident & health)
checks to determine the credit available. Chapter 2602 (TIC) (title)

20 Texas Comptroller of Public Accounts • Audit Division September 2008


Audit Procedures for Insurance Tax Chapter 9: Premium Tax Credits

CAPCO Credits Audit Adjustments/Verification


Certified Capital Companies (CAPCOs) are private venture Discrepancies in reported credits or assessment credits must
capital companies that invest money in qualified businesses be verified in writing (via e-mail or memo) with Revenue
in this state. The insurers making an investment in a CAP- Accounting. Written documentation should be included
CO are “certified investors” and these companies may take in the audit plan. Verified differences in credits should be
a 25 percent tax credit against premium tax owed beginning scheduled as adjustments in an audit. Differences in as-
with the 2008 tax year, due March 1, 2009. Any remaining sessment credits are not scheduled as audit adjustments.
credits may be taken in successive years until exhausted. Currently application of available guaranty fund credits to
The credit may be used to reduce the tax liability to zero but a period within an audit is handled as a refund verification
it cannot result in a refund. after receipt of the taxpayer’s written request.

Only “certified investors” may transfer CAPCO credits to


other certified investors.

For more information on the CAPCO program, please visit


the following Web sites:

http://www.cpa.state.tx.us/taxinfo/taxforms/25-forms.html
http://www.legis.state.tx.us
http://info.sos.state.tx.us/pls/pub/readtac$ext.
TacPage?sl=R&app=9&p_dir=&p_rloc=&p_tloc=&p_
ploc=&pg=1&p_tac=&ti=34&pt=1&ch=3&rl=833
http://tlo2.tlc.state.tx.us/statutes/i1.toc.htm

September 2008 Texas Comptroller of Public Accounts • Audit Division 21


Chapter 10: Retaliatory Tax Audit Procedures for Insurance Tax

Chapter 10
Retaliatory Tax
Introduction • Make note of any additional taxes, assessments and
fees not shown on the home state’s tax return. In addi-
Retaliatory taxes are assessed on licensed foreign or alien tion, determine if the home state requires a franchise or
insurers when their State of Incorporation assesses higher income tax return in addition to or in place of the pre-
aggregate taxes, fees, and assessments on the writing of in- mium tax return.
surance by Texas domiciled insurers than the State of Texas
assesses on foreign insurers writing insurance in this state. Fees and Credits
The purpose of retaliatory taxes is to equalize taxation of Request copies of all assessment and fee invoices. If the
insurers in Texas and other states when other states place an state of incorporation allows 100 percent (immediately
overall higher tax burden on Texas insurers than this state or over time) premium tax credit on these assessments or
places on insurers from such other states. Further, such taxes fees, then do not enter the credits from these categories in
are intended to encourage more equal treatment of insurers Column II (commonly called the home state side) of the
by other states, thereby allowing Texas domiciled insurers Retaliatory Worksheet. Likewise, any Texas assessments or
equal access to markets in other states. fees that can be taken as a 100 percent credit against the pre-
mium tax return (e.g., guaranty fund assessments, overhead
Retaliatory taxes are determined and assessed on the basis of assessments and examination fees) should not be listed on
“what if” a Texas domiciled insurer was licensed and doing the Retaliatory Worksheet.
business in the other state and writing the same coverages as
the foreign insurer is writing in this state. For purposes of com- Fees that can be recouped by the company are not included
paring tax rates, “the basic” or highest rate of taxation is used in the retaliatory computation. The key is whether the com-
for both states. A “similar type insurance company” is a com- pany has the right to recoup the cost. If the state of incorpo-
pany licensed to write the same type of business, such as life, ration does not prohibit reimbursement, then the fees should
accident and health, property and casualty, or title insurance. not be included. For example, if the home state allows the
agent fees paid by the insurer to be recouped from the agent,
Retaliatory taxes do not apply to Surplus & Excess Lines then the fees should not be included on the home state’s side
insurance, Independently Procured insurance, Third Party of the retaliatory calculation.
Administrators, Registered Risk Retention Groups, Purchas-
ing Groups, and Health Maintenance Organizations. Similarly, the Automobile Burglary and Theft Prevention
Authority Assessment -is recoupable. This fee should not be
All states except Hawaii have retaliatory tax statutes. included on the Texas side of the retaliatory calculation.

Audit Activities Compute the Premium Tax Base


Recalculate the home state taxes, assessments, and fees that
Preliminary Activities are premium based using Texas premiums. Use the Retalia-
• Review the National Association of Insurance Com- tory Worksheet as a guide for this calculation.
missioner’s (NAIC) Retaliatory Guide for the state of
incorporation. Use the home state return instructions and the NAIC Retal-
• For the retaliatory comparison, the insurer under audit iatory Guide to determine the correct tax base. For example,
is considered a foreign company in the state of incorpo- if a taxpayer sells annuities the auditor will need to check
ration. Therefore, determine if that state has a separate the NAIC Retaliation Guide to see if the state of incorpora-
return for foreign insurers. tion taxes annuities. Texas does not tax annuities as premi-
• Request copies of all premium tax returns and miscel- ums, but does assess a maintenance tax on annuity consid-
laneous tax returns (e.g., Fire Marshall tax, state income erations (annuitized amounts, or back end reporting on the
tax) as filed by the insurer. maintenance tax/fee return.

22 Texas Comptroller of Public Accounts • Audit Division September 2008


Audit Procedures for Insurance Tax Chapter 10: Retaliatory Tax

Determine the Correct Tax Rate Title Company Premiums


The tax rate on the Texas side of the Retaliatory Worksheet The premium tax base can be calculated in one of two ways:
is fixed at the flat rate and is pre-printed on the form. the all-inclusive method, or the risk method. The method
used in a particular state depends on that state’s statutes
The tax rate for the home state is the basic tax rate. Certain and regulations. Schedule T for title companies contains a
states allow the basic rate to be indirectly reduced by allow- column which indicates the particular method that is used in
ing tax credits instead of a lower tax rate. Generally, credit each state. Note that Texas is an all-inclusive state.
is allowed against the premium tax due based on the amount
of qualifying investments in the insurer’s home state. The all-inclusive method produces a larger premium tax
base than the risk method. If the home state uses the risk
For example, the basic tax rate in Mississippi for foreign method, obtain schedules from the taxpayer showing how
insurers is 3 percent. However, a credit of as much as 50 the Texas premiums would be recalculated using the home
percent of the premiums tax due is allowed. This is the state’s statutes and regulations.
equivalent of reducing the tax rate to 1.5 percent.
All title insurance companies licensed and operating in
It is current Agency policy to disallow any investment type Texas report and pay premium and maintenance taxes on the
credits that reduce the effective tax rate. all-inclusive basis. Since title agents in Texas retain a very
large percent of the collected premium and are legally li-
Other Considerations able for premium taxes on the portion retained, the retained
portion of the title premiums should be deducted from the
Adjustments to Texas Maintenance Taxes Texas side on the Retaliatory worksheet in order to show
If the company is in a retaliatory tax position or paying re- only the tax base the title tile insurer is subject to. As an
taliatory tax, any adjustment to Texas maintenance tax may example, Title agents in Texas (by TDI rule) currently retain
be offset by an equal but opposite retaliatory tax adjustment. 85 percent of the collected premium. Chapter 223 provides
for the insurance company to remit taxes on 100 percent of
For example, assume the taxpayer owes $2,000 for retalia- the premium and that the tax due on the agents’ portion is
tory tax. An audit adjustment is then made for an OPIC As- included in the company’s portion of the premium. For pur-
sessment of $500. Once this adjustment is carried forward poses of completing the retaliatory worksheet, the premiums
to the Retaliatory Worksheet, the audited retaliatory tax due in the Texas column should be reduced by 85 percent for
will be reduced to $1,500. The net change from the OPIC premium tax purposes, but should not be reduced for main-
adjustment is zero. tenance fee purposes.

If the additional maintenance tax due is greater than the re- Statutory Reference: Chapter 281 (TIC)
taliatory tax originally due, there may not be a direct offset.

The audit plan should contain sufficient documentation to


explain why adjustments were not made.

September 2008 Texas Comptroller of Public Accounts • Audit Division 23


Chapter 11: New York Retaliatory Tax Audit Procedures for Insurance Tax

Chapter 11
New York Retaliatory Tax
Introduction An important point to consider is that there is a tax limita-
tion on taxable premiums that cannot be exceeded.
The New York (NY) retaliatory tax calculation is quite com-
plex and utilizes a series of calculations to arrive at the tax In addition, there is currently one tax surcharge that applies:
due. These amounts are computed on various schedules on
the CT-33, the “Franchise Tax Return for Insurance Corpo- • Metropolitan Transportation Business Tax Surcharge – the
rations” and on the CT-33-M, the “Metropolitan Transporta- rate is 17 percent of tax due above, after allocation to the
tion Business Tax Surcharge Return and Claim for Refund Metropolitan Commuter Transportation District (calcu-
of MTB Surcharge Retaliatory Tax Credit.” New York uses lated on NY CT-33-M). Effective with the 2003 return, the
the following as the basis for the calculation: wage component of the Metropolitan Business Tax Sur-
charge was eliminated for non-life companies. From 2003
1. Allocated Entire Net Income (Schedules B & F) forward, this factor is based solely on written premium.
2. Allocated Business and Investment Capital (Schedule D)
Effective with the 2003 return, non-life companies are
3. Alternative Tax (separate manual computation/no schedule) subject to a fixed rate of 1.75 percent for accident &
4. Minimum Tax of $250.00 health premiums and to a fixed rate of 2.00 percent for
5. Allocated Subsidiary Capital (Schedule C)
all other non-life premiums. The new form is entitled
CT-33-NL.
6. Insurance Premiums (Schedule H)
7. Tax Limitation at applicable tax rate of Taxable Premiums
(Schedule H)
Audit Activities
8. Surcharge (MTB surcharge from CT-33-M) • Request complete copies of the New York (NY) CT-33
return and the NY CT-33-M as filed, the NY state busi-
The actual tax computation is calculated by adding the larg- ness page, and the Federal 1120, along with the workpa-
er of items 1, 2, 3, or 4 to the total of items 5 & 6. This total pers, for the taxpayer under audit. If the taxpayer filed as
is then compared to the limitation amount in item 7. The tax part of a consolidated group, request the Federal pro-for-
will be the lower of these two totals. Usually the main focus ma return or the consolidating workpapers to the return.
of the work will be on the allocated net income, though the • Calculate the Texas retaliatory tax on a NY basis. This
other factors should be reviewed and calculated if necessary. complex calculation involves the eight steps outlined
below.

1.   Allocated Entire Net Income – a two part calculation


Part 1 – Schedule F – “Computation and Allocation of Entire Net Income:”
a. Using the 1120 requested, verify that the starting point on the NY Schedule F is Federal Taxable Income. Ascertain that the returns
provided are copies of the actual filings with NY state and the federal government.

b. Other amounts shown on Schedule F can be verified using the 1120. There is one amount that can be reported in a variety of
ways. The “NY State Franchise Tax deducted on federal return” is added back in the computation. This amount is usually based on
an estimate or on 100 percent of the prior year’s tax paid and generally can be verified using the taxpayer’s federal workpapers.
Alternative calculations, such as using the Schedule T premiums multiplied by the tax rate, plus the surcharge may be necessary. The
auditor should discuss this or any alternative calculation with the taxpayer.

c. After these additions and subtractions are made from the federal taxable income, the entire net income can then be
determined. The entire net income is then multiplied by the allocation percentage computed in the following section.

24 Texas Comptroller of Public Accounts • Audit Division September 2008


Audit Procedures for Insurance Tax Chapter 11: New York Retaliatory Tax

Part 2 – Schedule B – “Computation of Allocation Percentage:”


a. These amounts are computed using the hypothetical Texas company’s amounts. Substitute “Texas” for “New York” amounts on this
schedule using the Texas state page. Instructions for the CT-33 will be helpful in determining which amounts should be used to
compute each of the lines shown. For instance, “Texas taxable premiums” and annuities are included in the computation net of
dividends. Reinsurance assumed and ceded must be added and subtracted in the computation. Premiums that cannot be specifically
assigned to any other state (orphan policies) are included in the computation. It may be necessary to estimate the Texas amount
based on a ratio of Texas to NY premiums.

b. The auditor must next verify company wide total premiums. This should be the amount as filed on the N.Y. state returns.

c. The Texas premium percentage is based upon the ratio of Texas to total company premiums. The percentage is weighted; multiplied
by nine.

d. The second percentage is a percentage of Texas wages to total company wages. It is added to the weighted premium percentage
computed previously and that result is divided by 10.

e. The allocation percentage is then multiplied by the entire net income amount computed above to arrive at “Allocated Entire Net
Income.”

f. The “Allocated Entire Net Income” is taxed at the applicable rate.

g. A factor is disregarded if both the numerator and denominator are missing.


Note: It is helpful to follow the CT-33 return format to compute the Texas amounts. The instructions to this return will also aid the
auditor in preparation of the pro-forma Texas CT-33.
2. Computation and Allocation of Subsidiary Capital
a. The computation of subsidiary capital is applicable when a taxpayer owns greater than 50 percent of the voting stock of a
subsidiary. Generally the reported amounts are balance sheet or Annual Statement items.

b. The issuer’s allocation percentage is a predetermined ratio available from the prior year’s NY return. It is also available from NY
State Department of Taxation & Finance if third party verification is necessary.

c. The allocation percentage is then applied to the “Computation and Allocation of Subsidiary Capital.” The Allocated Subsidiary Capital
is taxed at the applicable rate.
3. Computation and Allocation of Business and Investment Capital
a. Verify that subsidiary capital shown on Schedule D, uses the reported net average fair market value amounts from NY
Schedule C. Generally the reported amounts are balance sheet or Annual Statement items.

b. The allocation percentage is applied to the “Computation and Allocation of Business and Investment Capital.”

c. The Allocated Business and Investment Capital is taxed at the applicable rate.
4. Alternative Tax
a. Start with the Texas Allocation of Entire Net Income previously calculated. This amount comes from Schedule F.

b. Add officers and certain stockholders salaries from Schedule G to this amount.

c. Subtract the allowable exclusion of $15,000.

d. Multiply this sub-total by 30 percent.

e. Multiply the result by the allocation percentage.

f. The “Alternative Tax” is computed at the applicable rate.

g. If the result is negative after combining the entire net income with officer & stockholder salaries, the “Alternative Tax” is zero.
5. Minimum Tax
a. This is fixed at $250.

September 2008 Texas Comptroller of Public Accounts • Audit Division 25


Chapter 11: New York Retaliatory Tax Audit Procedures for Insurance Tax

6. Insurance Premiums
a. This amount is from Schedule H and can also be crosschecked with the Texas taxable premium amount previously calculated on Schedule B.

b. Dividends deducted do not include cash paid on deferred dividends due policyholders on maturing policies and cash surrender values.
7. Tax Limitation
a. This is the same amount used from the “Insurance Premiums” step in item 6.

b. New York limits the total tax due to a percentage of total premiums as computed above. However, if a taxpayer derives more than 95
percent of premiums and other considerations from annuity contracts, ocean marine insurance, or from group insurance for the elderly,
these are included in the tax limitation computation. The total is multiplied by the applicable percentage to compute the limitation.

c. Total tax due cannot exceed the limitation.


Suggested Short Test: Perform the Tax Limitation calculation prior to the other tests. If the tax paid in Texas far exceeds the limitation
amount for NY, it is unlikely retaliation will be due. However, don’t forget to consider the MTA surcharge.
8.   Surcharges
Metropolitan Transportation Business Tax Surcharge
a. The first step is to verify that the taxpayer filed the CT-33-M return. If the company did not file the CT-33-M, check the CT-33 for a
disclaimer required of all insurers not filing the CT-33-M.

b. If this return was filed, computation of the MCTD allocation percentage and the MTA surcharge are necessary. Begin with the tax due
prior to the state tax surcharge as calculated in steps 1 through 7 above.

c. Compute the MCTD allocation percentage. Non-consolidated figures should be used reflecting New York business. This percentage
will reflect the premiums written on risks located in the MCTD area as well as wages paid to employees working within the MCTD
compared to the total premiums written and wages paid. The premium percentage is heavily weighted.

d. Apply the allocation percentage to the state tax due.

e. Multiply the allocated tax by the applicable tax rate to obtain the MTA surcharge.

Note: The logic used in this area is that almost every insurer doing business in New York State is also likely to be doing business within
the New York City Metro area, which includes the five New York City boroughs of Manhattan, Brooklyn, Queens, Bronx, and Staten
Island and also included are Nassau, Suffolk, Westchester, Orange, Putnam, and Rockland Counties. The assumption is that a
hypothetical Texas company doing business in New York state would be doing its MCTD business in a similar ratio as the actual
New York company under audit. However, although the Texas company is likely to have the same premium ratio within the MTA
as the NY company, it is not likely to have the same wage ratio since the New York company may include headquarters’ personnel
that will not likely be part of the Texas company ratio.

The Texas allocation for MCTD Premiums will follow the taxpayers actual NY reported premium ratio. The Wage ratio will be derived from
Texas wages over the reported NYS Wages as a base number. Multiply the reported premium ration by nine to obtain a Weighted Premium
Ratio. Add the Wage ratio to the Weighted Premium ratio. Divide this sum by ten to derive the Texas company’s MTA ratio; zero Texas wages
will not affect the calculation. Following is the format for the computation.

Computation of Texas Company’s New York Ratio:

1. Reported Premium Ratio x 9 = Weighted Premium Ratio


2. Texas Wages
----------------------------- = Wage Ratio
NY Wages

3. Add Weighted Premium Ratio to Wage Ratio. Total divided by 10 = ratio factor

4. Apply the ratio factor from #3 to the audited Retaliatory Tax due from the NY CT-33 to derive an allocated tax. The applicable tax rate
is then applied to the allocated tax to derive the audited MTA surcharge due for Retaliatory purposes.
Note: If the New York company’s reported MTA ratio is based on something other than a business related factor, it may be necessary to
recalculate the NY ratio. The reported NY ratio must be analyzed for reasonableness. For example a company may have used the
number of counties or square miles in the MTA compared to the state total as a basis. Neither would be an acceptable starting
point for the above calculation.

26 Texas Comptroller of Public Accounts • Audit Division September 2008


Audit Procedures for Insurance Tax Chapter 11: New York Retaliatory Tax

Other Considerations
1.   New York requires pre-payments on the Franchise Tax returns.
These are payments for the tax due in the next year, and
not the year under examination. Do not confuse this with
penalties or additional taxes. Verify amounts from New York
form CT-5, which the taxpayer can provide.
2.   Obtain a copy of the New York CT-33 & CT-33-M instructions,
which will be helpful in determining how to recalculate the
Texas CT-33 & CT-33-M.
3.   Always obtain a copy of the New York CT-33 & CT-33-M as
actually filed. Copies of returns as filed can be obtained from
the NY State Department of Taxation and Finance. See the
retaliatory guide for additional references.

References: NY Tax Code Sec. 1505, 1510, 1520

September 2008 Texas Comptroller of Public Accounts • Audit Division 27


Chapter 12: Maintenance Taxes Audit Procedures for Insurance Tax

Chapter 12
Maintenance Taxes
Property & Casualty Exemptions:
Ocean Marine and Aircraft premiums are not actually “ex-
The maintenance tax return contains separate lines for vari- empt” from maintenance tax, but the Texas Department of
ous categories of premiums. The different lines of business Insurance (TDI) has not set a rate for the collection of the
are obtained from the Texas Page and are summarized by maintenance tax. The TDI considers the following lines to
category according to the following chart: be Professional Liability Insurance predicated on Article
5.13. These “Professional Liability” lines are not subject to
Fire and Allied Lines regulation and therefore are not subject to maintenance tax-
Fire es: Accountants, Architects, Beauticians/Barbers, Engineers,
Allied Lines For Profit Nursing Homes, Lawyers, Medical Laboratories,
Earthquake
Psychologists, Real Estate Dealers, Surveyors, and X-Ray
Flood
Farmowner’s Multiple Peril Laboratories.
Homeowner’s Multiple Peril
Commercial Multiple Peril (non-liab.) The deductible dividends shown on the Texas Page, column
Growing Crops 4, should be subtracted from the premium amounts obtained
Inland Marine from column 2. Compare the category totals to the reported
Casualty and Fidelity amounts on the maintenance tax return.
Commercial Multiple Peril (liab. portion)
Financial Guaranty A company that writes any combination of life, accident and
Medical Malpractice Liability
health insurance or annuity business may net premiums/an-
Product Liability
Other General Liability nuity considerations between these lines of business if one
Fidelity or more contains negative premiums or negative consider-
Surety ations. Any resulting negative amounts for either are to be
Glass reported as zero.
Burglary & Theft
Credit Guaranty
A company that writes property and casualty coverage and/
Accident and Health or accident and health coverage MAY NOT offset the nega-
All Other Accident & Health tive premiums in one category of property and casualty
Group Accident & Health
against another category of property and casualty or against
Group Credit Accident & Health
Other Credit Accident & Health accident and health premiums. Negative premiums on any
Collectively Renewable A & H line item are to be reported as zero.
Non-cancelable Accident & Health
Guaranteed renewable A & H
Statutory References: Chapters 252, 253, and 254 (TIC).
Non-renewable for stated reasons
Other Accident Only
Auto Other Issues/Workers’
Private passenger Auto No-Fault
Other Passenger Auto Liability
Compensation Deductible Credits
Commercial Auto No-Fault If a policyholder selects a policy with a workers’ compensa-
Other Commercial Auto Liability
Private Passenger – Physical Damage
tion deductible option, the deductible credit amount is the
Commercial Auto – Physical Damage difference between the estimated standard premium and the
estimated modified/schedule rating premium. Refer to the
Workers’ Compensation
calculations that follow.
Workers’ Compensation

28 Texas Comptroller of Public Accounts • Audit Division September 2008


Audit Procedures for Insurance Tax Chapter 12: Maintenance Taxes

The workers’ compensation maintenance tax base is the The format used is essentially the same as in prior years (see
gross written premium amount. The premium tax base is the the 5/10/2003 edition of the Texas Workers’ Compensation
premium amount the policyholder actually pays the insurer and Employers’ Liability Manual from the TDI). Item #18
(gross written premium net of deductible credit). was added effective May 10, 2003.

Determine if the taxpayer writes workers’ compensation This format must be strictly adhered to because deductible
policies with deductible credits. If so, the deductible credit credits are added back to the Texas Page workers’ compen-
amounts should be obtained from the taxpayer and added to sation premiums for maintenance tax purposes.
the workers’ compensation premiums shown on the Texas
Page. This total should equal the reported base for mainte- Statutory References: Chapters 255 (TIC), Article 5.76-5 (TIC),
nance tax purposes. and section 403.003 (TLC), and section
404.003 (TLC).
The method for determining the Workers’ Compensation
Premium (Total Estimated Policy Cost) with a deductible Life/Accident & Health
credit adjustment is prescribed in the Workers’ Compensa-
tion and Employer’s Liability Manual and is available on- The maintenance tax return contains separate lines for acci-
line from the TDI Web site. dent & health premiums and life & annuity premiums.

Calculation of Total Estimated Policy Cost ** The maintenance tax base for accident & health is Texas
premiums as shown on Schedule T, less all non-taxable ac-
1. Estimated Payroll x Rate = Estimated Annual Premium for cident & health premiums reported on the Computation of
Each Classification (Items 1-3) Non-Taxable Premiums (form 25-205).
4. + Aircraft Passenger Seat Surcharge, if applicable
5. + Premium Charge for Waiver of Subrogation, if applicable The maintenance tax base for life premiums is Texas premi-
ums as shown on Schedule T, less all non-taxable life premi-
6. + Premium for Increased Limits for Employers’ Liability, if
ums reported on the Computation of Non-Taxable Premiums
applicable
(form 25-205).
7. + or – Premium Incentives for Small Employers, if applicable
8. = Estimated Premium Subject to Experience Modifier In 2001, the NAIC revised the Annual Statement, Schedule T
(1+2+3+4+5+6+or -7) reporting requirements for annuities as a result of Statements
9. x Experience Modifier (or Negotiated Modifier), if applicable on Statutory Accounting Practices (SSAP) 50, 51 and 52.
10. = Estimated Modified Premium (8x9) The maintenance tax base for annuities has not changed. The
changes on Schedule T mean that a column total from Sched-
11. x Schedule Rating Plan Factor, if applicable
ule T can no longer be used to accurately report maintenance
12. = Estimated Modified/Schedule Rating Premium (10x11) tax for annuities. Taxable annuities are the amounts that have
13. – Deductible Credit, if applicable Based on Estimated annuitized or that have been paid out to the annuitant, generally
Modified/Schedule Rating Premium referred to as “back-end” reporting of annuities. This amount
14. + Minimum Premium for L&H.W. Admiralty or F.E.L.A. will usually be less than the total shown as annuity consider-
Operations, if applicable ations, currently in Column 3 of Schedule T. There could be
15. = Estimated Standard Premium (12-13+14) taxable annuity amounts in other columns of the annual state-
16. – Premium Discount, if applicable Based on Estimated ment regardless of the application of morbidity or mortality
Standard Premium rates to the amounts. Deposit type accounts are not subject to
17. + Expense Constant
maintenance tax. The auditor will need to obtain information
from the taxpayer to verify the taxable portion in each column.
18. + Terrorism Premium (Total Payroll/100 x Terrorism Rate), if
applicable
Prior to this change, taxable annuities were generally the
19. = Total Estimated Policy Cost excluding premium adjustments Texas amounts shown on Schedule T, column 4. Other de-
for retrospective rating plan and/or reimbursements for
deductibles, if applicable (15-16+17+18).
posit type funds were not taxable.
** All workers’ compensation policies are subject to a final
payroll audit that reflects the actual payroll and the actual Statutory Reference: Chapter 257 (TIC)
premium developed on the policy in comparison to the Tax Policy Response dated July 7, 1995,
estimated payrolls and the estimated premium and estimated Other References: STARS accession number 9507047L
policy cost calculated at the time the policy is issued. Tax Policy News, January, 2003

September 2008 Texas Comptroller of Public Accounts • Audit Division 29


Chapter 12: Maintenance Taxes Audit Procedures for Insurance Tax

Health Maintenance Maintenance tax returns after 1997 list a third category of
HMO maintenance tax:
Organizations (HMO)
Chapter 258, TIC, states that the per capita maintenance tax limited health – an HMO providing preventative or curative
is based “on the correctly reported gross revenues” of an care service services directed at chemical dependency/
HMO. To facilitate taxation of enrollees tied to gross rev- mental health and long-term care.
enues, procedures were revised in December 2001. The revi-
sion applies to all periods within the statute of limitations. Statutory Reference: Chapter 258 (TIC)

The revised calculation requires a quarterly average of en-


rollees. The term “enrollee” means all individuals covered Title
by the HMO plan, including the primary enrollee and all The amount subject to maintenance tax is total direct written
covered dependents. For example, if there is one primary premiums for Texas as shown on the Schedule T of the An-
enrollee with three covered dependents, there are four en- nual Statement.
rollees for maintenance tax purposes.
Statutory Reference: Chapter 271 (TIC)
The auditor may calculate the quarterly average of enrollees
using the quarterly information found in the Premium, En-
rollment and Utilization Table of the Annual Statement. If Other Considerations
information is not available, alternate calculations, sources,
and verification may be required. Premiums received from the Federal Employees Health Ben-
efits Program (FEHBP) are preempted from taxes or fees by
Enrollees for whom revenues were reported on the Compu- § 8909, Title 5, United States Code. The definition of taxable
tation of Non-Taxable Premiums (form 25-205) are not sub- premiums now includes payments of state and federal funds
ject to maintenance tax. Those enrollees must be subtracted from the state treasury for Medicaid and Chip coverage. These
from the totals before computing the average enrollees. premiums are now subject to premium and maintenance taxes.
The change took effect September 1, 2003. Premiums received
Maintenance tax returns prior to 1997 listed two HMO from the Texas Employees Group Benefits Act (Chapter 1551,
maintenance tax categories: formerly Article 3.50-2), the Uniform Insurance Benefits Act
for Employees of the University of Texas System and the
Texas A&M University System (Chapter 1601, formerly Ar-
single health – an HMO providing preventative or curative
ticle 3.50-3) and the Texas Public School Employees Group
care service services directed at an injury or illness of a
single specified nature, i.e., dental or vision Benefits Program (Chapter 1575, formerly Article 3.50-4) are
care. not subject to maintenance tax. See Chapter 3, Non-Taxable
basic health – an HMO providing preventative or curative Life and A&H Premiums for additional information regarding
care service services directed at the general health of Chapter 1575, formerly (Articles 3.50-4 and 3.50-7).
the individual covered.
Generally, if any adjustments are made to reported premi-
ums (e.g., allocation errors) the maintenance tax base will
also change. This does not apply to HMO’s

30 Texas Comptroller of Public Accounts • Audit Division September 2008


Audit Procedures for Insurance Tax Chapter 13: Third Party Administration Fees

Chapter 13
Third Party Administration Fees
Introduction accounts represent TPA fees by asking the appropriate per-
sonnel how the insurance company participates in this type
An administrator collects premiums or contributions from of business. If a taxpayer is not licensed as a TPA but is act-
or adjusts or settles claims in connection with life, health, ing as a TPA, any additional fees would be subject to main-
and accident benefits or annuities for residents of this state. tenance tax only. This is a regulatory violation and the tax-
Administrators receive compensation for administering the payer should be instructed to contact the TPA licensing area
plans of other entities. of the Texas Department of Insurance to obtain a license. If
a taxpayer is unable to prove that the amounts in question
Third party administration (TPA) fees collected for church have been received from TPA activities, an audit adjustment
plans and government plans are subject to maintenance tax should be made.
but not premium tax.
Non-Taxable Fees
Third party administrators (TPAs) must be licensed by the Persons not subject to being licensed as an administrator are
Texas Department of Insurance. A list of licensed third party listed in Chapter 259, TIC.
administrators is maintained in the audit office. Licensed in-
surers may also be licensed TPAs. The XISUMM inquiry for Fees collected for administering ERISA plans are not sub-
tax type 72 will show an indicator (30 or 31) for “additional ject to tax; however the auditor should request a copy of the
lines” if a licensed company is also a licensed TPA. executed agreement between the plan sponsor and the TPA
for all non-church and non-government plans. This agree-
Audit Activities ment is sufficient documentation to prove that a plan is in
place and is therefore ERISA governed.
Premium Reconciliation
While conducting the premium reconciliation, investigate
Statutory Reference: Chapter 259/4151 (TIC)
any income accounts that are not reported as taxable pre- Sales Tax Rule 3.355
mium accounts and inquire about TPA fees that might be
collected for administering health plans. Determine if these

September 2008 Texas Comptroller of Public Accounts • Audit Division 31


Chapter 14: OPIC Assessment Audit Procedures for Insurance Tax

Chapter 14
OPIC Assessment
Introduction Other Considerations
For the listed types of coverage, the OPIC (Office of Public There are no statutory exemptions for OPIC assessments
Insurance Council) Assessment is based on the following: under Chapter 501 (formerly Article 1.35B) TIC. However,
Chapters 1551, 1601 and 1575 exempt the policies for these
Property & Casualty entities from any state taxes or other regulatory fees. The
Insurance Maintenance, Assessments and Retaliatory Report
The assessment is based on the total number of policies in Instructions (form 25-300) specifically exclude policies un-
force in Texas at the end of the calendar year. der these articles.

Life/Accident & Health Premiums received from the Federal Employees Health
Benefits Program (FEHBP) are preempted from taxes or
The assessment is based on the total number of new Texas fees by § 8909, Title 5, United States Code. This preemp-
individual policies and/or new Texas certificates of coverage tion applies to the OPIC assessment. Coverage paid from
under a group policy written for delivery and placed in force the United States Treasury or the State of Texas Treasury for
with the initial premium paid in full during the calendar year. the purpose of providing welfare benefits such as Medicare,
Medicaid and the Children’s Health Insurance Program is
Health Maintenance subject to the OPIC assessment.

Organizations (HMO)
Source Documents
The assessment is based on the total number of new Texas
individual policies and/or new Texas certificates of coverage Generally, there is no exhibit or schedule in the Annual
under a group policy written for delivery and placed in force Statement that lists the number of policies and/or certificates
with the initial premium paid in full during the calendar year. subject to the assessment. This information will have to be
obtained from the taxpayer. For individual life policies is-
sued, some taxpayers use the Policy Exhibit of the Texas
Title Page.
The assessment is based on the total number of owner poli-
cies and/or mortgagee policies written during the calendar Statutory Reference: Chapter 501 (TIC)
year on property located in Texas for which the full basic
premium was charged. For example, the reduced premium
on a mortgagee policy is the full basic premium for that type
of policy and should be included in the OPIC computation.

32 Texas Comptroller of Public Accounts • Audit Division September 2008


Audit Procedures for Insurance Tax Chapter 15: Surplus Lines Agents

Chapter 15
Surplus Lines Agents
Introduction Many agents and agencies now file electronically with the
SLSOT.
A Surplus Lines Agent or Agency is defined as an agent or
agency that holds a surplus lines license that this state has The SLSOT generates monthly and annual activity reports.
issued pursuant to Texas Insurance Code, Chapter 255. The The annual activity report specifically states that the agents
agent of record is the Texas licensed surplus lines agent who can not rely on the report for purposes of reporting or pay-
places a policy with an eligible surplus lines insurer or the ing taxes due to the State.
Texas licensed surplus lines agent who transacts business
directly with an out-of-state agent not licensed by Texas as
a surplus lines agent to obtain coverage with an eligible sur-
Audit Activities
plus lines insurer. The auditor’s function is to determine that all premiums
are reported and the agent of record remits all taxes to the
Surplus lines agents are responsible for collecting and Comptroller. The audit procedures used will depend upon
remitting the taxes due on premiums, assessments, dues, the types of records maintained by the agent.
membership fees and any other consideration for insurance
for policies that are placed within the surplus lines market. According to 28 TAC § 15.14, every surplus lines agent is
Taxes are remitted to this agency on Form 25-104. The required to maintain the following records: (1) a policy reg-
Comptroller requires the agents to prepay such taxes by the ister; (2) a contract file; (3) general books of account; and
15th of the month following the accrual of $70,000 or more (4) such other insurance and accounting records as are nec-
in premium taxes. Prepayment amounts must equal the li- essary to properly and promptly service policyholders in this
ability at the end of the month in which the agent accrues state and provide required information to the department. A
$70,000 in tax. Prepayments are remitted on Form 25-105. general ledger, a general journal, cash records and any other
Agents have an option to report and pay premium taxes on a items necessary to reflect the financial solvency of the agent
premium-received or premium-written basis. are required to be maintained per 28 TAC § 15.17. Both
month-end and fiscal or calendar year-to-date summary of
The Surplus Lines Stamping Office of Texas (SLSOT) is a operations are to be maintained in accordance with gener-
non-profit association that reports to the Insurance Commis- ally accepted accounting principles.
sioner. Chapter 255 enumerates the activities of the SLSOT.
Within 60 days of the issuance date or the effective date, Audit procedures include but are not limited to the follow-
whichever is later, the agent must file copies of all policy- ing:
related documents with the SLSOT.
• Run database reports on SLSOT data showing all activ-
Policy documents are submitted to the SLSOT in batches ity reported by the agent under audit.
not greater than 20. The SLSOT requests that non-premium • Reconcile from the database reports to the reported fee
items be filed together but separate from those policies con- system data. Note differences for later reconciliation.
taining premium amounts. Each batch is summarized on a If the agent or agency has reported using the SLSOT
“Transmittal and Verification Slip” and the premium tax and amounts, then audit adjustments will most likely be
other relevant items are shown on this form. The SLSOT required since neither the written nor received method
acknowledges receipt of the information by transmitting a would match this total.
“batch edit” to the agent within a few days of processing. • Determine the eligible surplus lines insurers doing
The batch edit is a computer generated listing of all items business through the agent. Currently a list of eligible
processed in the batch. If problems are found with any item, insurers can be found at the SLSOT’s Web site via the
it is “tagged” and returned to the agent for further research. following link: http://www.slsot.org/pman9.htm

September 2008 Texas Comptroller of Public Accounts • Audit Division 33


Chapter 15: Surplus Lines Agents Audit Procedures for Insurance Tax

• Request premium data files for each year that will be • Trace tax collected/billed through the accounting sys-
used to confirm the reporting method chosen and/or to tem and perform tests to insure that all tax has been ac-
compute the audited taxable premium. The population counted for and remitted.
of the data files should be tied to the general ledger for • Insure that tax due on any endorsements or the tax due
internal control purposes. However auditors have often on other changes in premium have been accounted for
found that because the agent’s income is commission and remitted.
driven and premiums are not booked as income, it can • Reconcile the information in the agent’s records as de-
be difficult to reconcile to any internal records. scribed in 28 TAC § 15.14 and 15.17 to the reported data.
• Determine if the agent files electronically with the • Reconcile from policy registers to reported data.
SLSOT. If so, examine the system used for transmitting • Use contract files to trace information from the detailed
the data and determine whether it’s on-line real-time records to the summary records. These files will contain
(done through the internet with web entry) or whether any endorsements or other changes to policies.
the information is simply compiled and transmitted at • Using the audited premiums for each year, enter the
regular intervals. audited premiums into the prepayment penalty and inter-
• Determine whether the agent reports on a premium- est spreadsheet. All payments made throughout the year
written or a premium-received basis and confirm that should be entered as well to determine whether any pre-
the reporting basis is consistent with the election filed. payment penalty and interest will be due. The same crite-
Explain the definition of each method: (1) the premium ria that apply to waiver of audit penalty and interest will
written method should reflect the use of an effective also apply to waiver of prepayment penalty and interest.
date for the new or renewing policy while other policy • If the agent or agency has reported using the SLSOT
changes are based on when the change is effective and amounts then the auditor will be required to add back
(2) the premium received basis reflects when the policy those premiums that have effective dates prior to the
premium is received by the agent or agency. first year of the audit. Otherwise these premiums would
• Determine if the agent reports 100 percent of the Texas not be picked up for audit purposes. Likewise, the audi-
premium to the Comptroller or if allocations are made tor should examine the SLSOT data for the year after
regarding any non-Texas risks. the last year under audit in order to determine if any of
• Verify non-taxable premiums. Federal preemptions exist those policies that contain a current year effective date
for the Federal Deposit Insurance Corporation (F.D.I.C.), should be brought back into that last year.
National Credit Union Administration (N.C.U.A.) and
federally chartered credit unions. Other statutory exemp- Tax Basis
tions include premiums for risks or exposures properly
allocated to federal waters, international waters or those Rate
under the jurisdiction of a foreign government. The tax rate is 4.85 percent and is applied to but not limited to:
• Determine how policyholders are billed, if invoices are
generated and if so, how they are filed. Reconcile from • all premiums
invoices to the policy registers for several selected peri- • membership fees
ods in order to test the reliability of internal controls. • assessments
• Verify that all amounts charged to the policyholder • dues
were reported as taxable premiums whether charged by • policy fees
the retail agent or the agent of record. Membership fees, • any other consideration for insurance
policy fees, dues or any other consideration for insur- • agent fees that are charged in addition to, or in lieu of, a
ance are taxable. Separately stated and billed finance commission
charges are not taxable.
• Determine how premium and tax amounts are compiled
Statutory Reference: Title 28 and Title 34, Texas
for reporting. Administrative Code Rule 3.822

34 Texas Comptroller of Public Accounts • Audit Division September 2008


Audit Procedures for Insurance Tax Chapter 16: Unauthorized Insurance

Chapter 16
Unauthorized Insurance
Introduction Stamping Office of Texas (SLSOT), within 60 days after the
effective or issue date, a true and correct copy of the con-
Section 101.001(b) of the Texas Insurance Code (TIC) tract issued, and must collect the tax from the insured at the
states, “It is the policy of this state to protect residents time of delivery of the policy.
against acts by a person or insurer who is not authorized
to do business in this state.” Section 101.051, TIC details
conduct that constitutes the business of insurance. Section
Audit Activities
101.102, TIC prohibits any act that constitutes the business • Determine if the taxpayer is eligible to act as a surplus
of insurance except as authorized by statute. lines insurer under Chapter 981. Check the list of eli-
gible surplus lines insurers maintained in your office or
This means that an insurer as defined in §101.002 TIC must be the TDI licensing system to determine eligibility.
authorized (licensed) or qualified as an eligible surplus lines • Verify if taxpayer is set up for other types of insurance
insurer in this state to conduct any type of insurance business. in Texas. Run the MTSUMM inquiry to view the taxes
and fees the taxpayer is currently responsible for report-
Surplus lines insurance transactions result from a consum- ing. The surplus lines insurer will not be set up on the
er’s inability to obtain coverage from licensed insurers. This fee system as a licensed insurer. The auditor may have to
may be due to the type or amount of coverage needed, or the perform account maintenance to set up the tax responsi-
relatively low demand for a particular type of coverage. bility before an audit assignment can be generated. The
company type is “97” for unauthorized insurance.
Surplus lines insurers are not licensed, but they must meet • Request that the taxpayer provide a report showing all
some minimum requirements established in Chapter 981 Texas surplus lines business in detail on an annual ba-
TIC. A surplus lines insurer must be licensed in at least one sis. Ideally, the taxpayer will provide this report on CD
state. The insurer must be authorized to write the same types or DVD. The following detail should be requested:
of coverage in the jurisdiction in which they are licensed • broker/agent name & address
or certified to do business as they are proposing to write in • insured name & address
this state. Another requirement is that all acts that constitute • policy number
the business of insurance in this state must be placed with a • policy effective date
Texas licensed surplus lines agent. • premium amount
• location of risk
The Texas Department of Insurance (TDI) maintains a Web • Reconcile the premiums from the taxpayer’s report
site that contains information on companies that are licensed to the Texas premiums on Schedule T. The taxpayer
or eligible to do business in Texas. should explain material differences between these two
amounts.
In order to provide regulation of this business, coverage • Reconcile Schedule T premiums to the taxpayer’s gen-
from eligible surplus lines insurers can be obtained only eral ledger. Request copies of the taxpayer’s Federal
through qualified, licensed and supervised surplus lines Return to further verify total premiums. These proce-
agents, and only if coverage is not available from licensed, dures may not be feasible unless onsite fieldwork is
regulated insurers conducting business in this state. conducted. The auditor is required to document proce-
dures not performed in the audit plan.
Surplus lines agents are charged with making a reasonable • Run a database report of all surplus lines policies re-
effort to ascertain the financial condition of the insurer be- ported to the SLSOT by the surplus lines agents for the
fore placing coverage with such company. The agent must insurer under audit. The report can be run by effective
promptly issue and deliver evidence of the insurance cover- date or by batch date. The effective date in the Stamp-
age. In addition, the agent must report to the Surplus Lines ing Office database corresponds to the effective date

September 2008 Texas Comptroller of Public Accounts • Audit Division 35


Chapter 16: Unauthorized Insurance Audit Procedures for Insurance Tax

of the policy. The batch date indicates when the policy • On individual policies, there may be material differ-
was reported to the Stamping Office. This report should ences between amounts on the surplus lines insurer’s
be run with sub-totals by year and by agent. Use the report and amounts on the Stamping Office database
insurer’s name exactly as it appears in the Listing of report. If the taxpayer is claiming an allocation of pre-
Insurers maintained in the audit office. mium among states, supporting documentation must be
• Transactions placed with licensed Texas surplus lines provided. Acceptable documentation includes policy
agents are not taxable to the Surplus Lines Insurer. applications, contracts, underwriting inspection reports
Analyze the taxpayer’s report and identify the licensed and risk survey reports. Audit adjustments may be nec-
agents. Determine if the agent was licensed at the ef- essary if sufficient documentation is not provided.
fective date of the policy. Transactions eliminated from • The insurer could be recording the premium to the state
the insurer’s audit as a result of this procedure must be where the agent’s office is located rather than to the
accumulated by the auditor and maintained in the audit state where the risk is located. Errors in premium al-
office for reference on audits of surplus lines agents. locations should be analyzed and audit adjustments may
• Cross-reference the taxpayer’s report against the Stamp- be necessary.
ing Office database report. Verify and compare the
information on the policies written by the unlicensed
brokers back to the Stamping Office database report to Unlicensed Agents/Brokers
determine if a licensed agent ultimately reported the Often the immediate agent of record on the insurer’s report
policy. Significant variances in premium amounts will may not be licensed in Texas. The risk may have passed
need an explanation. Transactions eliminated from the through a series of agents before a licensed Texas agent re-
insurer’s audit as a result of this procedure must be ac- ported the policy to the Stamping Office. If the trail ultimately
cumulated by the auditor and maintained in the audit does not lead to a licensed Texas agent, then the transaction
office for reference on audits of surplus lines agents. is considered Unauthorized Insurance and tax is assessed
• In some instances, the insured may have self reported this against the insurer. The fact that there is a licensed Texas
as Independently Procured (IP). The auditor should also agent in the chain after the initial policy placement by the
ask for this documentation. Properly documented IP trans- insurer is relevant only if this licensed Texas agent reports the
actions are not assessed in the audit of the insurer. Refer policy to the Stamping Office. The insurer must provide suf-
to the chapter on Independently Procured insurance. ficient documentation to verify proper reporting.
• Transactions that have not been placed with a licensed
Texas surplus lines agent or reported to the SLSOT or
do not meet the criteria for Independently Procured in- Unauthorized Insurance
surance should be scheduled as audit adjustments in the Insurance not placed through the admitted market or a li-
audit of the surplus lines insurer. These premiums are censed Texas surplus lines agent or that does not meet the
considered Unauthorized Insurance. criteria of independently procured insurance is considered
“unauthorized insurance.” The premium tax can be assessed
Problem Areas against either the insurer or the insured. Most often, these
audit adjustments are seen in audits of insurers not licensed
• Problems occur when tracing policies if the policy num- in Texas but writing business on Texas risks.
bers on the insurer’s report differ from those reported
to the Stamping Office. Some agents report “bundled” Hearing No. 37,015 addresses the burden of proof, which is
or “packaged” blocks of business from large customers placed upon the Comptroller when auditing surplus lines in-
such as banks or mortgage brokers, especially when surers. The Comptroller will meet its initial burden of proof
volume of business is large. when the auditor excludes from taxable premiums those pre-
• Be aware of credits reflected on the Stamping Office miums derived from business placed through licensed Texas
database report, but not on the insurer’s report. These surplus lines agents. Transactions shown to have been Inde-
may be the result of timing differences with amended pendently Procured on which tax was reported and remitted
or canceled policies. Differences may indicate that to the state should also be excluded from taxable premiums.
the agent/broker is claiming a premium allocation for
the non-Texas portion of the risk. Material differences The auditor must research all policies that are in question to
should be analyzed and supporting documentation ob- determine if any licensed Texas surplus lines agent has re-
tained. Audit adjustments may be necessary if sufficient ported the policies to the Stamping Office. Policies reported
documentation is not provided. to the SLSOT should be excluded from taxable premiums,

36 Texas Comptroller of Public Accounts • Audit Division September 2008


Audit Procedures for Insurance Tax Chapter 16: Unauthorized Insurance

regardless of which agent reported them. Any remaining poli- Applicability


cies are considered Unauthorized Insurance and should be • all risks located in Texas
scheduled as adjustments in the audit of the insurer. • all premiums written, procured, or received in Texas

The auditor also must research exceptions to determine if Exceptions


the insured is reporting Independently Procured premiums. • risks properly allocated or apportioned and reported as
The auditor should run applicable inquiries to determine taxable in other states or countries
whether an Independently Procured audit has been per- • risks properly allocated to federal or international wa-
formed on the insured. If so, then the auditor can examine ters
the audit schedules to determine if the policy in question • risks under the jurisdiction of a foreign government
was scheduled in the insured’s audit. These policies should • the FDIC (Federal Deposit Insurance Corporation)
not be taxed again in the surplus lines insurer’s audit. when they are the receiver of a failed financial institu-
tion holding the property being insured
The audit activities outlined earlier in this chapter meet the • the NCUA (National Credit Union Administration)
initial burden of proof required by the hearing. • a federally chartered credit union

See the chapter on Independently Procured Insurance for a


list of the qualifying criteria. Other Considerations
Penalty and Interest Waiver
Tax Basis Due to the nature of unauthorized tax, penalty is rarely
waived. As with all audits, the auditor should evaluate all of
Rate the criteria.
The tax rate is 4.85 percent and is applied to:

• all premiums
Statute of Limitations
If the decision is made to audit a seven-year period, then
• membership fees
additional penalties and varying rates of interest may apply.
• assessments
Hearing No. 37,015 includes detailed information about the
• dues
statute of limitations.
• any other consideration

Statutory Reference: Chapter 225 and 226

September 2008 Texas Comptroller of Public Accounts • Audit Division 37


Chapter 17: Independently Procured Insurance Audit Procedures for Insurance Tax

Chapter 17
Independently Procured Insurance
Introduction XISUMM / This inquiry will display Company Type 99
Tax Code 71 INDEPENDENTLY PROCURED.
Independently Procured (IP) insurance is insurance placed
with an unlicensed insurance company when all the trans- XIDATA / This inquiry will display premiums and tax on
Tax Code 71 independently procured insurance. The inquiry
actions involved in the negotiation and procurement of the shows one lump sum premium total. This total
coverage occur entirely outside the state of Texas, up to may include premiums from various policies
and including delivery of the policy and payment of the written by different insurers.
premium.
Determine whether the insured correctly reported the Inde-
The state of Texas does not regulate the placement of inde- pendently Procured tax.
pendently procured insurance but does collect tax on premi-
ums that apply to risks located in this state. Allocations
Premium allocations may be needed and should be based
Audit Activities on the type of coverage and location of the covered risk.
For example, product liability premiums might be allocated
Independently Procured Criteria based on sales of that product. A notification of sampling
• The insured must be domiciled or headquartered in Tex- must be issued to explain the allocation.
as. See the reference below under the “Current Policy”
section. Reporting
• The insurer is not licensed to do business in Texas
• All negotiation and procurement of the contract occur The insured or any person designated by the insured is
entirely outside of Texas responsible for reporting and paying tax on independently
• The transaction must be reported to the Comptroller and procured insurance.
• Tax must be paid
Tax Rate and Basis
A transaction is not independently procured insurance until
4.85 percent of Policies effective on or after September
the tax is paid. If no tax is paid, the transaction is considered Gross Premiums

1, 1993
to be unauthorized insurance and audit adjustments may be
scheduled in the audit of the insurer. Refer to the Unauthor- The tax on premiums for a policy in excess of one year,
ized Insurance chapter for additional information. with a fixed premium payable annually, shall be computed
as of the date the premium becomes due and payable. For
Premiums for risks or exposure in federal or international taxation purposes, this date is deemed to be the policy an-
waters, or under the jurisdiction of a foreign government are niversary date.
exempt from taxation.
Due Date
Inquiries
In the event a transaction is claimed as independently pro- May 15 – Effective tax year 1996 and forward
cured insurance, the auditor can determine if the tax was
reported and paid via system inquiry beginning with the The due date is in the year subsequent to the tax year and IP
1993 return. This information is set up under the insured’s tax reports are filed only if taxes are due. Zero returns are
name and taxpayer number. not required to be filed.

38 Texas Comptroller of Public Accounts • Audit Division September 2008


Audit Procedures for Insurance Tax Chapter 17: Independently Procured Insurance

Other Considerations ing independently procured taxes, the district court findings
were reversed and the court ruled in favor of Dow Chemi-
In order to avoid double taxation, the auditor should run the cal. In May 2002, about 3,500 taxpayers were mailed refund
applicable inquiries to determine whether an audit of each claim forms for independently procured taxes that were
insurer has been performed. These policies should not again paid.
be assessed against the insured if they were included in the
audit of the insurance company. Under the limited scope of the Dow decision, Texas can no
longer enforce the tax on independently procured insurance
Current Policy if the only connection with the state is that some or all of
the risk is located here. The state continues to enforce the
As a result of the Dow Chemical Company, Appellant v. tax when policyholders are domiciled or headquartered in
Carole Keeton Rylander, Comptroller of Public Accounts Texas.
of the State of Texas; and John Cornyn, Attorney General
of the State of Texas, Appellees supreme court case involv-
Statutory Reference: Chapter 010.252 Chapter 20 Glossary

September 2008 Texas Comptroller of Public Accounts • Audit Division 39


Chapter 18: Audit Write-Up Audit Procedures for Insurance Tax

Chapter 18
Audit Write-Up
General Information Form Period
Assembly Checklist P&I Worksheet Calendar basis (spelled out)
• Penalty and Interest Waiver Worksheets (one for each Cover Letter and Audit Report YYYY
tax, 71 and 72) Audit Adjustment Reports YYYY
• Cover Letter
Notification of Sampling
• Audit Report Calendar basis (spelled out)
Procedures
• Index To Working papers
• Audit Adjustment Reports (one for each tax code, 71 and Statute Waiver Report period: 200x return due
March 1, 200x
72; standard form for tax type 71, customized form – Extended to: Calendar date
not in forms supply – for tax type 72) (spelled out)
• Tax Adjustment Summary
Audit Plan YYYY
• Audit Exams in exam designation order (Exam 100,
200, 300, etc.) CD YY
• Supplements to Exams – behind the related exam rather
than as exhibits. Write Up Procedures
• Exhibits (All exhibits should be labeled as such and
should be numbered using Roman numerals. Pages CATS
should be numbered.) Complete all applicable write up screens in CATS. The as-
I. Agreement to Extend Period of Limitation (al- signments must be synched before Audit Finalization and
ways as Exhibit I if in audit) final routing to your Supervisor.
II. Notification of Sampling Procedures for State Tax
Audit Penalty and Interest Waiver
III. Sample Selection Worksheet Taxpayers do not have to request penalty and interest
IV. Other exhibits as necessary waiver. All audits are automatically reviewed for settlement
• Audit Plan – exclude unused pages of penalty and interest. Taxpayers should follow procedures
• Questionnaires (include Audit Questionnaires (one each outlined in “Contesting Disagreed Audits” if they disagree
for each tax code) after the last page of audit plan) with the decision. General rule §3.5 Waiver of Penalty or
• Inquiries (XISUMM, XICOLL, XIDATA to bring his- Interest provides detailed information regarding criteria for
tory current, TDI Web site) penalty and interest waiver.
• Imaging – place any taxpayer work papers and other
documentation to be imaged after the questionnaire. The auditor will complete the Penalty and Interest Waiver
Worksheet for any audit that has a period on which penalty
CD may be assessed. This includes overall credit audits when
Include properly labeled CD inside folder. there are tax due periods within the audit period. The infor-
mation on the worksheet should be as complete and accurate
Audit Periods as possible.
The beginning and ending periods must be the same on all
forms in the audit package. Use the format below. The cal- Interest is rarely waived and is considered only where writ-
endar basis should be spelled out; for example, January 1, ten, documented proof exists that a taxpayer relied to its
200X through December 31, 200X. detriment on misinformation from the State. If a taxpayer
disagrees with the waiver decision, they may request a rede-
termination hearing.

40 Texas Comptroller of Public Accounts • Audit Division September 2008


Audit Procedures for Insurance Tax Chapter 18: Audit Write-Up

Separate Penalty and Interest Waiver Worksheets should The taxpayer agreement section of the cover letter should
be completed for each tax type. However only one work- match the information in the exit conference section of the
sheet is required for surplus lines agents and agencies. audit plan.
The audit penalty and interest should be separated from
the prepayment penalty and interest in item #6. The The tax type should be “71” or “72” if there are adjustments
worksheets must include: to either, but not both of those tax types. A “71.5” should be
entered if there are adjustments to both tax types.
• The auditor, supervisor and manager signatures.
• The recommendation for denial or waiver. The audit period used on the cover letter will print in calen-
• Specific reasons for the recommendation, assuring that dar format but is a prompted entry on the template.
the reasons support the recommendation (waiver or de-
nial), using the facts of the situation and the appropriate The Index to Working Papers is included in the template and
criteria. A statement that the taxpayer “meets the crite- is completed along with the cover letter.
ria” is not sufficient.
• Use complete sentences. One sentence usually does not Audit Report
provide enough information for making a decision. The Audit Report is required for all taxes per AP40. This
• DRO conferences should be noted in the comments sec- must be customized to fit each audit situation. Adjustments
tion when applicable. for both tax codes 71 and 72 should be combined on one
Audit Report.
Calculation of Error Percentage
Currently, the error percentage is calculated by dividing the Audit Adjustment Reports (AAR)
audit assessment (tax due) by the total tax reported plus the There are separate AARs for premium (tax type 71) and
audit assessment (tax due plus reported tax). The calcula- maintenance (tax type 72) taxes. If either tax type results in
tions are automatically computed in the Penalty and Interest a tax change, the following information should be filled out
Waiver Worksheet. on the applicable AAR:

Penalty Waiver Over $10,000 • Taxpayer name


For audits where penalty is over $10,000 ($100,000 or over • Taxpayer number
in taxes/fees due), the completed Penalty and Interest Waiv- • Audit period –YY
er Worksheet should be e-mailed to the auditor’s supervisor/ • Audit type
manager for approval. • Auditor ID
• Open collection record information
Once the waiver is approved at the audit office level, it is e- • Field office
mailed to Audit Headquarters for approval. The RPC receives • Total tax adjustment
the approved copy from Headquarters. The recommendation • Payment information – run XICOLL for payment infor-
must be clearly stated and complete sentences must be used. mation
• Report years – list only report years in which an adjust-
Statutory Reference: Section 111.103; 111.102; Title 34, ment was made. The report year should be in YY for-
1.3 and 1.5 – Rules of Practice and mat and should be listed in chronological order.
Procedure, General Rule §3.5 Waiver of • Tax amount – list dollars and cents. On the tax type 72
Penalty or Interest AAR, indicate zero adjustments for particular mainte-
nance tax types with either a zero or a dash.
Cover Letter • Totals – Make sure the total is the sum of all entries on
The audit cover letter must be sent to the XISUMM address for this form.
each tax type. The letter must be addressed to the authorized
representative as shown on the audit questionnaire. The RPC Audit Adjustment Workpapers
will “cc:” the day-to-day contact if requested by the auditor. Standardized worksheets (called “Exams”) have been ad-
opted for insurance audits and must be used for consistency,
The cover letter includes a paragraph discussing the waiver clarity and ease of understanding for all parties that may
or denial of penalty and/or interest. The auditor should review them. Exams must include:
check the appropriate paragraph when the decision has been
made in the audit office. • Taxpayer name

September 2008 Texas Comptroller of Public Accounts • Audit Division 41


Chapter 18: Audit Write-Up Audit Procedures for Insurance Tax

• XISUMM, city, state Audit Plan


• Exam title indicating the type of adjustments to be The second page of the audit plan must be the Auditor Inde-
made on the exam such as Adjustments to Reported pendence Statement. This form can be completed in CATS
Premiums or by using the template for miscellaneous tax types.
• Exam designation (such as Exam 100, Exam 1), Date
and Auditor’s Initials The auditor is also required to update in CATS the Field-
• Taxpayer number work Activity tab under the Assignment button for impor-
• Page numbers in the following format: Page __ of __ tant dates. These dates should reflect when data files are
• Filename requested from the taxpayer, when they are received, when
• Column headings on each page of the exams additional information is requested and when schedules are
• Footnotes sent to the taxpayer.

The first exam in the audit package should be the “Tax Ad- In general, the audit plan should be written in such a way
justment Summary” and it has no Exam number. Footnotes that the procedures are understandable to a third party who
must include explanations for all mathematical calcula- is not familiar with Insurance Premium and Maintenance
tions not clearly shown in separate columns or rows on the Tax auditing. The following are some of the items that must
exams. Sources of data such as “reported gross premiums be addressed in the audit plan but are often overlooked.
from returns filed” or “audited amounts from general led-
ger” should be listed for all scheduled items. Forwarding Other Taxes:
footnotes to and from other exams must be shown. Any Reference must be made to other taxes for which the tax-
other comments pertinent to the method of reasoning used to payer may be responsible. Indicate whether the taxpayer
determine the facts and amounts shown on the exams should is permitted for or needs to be permitted for other taxes
also be footnoted. administered by the Comptroller. Note whether or not an
audit is warranted. Lead cards submitted should be noted.
If more than one type of tax adjustment is being made, a If the reporting of other taxes is the responsibility of
summary exam calculating total tax due must be completed. another company within the NAIC group, reference this
Exams should flow forward to the final summary exam, i.e., in the audit plan for each company in that NAIC group.
from back to front. If the taxpayer is not responsible for any other taxes, ex-
plain why or on what basis this determination was made.
Exhibits A simple “No” answer is insufficient. The auditor must
All exhibits must be labeled as such and numbered using investigate the Unclaimed Property reports filed by the
Roman numerals. Pages of each exhibit must also be num- company or group. If reports have not been filed or if the
bered. The taxpayer name and number must be included on reported property amounts appear to be understated, then
each exhibit. an audit should be generated.

The Agreement to Extend Period of Limitations is always NAIC Group Information:


labeled as Exhibit I, if applicable. Remember that two ex- Information on all companies within the taxpayer’s
tensions are required, one for each tax type. NAIC group must be provided in the audit plan. This is
to ensure that all companies within the group were re-
The tax type should be referred to as “Insurance Premium searched to determine the entities for which audits were
Tax” or “Insurance Maintenance Tax/Assessment”. Use this warranted. Note the company name, NAIC number, TDI
reference on notification of sampling forms and agreements number, and whether or not an audit was generated.
to extend periods of limitation, etc.
Labeling:
If the taxpayer is sent an exit conference letter explaining At a minimum, each page of the audit plan should have
the results of a tax change audit, a copy of this letter must be the taxpayer number, tax type and page number on it.
included as an exhibit. An exit conference letter is sent when
the final exit conference is not held in person. Exit confer- Planning and Procedures:
ences held over the phone must be followed up with a letter. Audit plans should contain dates in the fieldwork sec-
If the audit results in no tax change, include the exit letter in tions and complete details of internal control testing.
the audit plan. Plans, actual procedures and deviations from the plans
as well as results of procedures should be recorded.

42 Texas Comptroller of Public Accounts • Audit Division September 2008


Audit Procedures for Insurance Tax Chapter 18: Audit Write-Up

Credit Information: of Grounds. These documents are not listed on the Index
If an adjustment is required relating to exam fees and to Working Papers. Place this documentation before the
other TDI credits, then written confirmation must be in- Amended Audit Report. The documentation supplied by the
cluded as an exhibit to the audit as well as documented taxpayer should be retained by the auditor or included be-
in the audit plan. hind the amended audit package to be imaged.

Exit Conference: Amendments necessitate that the auditor begin with the
This section documents explanation’s of adjustments original audit adjustments and make changes to them. The
made and any minor errors that were not adjusted in the auditor starts by making a copy of the original diskette. Do
audit. Discussion of the administrative remedies, expla- not use a backup copy because corrections could have been
nation of the billing process and request for payments made to the original audit at the RPC. Make the necessary
should be recorded. This section also documents the changes to the exams by zeroing out the transaction amount
explanation of the IAR Conference process and notes if or by changing the amount to the amended amount and
the IAR conference was offered and what the taxpayer’s footnoting the change. Transactions or line items on exams
decision was regarding the conference. It should also should not be deleted in order to preserve the original audit
document that the exit brochure, Contesting Disagreed trail. All amended exams should be titled as “Amended.”
Audits, was given to the taxpayer.
Amended audits are generated either by Audit Headquarters
Listing of Events: as the result of a hearing or by the local audit office. The
Any delays in fieldwork should be documented in the headquarter request for amendment is accompanied by an
listing of events. Note why the time between the assign- “Audit Amendment Request” form. The auditor completes
ment and start date exceeds 180 days. item number 15 of this form.

Amended Audits P & I Waiver Worksheet


Following is an amended audit checklist and general infor- A new P & I Waiver Worksheet is needed if the waiver deci-
mation: sion differs from that of the original audit. The adjustments
should be re-evaluated to see if the amended audit results
• Audit Amendment Request – if the audit is a result of impact the original waiver decision. If the amended audit is
a hearing, complete item number 15, Auditor’s Com- changed from a NTD or credit to a deficiency, then a waiver
ments and Explanations worksheet is also needed.
• Penalty & Interest Waiver Worksheet (see below for
further information) Amended Index to Working Papers
• Amended Audit Report The auditor should make a copy of the original audit index and
• Amended Index to Working Papers make appropriate changes to it. All amended exams should
• Audit Adjustment Reports (AAR’s) – not shown as be listed. Any exams not affected by the amendment are not
amended. Required for all non-automated taxes. Sepa- included on the index and can be lined out. The original ex-
rate forms for tax type 71 and 72. hibits are not included and should be lined out. Add additional
• Amended Audit Adjustment Exams exhibits to the index, if applicable, and label them with the
• Any new exhibits, if necessary next available Roman numeral following the original exhibits.
• Amended Audit Plan Label the index and exams “Amended.” For example, Exam
200 – Adjustments to Reported Premiums – Amended.
The original audit and any prior amendments should be sent
to the RPC for review purposes if the assignments were Amended Audit Report
NOT imaged. There is no need to send a copy of the imaged If the field office amends the audit, the amended audit report
audit to the RPC. The original audit is not sent to the tax- should indicate all areas changed by the auditor as well as
payer, so it is not listed on the amended index. a brief statement outlining the basis for the adjustment. If
the audit was amended due to a hearing, a brief statement
When an audit is amended as a result of the documentation as noted below is sufficient. The same statement can also
supplied by the taxpayer with the Petition for Redetermina- be used for position letters. Interested parties can then refer
tion and Statement of Grounds, the audit package should in- to those documents for specific instructions. The auditor
clude the taxpayer’s Petition for Redetermination and State- should refrain from listing every transaction changed be-
ment of Grounds and the auditor’s response to the Statement cause of the greater chance for human error when the report

September 2008 Texas Comptroller of Public Accounts • Audit Division 43


Chapter 18: Audit Write-Up Audit Procedures for Insurance Tax

is typed. Label the report “Amended Audit Report.” Include The audit was amended in accordance with Hearing Number
the To: and cc: information if applicable on the Amended 42,999 and the Position Letter dated November 1, 2002.
Audit Report.
Pat Doe
The following is an example of an Amended Audit Report Auditor
from the field office: Current Date
To: Mr. Taxpayer
Amended Audit Report TP address
XYZ Surplus Lines Insurance Company City, State zip
New York, NY
Taxpayer No. 1-23-4567890-1 Audits Amended to Zero
Audits amended to zero do not require exams or an index.
The audit was amended to delete policies placed through a li- An “Amended Audit Report” will explain that the audit now
censed Texas surplus lines agent. These items are not taxable results in no additional taxes due.
to the insurer since evidence was provided to show that the
policies were placed through a licensed Texas surplus lines No Change Amendments
agent thus, transferring the tax responsibility to the agent. Amended audits where no changes are made to the original
amounts do not require exams or an index. The auditor will
Pat Doe complete an amended audit plan and an amended audit re-
Auditor port. A comment should be made in Agency Work Manager
Current date (AWM) that no changes were made. Include a brief explana-
To: Mr. Taxpayer tion of the reason for no changes.
TP address
City, State zip
Imaging
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Amended Audit Report


XYZ Surplus Lines Insurance Company
New York, NY
Taxpayer No. 1-23-4567890-1

44 Texas Comptroller of Public Accounts • Audit Division September 2008