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Common Compliance and Tax Issues Found During Distilled Spirits Plant (DSP) Audits

In support of TTB's mission to assist industry members in understanding and complying with the Federal tax, product, and marketing requirements associated with the commodities we regulate, we present here some of the common compliance and tax issues we have encountered during distilled spirits plant (DSP) audits conducted over the past few years.  We have grouped the issues into four categories:

  • Records;
  • Inventory;
  • Reporting; and
  • Application, Equipment, and Security.

Within these categories, we list common audit issues, beginning with the ones we encounter most frequently.  We also provide advice on how to avoid these problems.

If you have questions about this tutorial, please contact the closest Tax Audit Division office. For general questions regarding recordkeeping, reporting, excise tax, or other compliance matters, please contact the National Revenue Center at 1–877–882–3277.  You also may contact TTB by email at TTBInternetQuestions@ttb.gov.  You may directly access the Federal regulations TTB enforces via our Web site, http://www.ttb.gov.

Using This Tutorial

This tutorial details common tax and compliance issues associated with distilled spirits production and discusses how to avoid them.  We also include links to the applicable TTB regulations in Chapter I of Title 27 of the Code of Federal Regulations (CFR), TTB forms, and other helpful resources.

TTB forms used in this tutorial

Statutes and regulations cited in this tutorial

Additional resources


Common Compliance and Tax Issues at DSPs

Records

1. Physical Inventory Records
2. General Records and TTB Reports
3. Type of Records Required
4. Transfers between Bonded Premises
5. Finished Product Records
6. Record of Tax Determination
7. Record of Destruction

Inventory

1. Storage Inventory
2. Processing Inventory
3. Denatured Spirits Operations Inventory
4. Production Inventory
5. Beverage and Industrial Spirits Case Identification Markings
6. Gauge Records for Production, Storage, and Packaged Spirits

Reporting

1. Monthly Reports Submitted to TTB
2. Losses in Bond
3. Timing for Submitting Excise Tax Return TTB F. 5000.24

Application, Equipment, and Security

1. Registration and Permits of DSP and Identification of Structures, Areas, Apparatus, and Equipment
2. Security

 

Records Issue 1 — Physical Inventory Records

TTB finds that the most common recordkeeping issue among DSP operators is failure to keep adequate records of physical inventories in support of the:

Inventory record requirements are discussed in 27 CFR 19.623.

The most frequent violation of inventory recordkeeping requirements found at small and new DSPs is the lack of a signature on the inventory summary along with the written penalties of perjury statement as described in 27 CFR 19.45.  Another problem that TTB finds, even at large DSPs, is that inventory summaries do not provide all of the information required in 27 CFR 19.623, such as the kind of spirits in the tank, identification of the container(s), and the date of the inventory.

Some DSPs do not provide sufficient detail relating to losses, gains, or shortages reported on the production, storage, and processing forms.  TTB often finds this violation if the DSP has no inventory controls in place.  Even when controls are in place, they may not be effective due to employee turnover, sickness, vacations, or lack of adequate training.

If a DSP finds a loss, gain, or shortage when taking inventory, that DSP sometimes erroneously fails to show it on the storage report (TTB F 5110.11) or sometimes records only the calculated figure, e.g., the book value minus the physical inventory count, instead of the actual figure disclosed by the physical inventory.  Regulations require that proof gallons reported as losses on TTB F 5110.11 be derived from total losses, which DSPs must calculate:

  • Each time a tank or bulk conveyance is emptied;
  • On the basis of required physical inventories; and
  • Upon discovery of accidents or unusual variations in gauges.
    (See  27 CFR 19.462.)

DSPs must insure that they record transfer-in-bond losses and gains before they enter the gain or loss into the bulk inventory account.

DSPs must take a physical inventory of bulk tanks, processing tanks, and bottling tanks as required in:

DSPs also must provide to TTB, upon demand, a record of each inventory containing all information (including the date of the inventory, container identification, kind of spirits, losses, and signature) listed in 27 CFR 19.623.  DSPs must retain the inventory records required in 27 CFR 19.623 or for TTB inspection as stated in 27 CFR 19.573, 27 CFR 19.574.

How to avoid problems caused by poor general inventory records

  1. Review 27 CFR 19.623 at least annually as part of the DSP's standard operating procedures. This regulation details the types and contents of records required. Check the information recorded at inventory time against the required information listed in 27 CFR 19.623 to ensure that it matches.  If employees do not follow these procedures, take action to insure compliance.
  1. Keep DSP records well organized and readily available.  27 CFR 19.575 requires DSPs to retain records for not less than 3 years, and 27 CFR 19.576 requires that records be legible.
  1. Train employees who take inventory to properly record all required information.  If you experience high employee turnover, vacations during inventory, or find that well qualified employees are not taking the inventory for other reasons, train employees before every inventory.
  1. Always summarize source documents monthly and timely reconcile them to the Monthly Report of Storage Operations (TTB F 5110.11), Monthly Report of Processing Operations (TTB F 5110.28), and Monthly Report of Processing (Denaturing) Operations (TTB F 5110.43).  We recommend that DSPs update records as the process occurs, rather than waiting until later in the month, quarter, or year.

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Records Issue 2 — General Records and TTB Reports

General recordkeeping requirements for DSPs are discussed in 27 CFR 19.571.  DSPs must prepare daily records that "accurately reflect the operations and transactions occurring at the plant."

 27 CFR 19.572 provides that there is no specific required format for records.  Proprietors may keep records on paper, on microfilm or microfiche, or on a computer or other electronic medium, so long as the records are readily retrievable in hardcopy format for TTB review.  27 CFR 19.580 requires a proprietor to make entries required on a daily basis for each transaction or operation and not later than the close of the next business day after the transaction or operation occurred.  Details of the entries in the daily records are provided in 27 CFR 19.581.  The regulation says that the proprietor must:

  • Show the date of the operation or transaction;
  • For spirits, list the kind and the quantity in proof gallons;
  • For denatured spirits, list the formula number and the quantity in wine gallons;
  • For distilling materials produced on the premises, list the kind and the quantity in wine gallons; and
  • For alcoholic flavoring materials, list the kind, formula number (if any), and the quantity in proof gallons. 

Daily records should also list for containers or cases, the type, serial number, and the number of containers (including identifying marks on bulk conveyances) or cases.  A proprietor must record package identification numbers, number of packages, and proof gallons per package on deposit records in the storage account. For materials intended for use in the production of spirits, list the kind and the quantity, with liquids recorded in gallons and non-liquid materials recorded by weight.

For each receipt or removal of material, spirits, denatured spirits, articles, spirits residues, and wine, record the name and address of the sender (for receipts) or the delivery address (for removals).  Record the plant number or industrial use permit number of the consignee or consignor, and the serial number of any tank used.  Also recorded is the rate of duty paid on imported spirits and place of origin if it is from Puerto Rico or the Virgin Islands.  You also must identify spirits that are to be used exclusively for fuel use.

A typical records violation found during an audit occurs when the amounts recorded in the daily records do not equal the summary amounts recorded in the:

The differences between daily records and monthly reports often result from common errors (inaccuracies) or omissions

Examples of common errors are:

  • More inventory is removed than is reported to TTB;
  • Alcohol Transfer Sheets (Daily Logs) and tank records do not agree;
  • Dates on the Daily Distillation Log do not match the dates on the Monthly Summary Production Log;
  • Detailed blending and bottling reports are inaccurate or do not provide an adequate explanation for reported losses and gains; and
  • Inaccurate cutoffs are used when summarizing the final daily entry for transfer to the monthly report.

Examples of common omissions are:

  • Daily storage and tank records are not kept;
  • Batch records are not kept;
  • Gauging records are not maintained;
  • Tank records show only withdrawals, not deposits into the tank;
  • Records are incomplete and some data fields are left blank;
  • Records of accidents are not kept;
  • Final Alcohol Operations Logs are not all maintained;
  • Wine gallons and proof gallons are not calculated; and
  • Export documentation is not kept or is kept improperly.

27 CFR 19.285 states, in part, that, except in cases where the proof changes as a result of a storage or processing operation, the initial determination of proof for distilled spirits, wine, or eligible flavor may be used whenever a subsequent gauge is required.  Under 27 CFR 19.283, such required proof and quantity gauges include when spirits, wine, and alcoholic flavoring are:

  • Entered for deposit;
  • Filled into packages from storage tanks;
  • Transferred or received in bond;
  • Transferred between operational accounts;
  • Mixed in the manufacture of a distilled spirits product;
  • Mingled in a tank (when wines or spirits of less than 190 proof are mingled);
  • Reduced in proof prior to commencement of bottling;
  • Destroyed;
  • Denatured;
  • Tax Determined;
  • Removed or withdrawn from bond; or
  • Returned to bond.

The regulation governing storage inventories, 27 CFR 19.333, states that the DSP proprietor "must take a physical inventory of all spirits and wines held in the storage account in tanks and other containers (except packages) at the close of each calendar quarter."

How to avoid problems with errors and omissions in general records

  1. Make sure that you complete all source records, and that they contain sufficient information to accurately trace the quantity and movement of inventory and raw materials through plant operations.
  2. Verify that the figures on your source records match the amount reported in the:
  1. Have your compliance officer review the DSP's records for form and completeness on a periodic basis. 
  2. Make routine gauging of spirits in storage and processing part of your standard operating procedures, specifically when carrying out the operations listed above and those in 27 CFR 19.283.

 

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Records Issue 3 — Type of Records Required

DSPs are required to maintain extensive source records to support required reports, tax assessments, and claims.  When records that support TTB reports are missing or do not exist, the DSP is in violation of 27 CFR 19.571.

Each DSP must maintain certain supporting records, including:

  • All supplemental, auxiliary, and source data utilized to prepare TTB reports, returns, and claims;
  • Copies of notices, reports, returns, approved applications, and other documents relating to operations; and
  • Records that indicate receipts, movements between accounts, transfers-in-bond, or withdrawals of spirits, denatured spirits, articles, or wines.

Group records into the three primary accounts of production, storage, and processing to match the required operating reports:  

Common issues that TTB finds during audits include:

  • The monthly summary reports do not agree with the amounts reported on the monthly production, storage, or processing reports (TTB F 5110.40, TTB F 5110.11, TTB F 5110.28, and TTB F 5110.43);
  • The daily distillation logs do not agree with monthly summary production logs in dates or amounts, or the logs are incomplete or blank;
  • The proprietor does not follow proper reporting procedures which includes reporting on time and as instructed on the reporting forms, resulting in the submission of erroneous monthly TTB reports;
  • The DSP does not possess proper records for finished goods breakage and finished goods inventory in the remnant area.  The DSP does not properly log damaged inventory into and out of "leaker areas" where damaged inventory is stored; and
  • There are a variety of errors on the returns and reports, including:
    • Mathematical errors like:
      • Footing (adding down columns),
      • Cross-footing (adding across rows), and
      • Subtraction; and
    • Entry errors like:
      • Manual input errors,
      • Entry of amounts on the wrong lines,
      • Omission of totals, and
      • Lack of agreement between beginning inventory for one month and ending inventory for the prior month.

How to avoid problems caused by lack of proper records

  1. Review 27 CFR 19.571.
  1. Make sure that there are sufficient source records to support production, storage, and processing reports (TTB F.5110.40, TTB F 5110.11, TTB F.5110.28, and TTB F 5110.43).
  1. Double check the numbers on the daily and monthly reports to make sure they agree.
  1. Review the returns and reports for some of the common errors listed above, especially entering information on the wrong line of the reports and reconciliation between reports.

Form Tutorials:

TTB F 5110.11 – Monthly Report of Storage Operations
TTB F 5110.28 – Monthly Report of Processing Operations
TTB F 5110.40 – Monthly Report of Production Operations
TTB F 5110.43 – Monthly Report of Processing (Denaturing) Operations

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Records Issue 4 — Transfers Between Bonded Premises

When spirits are transferred in bond between qualified DSPs, as per 27 CFR 19.402, certain information is required to appear on the transfer records of both the consignor (the facility sending the spirits) and the consignee (the facility receiving the spirits).  Frequently, DSPs do not include all the necessary information on the transfer records.  The information required on the transfer record is very specific and is spelled out for the consignor in 27 CFR 19.620 and the consignee in 27 CFR 19.621.

Consignor:  27 CFR 19.405 requires that the consignor (the facility shipping spirits in bond) prepare a transfer record for each bond-to-bond transfer, retaining one copy of the transfer record and one copy of any accompanying document, and forward the original transfer record and any accompanying document to the consignee.  Except when secure seals or secured transport are used, spirits transferred in bond in packages must be weighed.  Furthermore, the proprietor must assign temporary serial numbers to the packages and show the gross shipment weight on a package gauge record prepared according to 27 CFR 19.619.

27 CFR 19.620 states that the transfer record of the consignor (the facility shipping spirits in bond) must show:

  • A serial number, which must commence with "1" on January 1 of each year or be a unique identifying number that is not repeated;
  • The serial number and date of TTB F 5100.16 ("Application for Transfer of Spirits and/or Denatured Spirits in Bond");
  • The name and distilled spirits plant number of the consignor (sender);
  • The name and distilled spirits plant number or bonded wine cellar number of the consignee (the facility to which the spirits are shipped);
  • The account from which the spirits or wines were removed for transfer (i.e., production, storage, or processing account);
  • A description of the spirits, denatured spirits, or wine, including:
    • The name and plant number of the producer, warehouseman, or processor (This is not required for denatured spirits or wine.);
    • Kind of spirits or wines (For denatured spirits, show the kind and formula number.);
    • Age (in years, months, and days) and year of production;
    • Number of packages or cases with their lot identification numbers or serial numbers and date of fill;
    • Type of container (If spirits, denatured spirits, or wines are to be transferred by pipeline, show "P/L".);
    • Proof gallons for distilled spirits, or wine gallons for denatured spirits or wine;
    • Conveyance identification; and
    • For distilled spirits products that contain eligible wine or eligible flavors, the elements necessary to compute the effective tax rate as follows:
      • Proof gallons of distilled spirits;
      • Wine gallons of each eligible wine and the percentage of alcohol by volume of each; and
      • Proof gallons of distilled spirits derived from eligible flavors;
  • Notation to indicate when spirits will be transferred in bond from production facility to another plant;
  • Identification of seals, locks, or other devices affixed to the conveyance or package;
  • Date of transfer; and
  • Signature and title of the consignor with the penalties of perjury statement required in 27 CFR 19.45.

 Consignee:  27 CFR 19.407 states that the consignee (the receiver of the spirits) must examine each conveyance to determine whether the securing devices, if any, are intact.  If the securing devices are not intact, the consignee must immediately notify the appropriate TTB District Director, Trade Investigations Division; or District Director, Tax Audit Division before removing any spirits from the conveyance.  The consignee should determine, record, and report any losses.  The consignee must retain the original of the transfer record and any accompanying documents for his or her files.

The consignees must weigh each package, except sealed containers.  When the consignee receives spirits in bulk conveyances or by pipeline, he or she must gauge the spirits and record the gauge on the transfer record.

27 CFR 19.621 states that when the consignee receives spirits, denatured spirits, or wine, he or she must record the following information on the transfer record:

  • Date of receipt;
  • Notation whether the securing devices on the conveyance were or were not intact on arrival;
  • Gauge of spirits, denatured spirits, or wine showing the tank number, proof (percent of alcohol by volume for wine), and quantity in wine gallons or proof gallons, and any losses or gains;
  • Notation of excessive in-transit loss, missing packages, tampering, or apparent theft;
  • Account into which the spirits, denatured spirits, or wines were deposited (i.e., production, storage, or processing); and
  • Signature and title of the consignee with the penalties of perjury statement required by 27 CFR 19.45.

The required information that consignees most frequently fail to record includes:

  • Signature and title of the consignee with the penalties of perjury statement required by 27 CFR 19.45;
  • Serial number and date of an approved TTB F 5100.16 ("Application for Transfer of Spirits and/or Denatured Spirits in Bond") on transfer record documents;
  • Annotation of gains or losses;
  • Annotation of whether bulk spirits were received with the securing device on the conveyance intact or not;
  • The registry numbers of the consignor or consignee;
  • Gauging and metering of bulk alcohol received;
  • Amount of proof gallons of distilled spirits transferred;
  • The lot number of the spirits produced;
  • The description of the account from which withdrawn (storage, processing); and
  • The age (in years, months, and days) and year of production.

Transfer records required by 27 CFR 19.620 may consist of the proprietor's commercial documents.  However, such documents must fully comply with the requirements of 27 CFR 19.620.

How to avoid problems caused by lack of proper in-bond transfer documents

  1. Review the bill of lading forms for shipping bond-to-bond merchandise.  Make sure that the information listed above and in  27 CFR 19.620 for consignors and 27 CFR 19.621 for consignees are included on the bill of lading.
  2. If all of the data listed above is not included in the bill of lading form, modify the present format to include the correct data.
  3. Have a third party (such as your compliance officer or a TTB investigator) check over the bill of lading to insure that the data required in  27 CFR 19.620 for consignors and in 27 CFR 19.621 for consignees are included.

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Records Issue 5 — Finished Product Records

DSP proprietors must maintain daily summary information of finished products in support of the monthly reports.  The required information is described in 27 CFR 19.601.  Audits have disclosed that sometimes the summary records do not support what is reported to TTB on forms TTB F 5110.40, TTB F 5110.11, TTB F 5110.28, and TTB F 5110.43.

Under 27 CFR 19.601, each processor must maintain the following information on a daily summary record of the kind and quantity of spirits bottled or packaged:

  • Beginning and ending quantity of bottled or packaged spirits on hand;
  • Spirits bottled or packaged; and
  • Bottled or packaged spirits disposed of by:
    • Withdrawal with or without payment of tax;
    • In-bond transfer;
    • Dumping for further processing;
    • Redistillation;
    • Voluntary destruction;
    • Accountable losses;
    • Samples;
    • Inventory shortages and inventory overages; and
    • Other dispositions.

In lieu of showing the proof gallons of spirits on daily transaction records of withdrawals from bonded premises, proprietors may show the wine gallons or liters and the proof of spirits in cases.  Proprietors must use summary records to compile the reports required in 27 CFR 19.632.

Many recordkeeping issues we encounter relate to the remnant area (the area where individual bottles or partial cases are stored) and the leaker area (the area where leaking product is stored).  Employees sometimes fail to properly record spirits transferred into and out of the remnant or leaker areas.  Due to the small amount of wine or spirits maintained in these areas on a daily basis, warehouse supervisors may fail to establish good inventory accountability processes or to stress the importance of maintaining an accurate daily inventory; however, the regulations require full compliance with inventory requirements for product in these areas.

We also find that records of losses or destructions are frequently lacking or incomplete:  

  • We have found that some proprietors are unaware that they must report destructions and losses separately on the Monthly Report of Processing Operations (TTB F 5110.28). 
  • Proprietors rarely destroy spirits in bulk storage because they are usually reprocessed. 
  • We more frequently see destructions in the production account due to broken bottles or quality problems. 
  • There are several reasons for common losses in bulk storage, including:
    • Overfill;
    • A broken line; or
    • A valve left open unintentionally. 
  • If the losses are severe enough to be reported to casualty insurance carriers, they are reported as casualty losses. 
  • If they are modest, they may be reported as ordinary losses. 
  • Losses are rare in bottled spirits.  If the book inventory does not match physical inventory, the difference may be an unexplained shortage, which is taxable.

A high volume of destructions may indicate a quality control issue and a high volume of losses may indicate process control problems within the plant.  Neither can be determined by financial analysis unless both are reported separately.

Another common issue we find during audits is that the monthly summary records do not support the totals reported on the Monthly Report of Processing Operations (TTB F 5110.28).  In other words, the DSP did not compare the quantities reported on Part I, line 9 and on Part II, line 28.

How to avoid problems caused by poor finished product records

  1. DSP management should make it clear to employees and warehouse supervisors that they must track and account for destructions, losses, and leaker and remnant areas separately.
  2. DSP management should give employees sample loss, destruction, and leaker reporting forms and a list of the required information for each report.
  3. Supervisors should periodically check destruction, loss, and leaker area reports to verify that they are complete and accurate.
  4. Before the Monthly Report of Processing Operations (TTB F 5110.28) is submitted to TTB, Part I, line 9 should be compared to Part II, line 28 for agreement.

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Records Issue 6 — Record of Tax Determination

An agent or employee of the proprietor must sign or initial the record of tax determination required in 27 CFR 19.611, which must be a serially numbered invoice or shipping document (such as a bill of lading).  It is best to show the proof gallons and effective tax rates on the shipping document.  However, if the proof gallons and tax rate are not shown, "Each invoice or shipping document must contain information sufficient to enable TTB officers to determine the total proof gallons and, if applicable, each effective tax rate and the proof gallons removed at each effective tax rate."  That information could be the proof of each bottle of the product and the net contents of each bottle (750ml, liter, etc.) so TTB may multiply proof by volume to obtain proof gallons.

The most common issues that TTB encounters on audits in the area of records of tax determination are that shipping documents do not contain the proof gallons or tax rates (or proof and volume of the product), and they are not signed or initialed.  If the proof gallons or type information is missing, the alcohol proof and product volume information should appear in order to enable TTB to determine the total proof gallons and each effective tax rate.

How to avoid problems with records of tax determination

  1. Instruct shipping personnel that bills of lading or other shipping invoices must be signed.
  2. Make sure that every shipping document includes the proof gallons and effective tax rate or sufficient information to enable TTB to determine this information (such as the proof, number, and volume of each bottle of the product).

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Records Issue 7 — Record of Destruction

DSPs may need to destroy product from time to time due to contamination, broken bottles, or other problems that make the product unsellable.  DSPs may only voluntarily destroy spirits, denatured spirits, articles, or wines in accordance with 27 CFR 19.459.  TTB requires certain records to be maintained when DSPs voluntarily destroy products.

27 CFR 19.617 details the records required for voluntary destruction.  It states that the proprietor must record details of the voluntary destruction of spirits, denatured spirits, articles, or wines as follows:

  • The kind, quantity, elements of gauge, name, and permit number of the producer, warehouseman, or processor, and identification and type of container;
  • The date, time, place, and manner of the destruction;
  • A statement of whether or not the spirits were previously withdrawn and returned to bond; and
  • The name and title of the proprietor's representative who accomplished or supervised the destruction.

Common audit issues found in this area include:

  • DSPs sometimes do not maintain documentation of destructions or the documentation does not include all the required information.  The Monthly Report of Storage Operations (TTB F 5100.11) contains a line for reporting destruction of products in the storage account.  You must possess complete documentation to support any destructions claimed, otherwise excise taxes are due on the spirits reported as destroyed (See 27 CFR 19.254 and 27 CFR 19.263). 
  • The DSP must also file a claim in conjunction with a destruction and must receive approval of the claim before it can take a decreasing adjustment on the Excise Tax Return (TTB F 5000.24). 
    • The claim must include:
      • The date;
      • Time;
      • Place;
      • The manner of destruction; and
      • The name and title of the DSP representative who conducted and supervised the destruction. 
    • The claim should also include all other required information including the permit number and a statement whether the products were previously taxpaid and returned to bond.

How to avoid problems with claims for destructions

  1. If you report destructions on the Excise Tax Return (TTB F 5000.24) or Monthly Report of Processing Operations (TTB F 5110.28), you should insure that you have adequate supporting documentation containing all of the information required in 27 CFR 19.617.
  2. For additional help see Industry Circular 71–10.

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Inventory Issue 1 — Storage Inventory

TTB finds that the most common inventory issue at DSPs is the failure to take physical inventories of bulk spirits in tanks and other vessels.  Also, sometimes the inventory records do not contain a signature or the statement that the record is signed under penalties of perjury.

The regulation governing storage inventories, 27 CFR 19.333, states that you "must take a physical inventory of all spirits and wines held in the storage account in tanks and other containers (except packages) at the close of each calendar quarter."  The DSP must maintain a record of that inventory including all of the information (date, container identification, kind of spirits, losses, and signature) listed in 27 CFR 19.623.

27 CFR 19.45 and 27 CFR 19.623, require that all records of inventory contain the signature of the proprietor or of the person taking the inventory and a statement indicating that the record is signed under penalties of perjury.  The declaration required by 27 CFR 19.45 reads:  "I declare under the penalties of perjury that this [insert type of document, such as report, or claim], including supporting documents, has been examined by me and, to the best of my knowledge and belief, is true, correct, and complete."

All of the supporting documentation for inventories, which DSPs also may use to support the amount reported on line 23, "On Hand End of Month," on the Monthly Report of Storage Operations (TTB F 5110.11), must be retained for TTB inspection.

How to avoid issues with storage inventories

  1. Review 27 CFR 19.333.
  1. Take a physical inventory of spirits held in the storage account in tanks and other vessels (except packages) every three months (at the close of each calendar quarter).
  1. Have the inventory taker or proprietor sign the inventory summary sheets under penalties of perjury with the following declaration:  "I declare under the penalties of perjury that this [insert type of document, such as report, or claim], including supporting documents, has been examined by me and, to the best of my knowledge and belief, is true, correct, and complete."
  1. Retain a record of the physical inventories, which should include the inventory date, container identification, type of spirits, losses, and signature.

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Inventory Issue 2 — Processing Inventory

Some DSPs move bulk spirits from storage tanks (which must be reported on TTB F 5110.11) to processing tanks or to bottling (which must be reported on TTB F 5110.28).  Others skip storage and put bulk inventory directly into processing tanks.  Although both stored bulk and process bulk inventories are part of making spirits, the inventories reported on TTB F 5110.28 are taken from the processing tanks and bottled or packaged spirits.

The regulations require two different physical inventories in the processing account:

  • Under 27 CFR 19.371, proprietors must take an inventory of wines and bulk spirits held in the processing account "at the close of each calendar quarter."
  • Under 27 CFR 19.372, proprietors must take an inventory of bottled and packaged spirits in the processing account for the return periods ending June 30 and December 31 of each year.

 

A common issue found during audits is that the DSP does not take the required inventories on these dates or within the time periods allowed by 27 CFR 19.372(a) (1) and (a) (2).  27 CFR 19.372(b) allows you to request a count of the physical inventories of finished goods (bottled or packaged spirits) on a different schedule than June 30 and December 31; however, you must first receive TTB approval.  You may request alternative physical inventory dates by submitting a letterhead application to TTB's National Revenue Center (NRC) in Cincinnati, Ohio.

How to avoid issues with processing inventories

  1. Review 27 CFR 19.371 and 27 CFR 19.372.
  2. Take a physical inventory of bulk spirits in the processing account every three months and of case finished goods for periods ending June 30 and December 31.
  3. If you wish to take the finished goods inventory on dates other than June 30 and December 31, apply for permission in writing to TTB's National Revenue Center (NRC) in Cincinnati, Ohio.
  4. Have an authorized person sign the inventory summary sheets under penalties of perjury with the following declaration:  "I declare under the penalties of perjury that this [insert type of document, such as report, or claim], including supporting documents, has been examined by me and, to the best of my knowledge and belief, is true, correct, and complete."

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Inventory Issue 3 — Denatured Spirits Operations Inventory

For producers of denatured alcohol, one of the most frequent issues TTB finds during audits is the timing of physical inventories.  27 CFR 19.394 states that you must take a physical inventory of all denatured spirits in the processing account at the close of each calendar quarter.

How avoid issues with denatured spirits operations inventory.

  1. Review 27 CFR 19.394.
  1. Take a physical inventory of denatured spirits at the end of every calendar quarter.
  1. If you wish to take the inventory on dates other than at the close of the calendar quarter, apply for permission in writing to TTB's National Revenue Center (NRC) in Cincinnati, Ohio.
  1. Have an authorized person sign the inventory summary sheets under penalties of perjury with the following declaration:  "I declare under the penalties of perjury that this [insert type of document, such as report, or claim], including supporting documents, has been examined by me and, to the best of my knowledge and belief, is true, correct, and complete."

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Inventory Issue 4 — Production Inventory

The most frequent issues related to unfinished spirits (spirits in production) that we find during audits is that DSPs do not take physical inventories on the correct date or they do not take them at all.  27 CFR 19.312 states that, "A proprietor must take a physical inventory of the spirits and denatured spirits in tanks and other containers in the production account at the close of each calendar quarter.  A proprietor …must show separately spirits and denatured spirits received for redistillation. TTB may require additional inventories be taken at any time."

You must report the results of each physical inventory on line 17(b) of the Monthly Report of Production Operations (TTB F 5110.40).  DSPs also sometimes neglect to report the inventory results as required.  Remember that tax attaches as soon as the spirits come into existence, and you are liable for the tax at that time, so it is imperative to have an accurate accounting of spirits on-hand.

How to avoid issues with unfinished spirits inventories

  1. Review 27 CFR 19.312.
  2. Take a physical inventory of unfinished spirits at the end of every calendar quarter.
  3. If you wish to take the inventory on dates other than at the close of the calendar quarter, apply for permission in writing to TTB's National Revenue Center (NRC)  in Cincinnati, Ohio.
  4. Make sure that the amount reported on line 17(b) of the Monthly Report of Processing Operations (TTB F 5110.40) agrees with the amount shown on the physical inventory record.
  5. Have an authorized person sign the inventory summary sheets under penalties of perjury with the following declaration:  "I declare under the penalties of perjury that this [insert type of document, such as report, or claim], including supporting documents, has been examined by me and, to the best of my knowledge and belief, is true, correct, and complete."

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Inventory Issue 5 — Beverage and Industrial Spirits Case Identification Markings

The TTB-required markings that must appear on cases of finished beverage distilled spirits are different than those that must appear on cases of industrial distilled spirits, and these differences can cause confusion for distilled spirits producers.  (see TTB Forms Tutorial ).  Cases of alcohol fall into two categories:  

  1. cases of beverage (consumable) alcohol, and
  2. cases of industrial alcohol.  

Beverage Alcohol:  Under 27 CFR 19.489, the following marks must appear on each case of beverage spirits that is filled in processing:

  • Serial number;
  • Kind of spirits;
  • Plant number where bottled;
  • Date filled;
  • Proof;
  • Liters or proof gallons; and
  • Cases removed for export, transferred to customs bonded warehouses, transferred to foreign-trade zones, or as supplies for certain vessels and aircraft must bear the additional marks required in 27 CFR part 28.

In addition to the required marks on cases of finished goods filled in processing, the proprietor may include other marks such as:

  • Name or trade name, and location of the bottler in conjunction with the word "bottler";
  • For products actually distilled or processed by the proprietor, the name or trade name, and location in conjunction with the words "Distiller" or "Processor" as applicable;
  • For products imported and bottled by the proprietor, the words "Imported and Bottled By," followed by the name or trade name, and location;
  • For products bottled for a dealer, the words "Bottled For," followed by the name of such dealer;
  • Labels or data describing the contents for commercial identification or accounting purposes, or indicating payment of State or local taxes.

Industrial Alcohol:  27 CFR 19.496 states that the following mandatory marks must appear on cases or encased containers of industrial alcohol:

  • The words "Alcohol" and "Tax-Free";
  • Serial number or lot identification number;
  • Plant number;
  • Proof;
  • Proof gallons; and
  • For cases withdrawn for export, transferred to customs bonded warehouses, transferred to foreign-trade zones, or as supplies for certain vessels and aircraft, the information required by 27 CFR part 28.

How to Ensure Proper Markings on Cases

  1. Review 27 CFR 19.489 and 27 CFR 19.496.
  2. Understand that cases of beverage alcohol and industrial alcohol have different marking requirements.
  3. Train employees to make the proper markings and put controls in place to ensure that the markings are consistently applied.

 

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Inventory Issue 6 — Gauge Records for Production, Storage, and Packaged Spirits

DSPs must keep records of gauges that are required to be performed on both beverage and industrial alcohol.  Frequently, DSPs do not keep gauging records or they do not perform gauging when it is required.

Gauges are required (among other times):

  • At the time of production (27 CFR 19.304);
  • Prior to filling packages from storage tanks (27 CFR 19.324); and
  • When distilled spirit product is to be bottled or packaged from bottling tanks (27 CFR 19.353).

27 CFR 19.618 "Gauge record" outlines the requirements for records that DSPs must maintain for production gauges and gauges performed before filling packages from storage tanks.  The record must contain all the information required in this regulation.
Gauge records at the time of production must include the:

  • Kind of spirits;
  • Age of spirits; and
  • Specific gauge data, including:
    • Package identification number;
    • Tank number;
    • Volumetric data;
    • Wine gallons;
    • Entry proof (whisky);
    • Proof gallons per filled package; and
    • Total proof gallons. 

If spirits are put into barrels (cooperage) for aging, DSPs must keep records that designate the type of cooperage:

  • "C" for charred;
  • "REC" for recharred;
  • "P" for plain;
  •  "PAR" for paraffined;
  • "G" for glued; or
  • "R" for reused; and
  • "PS" if a barrel has been steamed or water soaked before filling. 

27 CFR 19.619, "Package gauge record," requires that DSPs prepare a record to document the gauge of packages of spirits and to convey information on package gauges.  The information required to appear in the record can be found in 27 CFR 19.619.

Records for each package must include (among other things):

  • Serial or identification number;
  • Kind of spirits;
  • Gross weight at original gauge;
  • Regauge and shipment;
  • Present tare on regauge;
  • Proof; and
  • Original proof gallons and receiving weights.

DSPs frequently record the gauge incorrectly when they transfer alcohol from place to place.  DSPs must gauge alcohol and must record that gauge when the DSP:

  • Enters or transfers alcohol between storage and processing;
  • Returns spirits to bond;
  • Redistills or repackages spirits; or
  • Packages spirits. 

These records must show the:

  • Date of the transaction;
  • Identification of the transaction by form;
  • Serial number;
  • Name and plant number of the processor or warehouseman; and
  • Proof if over 190 proof.  

How to maintain proper gauge records

  1. Gauge alcohol content of inventory when the DSP:  
  • Enters into or transfers alcohol between storage and processing;
  • Returns alcohol to bond;
  • Redistills or repackages alcohol; or
  • When the DSP packages alcohol.
  1. When a DSP transfers alcohol into the plant, records must show the:
  • Date of the transaction;
  • Identification of the transaction by form;
  • Serial number;
  • Name and plant number of the processor or warehouseman; and
  • Proof if over 190 proof.
  1. Production gauge records must include the information described in 27 CFR 19.618.
  1. Package records must include the information described in 27 CFR 19.619.

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Reporting Issue 1 — Monthly Reports Submitted to TTB

Common issues related to the TTB monthly reports include that the DSP does not file the required operational reports or fails to file the reports on time.  Also, the information that DSPs provide is frequently incomplete or incorrect.

There are four reports required in 27 CFR 19.632, Submission of monthly reports:

Under which conditions are you required to file these forms?

  • Form TTB F 5110.40 (Monthly Report of Production Operations) – You must file this report if distilling/production operations appear on your DSP permit and registration.
  • Form TTB F 5110.11 (Monthly Report of Storage Operations) – You must file this report to report storage account activity at a beverage or industrial DSP.  You must file this report if the operation of warehouseman appears on your DSP permit and registration.
  • Form TTB F 5110.28 (Monthly Report of Processing Operations) – You must file this report if you conduct processing (rectifying), bottling, packaging, or denaturing operations at your DSP.
  • Form TTB F 5110.43 (Report of Processing (Denaturing) Operations) – You must file this report if you report monthly denaturing activity conducted by industrial DSPs that are authorized to denature spirits and/or manufacture articles.  

When and where do you send the reports?

You must file TTB reports no later than the 15th day of the month following the reporting period, even if there is no activity during the month.  If there is no activity during the month, you are required to file the report showing zeros.  Send all forms to:

Director, National Revenue Center
550 Main Street, Room 8002
Cincinnati, Ohio  45202

Send the original form to the NRC.

Are there tutorials available to help complete the reports?

Filling out the monthly reports requires that the DSP proprietor follow the instructions on the back of the forms.  Tutorials, which include a checklist, frequently asked questions, tools, and a glossary of terms for each form may be found at these links:

Errors when filling out forms.

Audits uncover many errors on these forms or in the reports; some of these errors are described below:

General errors:

  • Failure to maintain the daily and monthly summary information in support of the monthly reports.
  • Failure to maintain copies of monthly TTB reports for the prior three years.
  • Errors in footing (adding down), cross footing (adding across), inventory flow (beginning inventory plus additions minus withdrawals equal ending inventory), and clerical errors related to missing and incorrectly recorded information.  

Monthly Report of Storage Operations, TTB F 5110.11:

  • Inventory gains and losses are entered on the wrong lines.
  • Inventory gains are entered on line 3 instead of line 5.  Use line 3 of the storage report for alcohol received from customs custody.
  • Line 21 is used to enter inventory losses instead of line 22.  Line 21 is designated as a blank line.  

Monthly Report of Processing (Denaturing) Operations, TTB F 5110.43:

  • Mis-reporting the amount of SDA (specially denatured alcohol) and SDR (specially denatured rum) sold to dealers and users, line 6, instead reporting this amount on line 9, "For use in manufacture of articles on my bonded premise."
  • Failure to report Wine Gallons of various SDA and SDR by formula number.  

How to avoid problems with monthly reports

  1. Using Pay.gov, to which you may request access, is a good way to avoid problems with monthly reports since it does the calculations and automates some of the forms.  Pay.gov instruction for form TTB F 5110.40 and Pay.gov instruction for form TTB F 5110.11 are available.  For more information see Pay.gov User Guides at the end of this tutorial.
  1. You must complete and file the forms for production (TTB F 5110.40), storage (TTB F 5110.11), and/or processing operations (TTB F 5110.28 or TTB F 5110.43 ) as appropriate.
  1. TTB monthly reports must be completed and submitted to TTB's National Revenue Center (NRC) by no later than the 15th day of the month following the reporting period, even if there is no activity during the month.
  1. Retain copies of these reports for at least 3 years.
  1. When completing the forms:
  • Be careful that all the information is entered on the right lines of the form.
  • Review the reports before sending them.  Carefully add the numbers to insure they are correct, check for accurate inventory flow (beginning inventory plus additions minus withdrawals equal ending inventory) and check for clerical errors related to missing and/ or incorrectly recorded information.
  • Have a person independent of the preparer review the form for errors and omissions.
  1. For questions or concerns, please call TTB's National Revenue Center at 1-877-TTB-FAQS (1-877-882-3277) toll free; (513)-684-3334 or email ttbspirits@ttb.treas.gov.

Additional Resources:

Form Tutorials:
TTB F 5110.11 – Monthly Report of Storage Operations
TTB F 5110.28 – Monthly Report of Processing Operations
TTB F 5110.40 – Monthly Report of Production Operations
TTB F 5110.43 – Monthly Report of Processing (Denaturing) Operations

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Reporting Issue 2 — Losses in Bond

TTB notes that it is sometimes difficult to understand the difference between a loss and a shortage.  Losses are spirits, denatured spirits, or wines that are lost, destroyed or otherwise unaccounted for while in bond.  Losses are generally taken for bulk inventory.   A shortage is a loss that is an unaccounted for discrepancy (missing quantity) that is disclosed by physical inventory.  Shortages are usually found in cased finished goods inventory.

In storage tanks, because there is a gauge performed when the tank is filled and another when the tank is emptied, gains and losses encountered in storage are measurable and must be recorded on tank summary records.  Each quarter, the proprietor must add up the summary sheets and determine gains and losses.  

In the DSP production process, a loss is a measureable difference between the gauge of the outcome of the production process and the gauged sum of the raw ingredients.  For example, when a batch of alcohol is produced, the proof gallons of alcohol are measured.  Then the amounts of other materials are gauged and added, the sum of which is the estimated amount produced and transferred to a bottling tank.  The amount transferred is measured (gauged) and is compared to the sum and proof of the ingredients in the batch record.  If the amount transferred is less than the sum of the ingredients, a loss occurs.  Leaks in the line, breakage, or errors in pumping between tanks are explainable losses due to accident.

A disappearance that is disclosed by physical inventoryis a shortage.  DSPs must pay taxes on unexplained shortages of bottled distilled spirits.  27 CFR 19.465 states that such unexplained shortages "must be made by comparing the spirits recorded as being on hand to either the results of the physical inventory required by §19.372 or the results of any other complete physical inventory taken by the proprietor.  When the recorded quantity is greater than the quantity determined by physical inventory, the difference is an unexplained shortage. The proprietor must adjust its records to reflect the results of the physical inventory."  

Shortages represent a difference between the "book" inventory and the physical count.  If the proprietor cannot explain these shortages, he or she must pay tax on them.  In addition to unexplained shortages of bottled spirits, a proprietor may also be required to pay tax on other losses (or corresponding shortages) of spirits.  Under 27 CFR 19.462, losses shall be determined:

  • Each time a tank or bulk conveyance is emptied;
  • On the basis of required physical inventories; and
  • Upon discovery of accidents or unusual variations in gauges. 

When it appears that any container in bond has sustained a loss resulting from theft or unauthorized voluntary destruction, such loss shall be taxpaid or the container shall be segregated with the loss reported promptly to District Director, Trade Investigations Division; or District Director, Tax Audit Division. 

In any instance in which spirits, denatured spirits, or wines are lost or destroyed in bond, whether by theft, unauthorized voluntary destruction, or otherwise, the appropriate TTB officer may require the proprietor or other person liable for the tax to file a claim for relief from the tax in accordance with 27 CFR 19.263.  The following losses must also be reported and, potentially, taxpaid: 

  • Missing packages.  Whenever any packages of spirits, denatured spirits, or wine recorded as deposited on bonded premises cannot be accounted for or located.
  • Tampering, material deficiency, or loss of proof.  When it is discovered that:
    • Someone has tampered with spirits;
    • Inventory physically counted is different from what is recorded and the loss is not by leakage or casualty; or
    • There is a loss of proof not attributable to variations in gauging.
  • Excessive in-transit losses.  If there are losses of spirits received in bond in bulk conveyances which exceed one percent of the quantity of a product consigned.
  • Losses from storage tanks and bulk conveyances.  When the quantity of spirits lost from all the storage tanks and bulk conveyances exceeds 1.5 percent of the total quantity contained in the tanks and bulk conveyances during the calendar quarter.

The most frequent violations of the regulations that TTB finds during audits are:

  • The DSP fails to determine losses each time a tank or bulk conveyance is emptied or at each physical inventory or upon discovery of accidents or unusual variations in gauges.
  • The DSP does not gauge the proof of in-bond spirits or denatured spirits in bulk conveyances.
  • Storage losses of spirits exceed the allowable loss limit of 1.5 percent of all available spirits in storage tanks for the quarter.
  • The DSP does not record processing losses from the bottling line.  27 CFR 19.353, "Bottling tank gauge," 27 CFR 19.354, "Bottling or packaging records," and 27 CFR 19.599, "Bottling and packaging records" require a listing of the bottling loss or gain.  Also, 27 CFR 19.283, "When gauges are required," requires a gauge or measurement when the product is reduced in proof prior to bottling.  This amount is measured against the amount bottled, with the difference being the gain or loss, recorded for each bottle tank.
  • DSPs do not have contemporaneous records to support the contention that the product was "lost."  Many times the loss will be calculated on an ad hoc basis and "plugged" to make the TTB monthly report balance.

If there are cased goods stored in the processing account and a physical inventory shows that the physical inventory is less than the book inventory and there is no explanation (such as breakage, theft, etc.), the result is a shortage and tax is due on this shortage.

How to avoid problems with Losses in Bond

  1. Understand the difference between a loss and a shortage. 
  • A loss is a known difference in quantity between the gauged ingredients going in and the actual count at the end of the process, such as losses through leaks or accidents.  Some losses are taxable. 
  • A shortage is a disappearance or loss that is disclosed by physical inventory.  Some shortages are taxable, including unexplained shortages of case finished goods.
  1. Losses must be determined frequently – specifically:
  • Each time a tank or bulk conveyance is emptied;
  • At each physical inventory; and
  • Upon discovery of accidents or unusual variations in gauges.
  1. Do not forget that when a physical count of finished goods cases is less than the book value, this is a shortage, and tax is due.
  1. Keep records that support the losses you claim for tank inventory.
  1. When you file a claim for losses to TTB's National Revenue Center (NRC) make sure to follow the criteria in 27 CFR 19.263.
  1. Put the correct amount of losses of storage and processing tank inventory on the TTB monthly reports, including TTB F 5110.11, TTB F 5110.28 and TTB F 5110.40,and refrain from just plugging in a figure rather than determining what caused the loss.

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Reporting Issue 3 — Timing for Submitting Excise Tax Return

TTB F 5000.24

Late filing of the excise tax form, TTB F 5000.24, is frequently the reason that auditors conduct audits.  A DSP that consistently files tax returns late indicates to TTB that the DSP may have problems.  27 CFR 19.236 "Due dates for returns," states that when DSP proprietors withdraw spirits from their bonded premises, the tax payments are due during the same semimonthly or quarterly period (depending of amount of removals and unless the DSP must pay by prepayment return).  The regulation states, "[T]he proprietor must file a semimonthly or quarterly tax return * * * on TTB F 5000.24" and pay tax "not later than the 14th day after the last day of the return period."  If the due date falls on a weekend, the payment is due the Friday before the weekend.  27 CFR 19.238 describes how to file TTB F 5000.24 by mail or courier and 27 CFR 19.240 describes how to make payment by electronic funds transfer (EFT).

The following tables summarize the due dates for filing semi-monthly returns:

For return periods ending on--

Returns and payments are due on--

The 15th of the month

The 29th of the same month

The last day of the month

The 14th of the next month

September Return periods for EFT filers

For the return period ending on--

Returns and payments are due on--

The 15th of September

The 29th of September

The 26th of September

 The 29th of September

The 30th of September

The 14th of October

September Return periods for non-EFT filers

For the return period ending on--

Returns and payments are due on--

The 15th of September

The 28th of September

The 25th of September

The 28th of September

The 30th of September

The 14th of October

For example, the return for the period ending January 15 is due January 29, and the return for the period ending January 31 is due February 14. TTB considers the date of the official postmark stamped on the envelope as the date of delivery of the return and the date of delivery of the remittance, if enclosed with the return.

The following table summarizes the due dates for filing quarterly returns:

For the return period--

Returns and payment are due on--

January 1st to March 31st,

April 14th

April 1st to June 30th,

July 14th

July 1st to September 30th,

October 14th

October 1st to December 31st,

January 14th

However, under 27 CFR 19.237(b) "Safe harbor rule":

  • EFT filers are considered to have met the requirements of payment without penalty if they pay, no later than September 29, more than 11/15 (73.3 percent) of the tax liability incurred for the semimonthly period beginning on September 1 and ending on September 15, and if any underpayment of tax is paid by October 14. 
  • Non-EFT filers are considered to have met the requirements of payment without penalty if they pay, no later than September 28, not less than 2/3 (66.7 percent) of the tax liability incurred for the semimonthly period beginning on September 1 and ending on September 15, and if any underpayment of tax is paid by October 14.

Failure to file and make tax return payments timely, on or before the close of business on the prescribed last day for filing, subjects DSP proprietors to penalties, interest, and additions to the tax imposed by the following statutory provisions: 26 U.S.C. 5684, 26 U.S.C. 6651, or 26 U.S.C. 6656.  In addition, penalties can be assessed under 26 U.S.C. 5603  and 26 U.S.C. 5687 of $1,000 or 1 year imprisonment for each occurrence for failure to comply with requirements for filing returns and penalties of up to $10,000 and 5 years imprisonment if fraud is involved.

How are returns filed?

DSPs must complete each return on TTB F 5000.24 in accordance with 27 CFR 19.234 or 27 CFR 19.240, and the instructions on the form.  Failure to follow directions is a compliance violation.

When DSPs send TTB F 5000.24 by U.S. mail, TTB considers the official postmark of the U.S. Postal Service stamped on the cover in which the return was mailed to be the date the return is filed and, if the remittance is enclosed, the date payment is received.  TTB keeps copies of the envelope in case of a dispute.

Any DSP may use EFT payment, but it is required of all DSPs or controlled groups (multiple DSPs registrations grouped under one ownership) liable, during this or the prior calendar year, for a gross amount equal to or exceeding $5 million in distilled spirits taxes.  Any EFT paying DSP that drops below $5 million in tax payments in a given year may choose to make payments by EFT, cash, check, or money order.  The DSP's bank makes EFT payments to the specified Treasury Account at a Federal Reserve Bank.  Remittances shall be considered as made when the Treasury Account receives the tax payment by EFT.

Any transfer data record furnished to the DSP will serve as the record of payment, and shall be retained as part of required records.  For instructions, see Pay.gov Submission User Guide and TTB Procedure 2011-1.

Using Pay.Gov may be beneficial to many DSPs because it facilitates reporting and helps the DSP avoid minor reporting problems.

In regard to penalties, interest, and additions:

  • Generally, additions (additional fees) are charged both for failure to file a tax return and for failure to pay the tax. 
  • Under 26 U.S.C. 6651, failure to file a tax return "unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount required to be shown as tax on such return 5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate." 
  • For failure to pay the amount shown on the tax return on or before the due date, 0.5 percent of the tax shown on the return will be added if the delinquency is less than 1 month, with an additional 0.5 percent added for each additional month or fraction thereof, not exceeding 25 percent in the aggregate.

According to 26 U.S.C. 5687, the DSP proprietor could be fined $1,000 or 1 year imprisonment for each occurrence of failure to comply with applicable regulations. Fines for failure to make tax deposits (such as EFT deposits if the annual tax is over $5,000,000 – see above) are described in the law at 26 U.S.C. 6656, which states that any failure to deposit on the due date any amount of tax imposed into the prescribed government depository as required will result in a financial penalty.  A penalty will be assessed equal to:

  • 2 percent of the amount of the underpayment if the failure is for not more than 5 days;
  • 5 percent if the failure is for more than 5 days but not more than 15 days; and
  • 10 percent if the failure is for more than 15 days.

There are also penalties associated with such fraud.  The criminal provision at 26 U.S.C. 5602 states that "Whenever any person engaged in or carrying on the business of a distiller defrauds, attempts to defraud, or engages in such business with intent to defraud the United States of the tax on the spirits distilled by him, or of any part thereof, he shall be fined not more than $10,000, or imprisoned not more than 5 years, or both."  The law at 26 U.S.C. 5603 specifically states that these penalties apply to failure to keep records or alteration of records with the intent to defraud.  The penalties also apply if the employees of the DSP "hinder or obstruct any [TTB] officer from inspecting any such document * * * or fail or refuse to preserve or produce any such document, as required by * * * regulations."

How to avoid problems with Tax Payments and Reporting

  1. Carefully complete the TTB excise tax form TTB F 5000.24.  Follow the directions printed on the back of the form.
  2. File a TTB excise tax form TTB F 5000.24 twice monthly, except for September when it is filed three times.  File the return and pay no later than the 14th day after the last day of the return period.
  3. EFT payment is required of all DSPs and controlled groups liable, during the present or prior calendar year, for a gross amount equal to or exceeding $5 million in distilled spirits taxes.  If this is the case with the DSP, make sure to enroll in the Electronic Funds Transfer system.
  4. Using Pay.gov is a good way to avoid problems with monthly reports since it does the calculations and automates some of the forms.  For more information, see Pay.gov User Guides at the end of this tutorial.

Additional Resources:

Helpful Hints in Preparing Form 5000.24, Excise Tax Return
Pay.gov Excise Tax Return and Payment Electronic Submission User Guide
TTB Procedure 2011–1

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Application, Equipment, and Security Issue 1 — Registration and Permits of DSP and Identification of Structures, Areas, Apparatus, and Equipment

DSPs are required to keep TTB informed about changes that occur with their business or distillery.  We frequently find that DSPs fail to file the required paperwork when these changes take place.

What changes to my DSP registration and/or permit must I report to TTB?

Before commencing operations as a DSP, proprietors are required to file the original:

The DSP must maintain the registration and permit on the plant premises, as required by 27 CFR 19.81.

When certain changes occur in ownership, plant, or operations:

The DSP must notify TTB's National Revenue Center (NRC) within 30 days of the change.  27 CFR 19.112 states that "If there is a change in any of the information in the proprietor's current, approved notice of registration, the proprietor must amend the registration within 30 days of the change… Except when a letterhead application or letterhead notice procedure is allowed…the proprietor must submit an amended form TTB F 5110.41…"

What are the requirements for identification of Equipment, Tanks, Apparatus, and Structures at my plant?

The management and workers in a DSP know what the equipment does; where the tanks, stills, and fermenters are located; and what is in the tanks.  The DSP employees have charts that show tank capacity.  However, office workers or government compliance personnel at the plant may not know this information.

DSPs should clearly mark the details of equipment and its location in accordance with 27 CFR 19.189, which states that:

  • "The proprietor must mark each building at a distilled spirits plant where spirits, denatured spirits, articles, wine, or distilling or fermenting materials are kept with a distinguishing number or letter"; 
  • Each tank or receptacle for spirits must be marked to show "a unique serial number and capacity"; 
  • Each still, fermenter, cooker, and yeast tank shall be numbered and marked to show its use; and 
  • Other major equipment used for processing or containing spirits, denatured or distilling or fermenting material, and all other tanks, shall be identified as to use.

The most frequent violation of this regulation is lack of signage on buildings, rooms, and areas that hold distilling material and unfinished spirit products.  DSPs do not always mark buildings on the premises and areas within each building appropriately.  One way to mark the room or building is to use the DSP permit number, followed by a sequential number if there is more than one room or building used for spirits or production materials.

Most tanks have the capacity marked on them when installed, but over time, the capacity marking may become illegible, or the numbering systems may change.  All tanks and containers associated with production, including flush drums, should be marked with a unique serial number and their capacities.  Stills and all tanks, including yeast tanks, must be marked as to use.

How to avoid problems with your Registration and Permit and how to properly identify structures, areas, apparatus, and equipment

  1. Once a year, or anytime there is major change in operations, review your registration and permit files to ensure they are up-to-date.  You must notify TTB within 30 days of major changes, such as change of officers, addition of equipment, change in location, etc. (See the list above.)
  1. Once a year, check that equipment, structures, and apparatus are properly marked.
  • All structures, areas, apparatus, and equipment must be marked with a distinguishing number or letter (a unique serial number).
  • All tanks used in production must be marked to show capacity.
  • All stills, fermenters, cookers, yeast tanks, and other major equipment used for processing or containing spirits must be marked to show their use.

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Application, Equipment, and Security Issue 2 – Security

Plant security, and the security of all equipment and products, is not only important to the DSP owners and employees, but it is also important to TTB.  27 CFR 19.192 requires adequate security measures that will "protect the revenue." 

  • Buildings must be sturdy and there must be locks on all doors, windows, and other openings. 
  • Outdoor tanks must be individually locked or locked within an enclosure when they are not in use. 
  • Indoor tanks or the rooms or buildings in which they are housed must be equipped for security.

The locks that DSPs use to secure outdoor tanks or indoor tanks containing spirits and, the enclosures around outdoor tanks and doors from which access may be gained from the outside to the rooms or buildings containing the indoor tanks or portable bulk containers of spirits, shall meet the minimum specifications in 27 CFR 19.192(f).

The most frequent security issues TTB auditors find are:

  • Outdoor tanks that contain spirits that are not equipped for locking;
  • Outdoor tanks that contain spirits that are equipped for locking, but:
    • There is no lock on the tanks, or
    • Tanks are not locked within an enclosure when not in use; and
  • Locks do not meet the required specifications.  The lock is frequently improper because it lacks the "captured key" feature.  

How to ensure adequate security for tanks and buildings

  1. Unless outdoor tanks are in locked enclosures, DSPs should fit them for locks and they should be locked whenever they contain alcohol.  For questions regarding enclosures or locks, please contact TTB's National Revenue Center (NRC)  or a TTB investigator in the area of the DSP.
  2. When purchasing locks, make sure they meet the requirements of 27 CFR 19.192.
  3. Train employees to lock tanks.

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FORMS frequently used by Distilled Spirits Plants

Form Number

Form Title

TTB F 5000.8

Power of Attorney

TTB F 5000.18

Change of Bond (Consent of Surety)

TTB F 5000.24

Excise Tax Return

TTB F 5000.31

Pay.gov User Agreement

TTB F 5100.1

Signing Authority for Corporate and LLC Officials

TTB F 5100.11

Withdrawal of Spirits, Specially Denatured Spirits, or Wines for Exportation

TTB F 5100.16

Application for Transfer of Spirits and/or Denatured Spirits in Bond

TTB F 5110.11
Tutorial

Monthly Report of Storage Operations

TTB F 5110.25

Application for Operating Permit Under 26 U.S.C. 5171(d)

TTB F 5110.28
Tutorial

Monthly Report of Processing Operations

TTB F 5110.30

Drawback on Distilled Spirits Exported

TTB F 5110.38

Formula for Distilled Spirits Under the Federal Alcohol Administration Act

TTB F 5110.40
Tutorial

Monthly Report of Production Operations

TTB F 5110.41

Registration of Distilled Spirits Plant

TTB F 5110.43
Tutorial

Monthly Report of Processing (Denaturing) Operations

TTB F 5110.56

Distilled Spirits Bond

Code of Federal Regulations (CFR) and United States Code (U.S.C.) Referenced in this Tutorial

 

CFR

TITLE

27 CFR 19

 

27 CFR 19.45

Execution under penalties of perjury

27 CFR 19.71

Registration and permits in general.

27 CFR 19.72

General requirements for registration.

27 CFR 19.73

Information required in application for registration.

27 CFR 19.81

Maintenance of registration file.

27 CFR 19.91

Operating permit.

27 CFR 19.112

General rules for amending a registration.

27 CFR 19.113

Change in name of proprietor.

27 CFR 19.114

Changes in stockholders or persons with interest.

27 CFR 19.115

Change in officers, directors, members, or managers

27 CFR 19.116

Change in proprietorship.

27 CFR 19.117

Partnerships.

27 CFR 19.118

Change in location.

27 CFR 19.119

Change in premises.

27 CFR 19.120

Change in operations.

27 CFR 19.121

Change in production procedure.

27 CFR 19.122

Change in construction or use of buildings and equipment.

27 CFR 19.126

General rules for amending an operating permit.

27 CFR 19.128

Change in name of proprietor.

27 CFR 19.129

Change in trade name.

27 CFR 19.130

Changes in stockholders or persons with interest.

27 CFR 19.131

Changes in officers, directors, members, or managers.

27 CFR 19.132

Change in proprietorship.

27 CFR 19.133

Partnerships.

27 CFR 19.134

Change in location.

27 CFR 19.135

Change in operations.

27 CFR 19.189

Identification of structures, areas, apparatus, and equipment

27 CFR 19.192

Security

27 CFR 19.233

Filing prepayment returns.

27 CFR 19.234

Filing deferred payment returns.

27 CFR 19.235

Deferred payment return periods—quarterly and semimonthly.

27 CFR 19.236

Due dates for returns.

27 CFR 19.237

Special rule for semimonthly filers for the month of September.

27 CFR 19.238

Payment by mail or courier.

27 CFR 19.240

Payment of tax by electronic fund transfer.

27 CFR 19.254

Assessment of tax for losses or unauthorized removals.

27 CFR 19.263

Claims on spirits, denatured spirits, articles, or wines lost or destroyed in bond – specific requirements.

27 CFR 19.283

When gauges are required.

27 CFR 19.284

Quantity determination of bulk spirits.

27 CFR 19.285

Proof determination of distilled spirits.

27 CFR 19.304

Production gauge.

27 CFR 19.312

Physical inventories.

27 CFR 19.322

Receipt and storage of bulk spirits and wines.

27 CFR 19.324

Filling of packages from tanks.

27 CFR 19.333

Physical inventories

27 CFR 19.353

Bottling tank gauge

27 CFR 19.354

Bottling or packaging records.

27 CFR 19.371

Inventories of wines and bulk spirits in processing

27 CFR 19.372

Physical inventories of bottled and packaged spirits.

27 CFR 19.394

Inventory of Denatured spirits

27 CFR 19.402

Authorized transfers in bond.

27 CFR 19.405

Consignor for in-bond shipments.

27 CFR 19.407

Consignee premises.

27 CFR 19.459

Voluntary destruction.

27 CFR 19.462

Determination of losses in bond

27 CFR 19.465

Shortages of bottled spirits

27 CFR 19.489

Marks on cases filled in processing.

27 CFR 19.496

Cases of industrial alcohol

27 CFR 19.571

Records in General

27 CFR 19.572

Format of records.

27 CFR 19.573

Location of required records.

27 CFR 19.574

Availability of records.

27 CFR 19.575

 Retention of records.

27 CFR 19.576

Preservation of records.

27 CFR 19.577

Documents that are not records.

27 CFR 19.578

Financial records and books of account.

27 CFR 19.580

Time for making entries in records

27 CFR 19.581

Details of daily records

27 CFR 19.599

Bottling and packaging records.

24 CFR 19.601

Finished products records.

27 CFR 19.611

Records of tax determination in general.

27 CFR 19.617

Destruction Records.

27 CFR 19.618

Gauge Record

27 CFR 19.619

Package gauge record

27 CFR 19.620

Transfer record—consignor's responsibility.

27 CFR 19.621

Transfer record—consignee's responsibility.

27 CFR 19.623

Record of inventories

27 CFR 19.632

Submission of monthly reports.

27 CFR part 28

Exportation of Alcohol

U.S.C. Reference

U.S.C. Section

26 U.S.C. 5010

Credit for wine content and for flavors content

26 U.S.C. 5041

Imposition and rate of tax

26 U.S.C. 5207

Records and reports

26 U.S.C. 5602

Penalty for tax fraud by distiller

26 U.S.C. 5603

Penalty relating to records, returns and reports

26 U.S.C. 5661

Penalty and forfeiture for violation of laws and regulations relating to wine

26 U.S.C. 5684

Penalties relating to the payment and collection  of liquor taxes

26 U.S.C. 5687

Penalty for offenses not specifically covered

26 U.S.C. 6651

Failure to file tax return or to pay tax

26 U.S.C. 6656

Failure to make deposit of taxes

 

 

Industry Circular

 

Industry Circular 95–4

Accelerated Payments Of Certain Excise Taxes

Additional Resources - Distilled Spirits Plants

Pay.gov User Guides:

Tutorials on filling out DSP reports:

 

TTB G: 2010–6
OPR:  TAD
Updated December 21, 2011

Page last reviewed: December 20, 2014
Page last updated: July 11, 2016
Maintained by: Tax Audit Division

TTB
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