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:

• Monthly Report of Production Operations (TTB F 5110.40);

• 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).

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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.

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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.

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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.)

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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:

• 27 CFR 19.371, Inventories of wines and bulk spirits (except in packages) in processing account;

• 27 CFR 19.333, Physical [Storage] inventories;

• 27 CFR 19.312, Physical [Production] inventories; and

• 27 CFR 19.394, Inventory of denatured spirits.

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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.

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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:

• Monthly Report of Production Operations (TTB F 5110.40);

• 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).

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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.

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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.

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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."

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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:

• Monthly Report of Production Operations (TTB F.5110.40);

• 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).  

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.

 

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:  

• Monthly Report of Production Operations (TTB F 5110.40);

• 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).

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.

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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

 

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.

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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. 

 

 

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.

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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.

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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.

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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.

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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). 

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.