Sales Tax Audits! Be prepared
I hope you have managed to stay safe and well! We focus on resolving tax issues in Prince William County and throughout the lower Northern Virginia area.
It’s an unfortunate fact that many of the businesses out there are failing to properly calculating and reporting their sales and use tax. While, most taxpayers (business owners or not) are afraid of the Internal Revenue Service, very rarely will the IRS shutdown a business (normally has to be for repeated violation of payroll tax law). However, states and local jurisdictions confiscate sales tax certificates regularly, effectively, shutting down a taxpayer’s business overnight. If you have ever had your business subject to or have been the responsible person involving a sales tax exam by your state, you know how aggressive state tax auditors can be.
Here's a brief overview regarding how sales tax audits are performed by evaluating oft employed sales tax audit techniques. Disclaimer each state will have slightly different laws and regulations and thus will have slightly different techniques often used by
overzealous state auditors. Sales tax are trust fund taxes, so taxpayers are holding property of the state, and when the tax is not remitted, states tend to address the failure to remit with draconian measures. Because sales tax is a trust fund tax often “responsible persons” can be held personally liable for it. State auditors sometimes put more focus on sales tax audits since money is held in trust for the state.
For example, in the case of a relatively small or localized taxpayer (e.g., retail store, only one sales tax location) the state would expect total receipts on the business income tax return to tie to total sales (before exclusions) on the sales tax return. Discrepancies could result in an audit. States also select taxpayers for sales tax audits based on what they learn in other audits. For example, if during an audit an auditor notices a vendor not charging sales tax, that vendor may be selected for audit. States will look to substantiate return data using the
• Bank records
• Accounting records
• Point of sale records
• Credit card company records
• Sampling of cash receipts, if applicable
States may look at capital expenditures to determine appropriate depreciation and sales tax payments, respectively. State audits will also look at income tax returns while income tax audits are not likely to involve a review of sales tax returns. While, income tax audits tend to be extremely broad in scope and detailed, sales taxes are generally well defined and as a result, once the taxability of a given good or service is established, which is often a fairly easy process, only financial records (i.e., sales figures) are relevant, unless something else is found. Sales tax audits become more complex in states like Connecticut that tax many services. Much time and effort can be spent distinguishing what type of services is being sold to determine if sales tax applies. sales tax audits tend to rely more on sampling than income tax audits, which tend to involve a review of a complete sets of records:
• Sampling can be good for your clients and for auditors, but make sure reasonable techniques are used and that “typical” periods are sampled
• For example, reviewing one day’s activities when the audit period covers 1200 days is not reasonable
All too often clients “can’t afford” to speak with their accountant or a tax attorney to determine how sales tax applies to their industry, but the cost of speaking with a professional for thirty to sixty minutes would be relatively inexpensive (less than a thousand dollars) as compared to paying back tax that was not collected or remitted (tens of thousands,more?) Similarly, clients hesitate to hire an accountant / bookkeeper to keep up with monthly accounting records, but this can leave room for state auditors to make bad assumptions and result in costly audit bills
• The audit bills then must be defended by accountants / lawyers which, again becomes costly
• Unless a state has an independent appeals body, appeals is likely to side with auditors
• You frequently see relatively large sales tax bills as the result of an audit, but the bills are not large enough to warrant professional fees to contest the audit in court
If ever you’re feeling overburdened by your tax situation or you’d rather be doing something else with your time, just remember we’re here to help you with all of your tax preparation, resolution/representation needs. Now and in the future. Don’t put off addressing your tax situation. Feel free to contact us with any questions you may have in approaching your specific tax scenario.