Sales Tax Audits - Protect Your Business

Dealing with a Sales Tax audit notice

You see the return address, New York State Department of Taxation and Finance. You just know the envelope contains a notice you wish you would never receive. Your palms shake, you break out in a sweat, your heart rate soars. You are not alone, This is the initial reaction most business owners experience.

This may be the beginning of bigger problems unless you know what to do.

The New York State Tax Department has become much more aggressive over the last few years. The keys to success from this point are the quality of your records and the actions taken during the audit. The following are the most common mistakes business owners make when they receive the dreaded notice of a sales tax examination. 

Ignore the notice and hope you are having a bad dream.

This is a very bad idea. The notice usually states that an examination covering three years of sales records has been scheduled at your place of business to begin a few weeks after the notice was sent. If you ignore the notice, the examiners will appear at your front door, ask for a long list of business records and make your life miserable for anywhere from a few days to a month.

Sign the notice and wait for them to arrive.

You are waiting for trouble to begin. Without proper preparation, your business will be disrupted for weeks. You are setting the stage for you to be so distracted from the conduct of your business that you and your customers will suffer. You also might offer records to which the examiners are not entitled.

Fax the notice to your accountant and hope that it will all go away.

Sending the notice to your accountant is an excellent place to start. Be sure, however, to ask your accountant what experience they have specifically in sales tax audits of liquor stores. Your accountant may be fantastic at tax preparation, tax planning and business consulting and may be a wonderful advisor and friend. Sales tax audits are a specific area of expertise.

Many accountants would appreciate the opportunity to work with a specialist in this area. A specialist works with your accountant, supporting them and the records they prepared as well as supporting the owner of the business. The danger is that without taking proper actions at key points during the process, sales tax audits can end in very large assessments. It is not uncommon for initial assessments to exceed $75,000.

Once the audit begins, be wary of the auditor overstepping their authority. They often ask for information to which they are not entitled. They often misuse information provided by suppliers. They attempt to perform tests of markup percentages that they have no right to perform. They then issue assessments based on “industry standard” information that is not applicable, especially in our geographic area.

If you are already facing a large audit assessment, there may still be time to fight it. Depending on the procedures followed by the auditor, a mediation conference or appeal may still be available. If you are at this stage, you must act quickly.  

 

If you have any questions, you can contact me directly.

Joel Peck, CPA

[email protected]

212-382-2455

Use your own records to defend a sales tax audit.

Millions of dollars in sales tax audit assessments have been made as a result of store owners and their accountants not keeping “adequate” records. How do you know if your records meet the test?

NYS has hired over one thousand new auditors during the past year. The auditors are being encouraged to produce tax assessments to help close the budget gap.

If you are not 100% confident that your records qualify as adequate according to NYS Tax Regulation and Case Law, you may be set up for a disaster. You must improve your system immediately.

Do you have a point of sale system? Does your point of sale system reconcile directly with your accounting software?

What type of cash registers do you use? How do they coordinate with the sales and sales tax you report?

Do you record sales based on deposits?

Amendments in 2009 to New York State’s tax law impose a civil penalty for every quarter for which a taxpayer fails to maintain adequate books and records. The penalty begins at up to $1,000 for the first quarter and can increase up to $5,000 for each additional quarter.

Are your accounting books and records adequate? How do you fight the auditors’ claims that they are not?

We can help you with this. If you or your accountant contacts us, we have a process to review your books and records and discuss whether they are more of a risk or a reward.

Sales Tax Desk Audits Become More Popular

In an effort to collect money from unsuspecting business owners, NYS has increased the number of desk audits they are performing.

Letters are being sent to businesses stating that “taxable sales reported on your New York State sales tax returns for the above audit period may be understated” based on information received from your suppliers? The letter goes on to say they are conducting a limited scope audit.

If you have received such a letter, it is very important that you respond within 30 days and, most of all, respond correctly.

You may not need to send any detailed information, but we suggest you respond to the letter as soon as possible.

We have been successfully defending businesses in sales tax audits for over ten years. Please contact us for additional information.

Joel Peck, CPA

Joel Peck & Associates

212-382-2455 (ph)

914-560-2266 (fax)

Web: www.JoelPeckCPA.com

Sales Records Required to Survive a Sales Tax Audit

Adequate records are very important to keep, but who defines what is adequate? The answer has to do with whom you ask.

As a business owner, you may be interested in sales by category or sales by specific product. Some owners only care about total gross sales or total deposits to the bank.

Sales tax auditors have been known to make an early decision that the sales records maintained by the business are inadequate. The reason behind this often premature determination is that it enables the auditor to use data from outside the business to calculate a sales tax deficiency. This almost always leads to a large sales tax deficiency.

Sales tax case law has upheld that a taxpayer who maintains sales records as required by law has a right to expect that these records will be used in an audit to determine any tax liability. Very few business owners are aware of the laws that differentiate adequate sales records from inadequate sales records, especially as the records pertain to sales tax liability.

Follow these rules for purposes of sales tax calculation and substantiation.

l      Sales records must provide sufficient detail to independently determine the taxable status of each sale and the amount of tax due and collected.

l      Sales records should be reconciled to deposits to the bank.

l      Cash register tapes which indicate whether each sale is in a taxable or exempt category, but which do not identify the individual item(s) sold, are sufficient to prove gross sales but are not sufficient to independently determine the taxable status of each sale.

l      For deliveries out of state, records must substantiate points of delivery. These documents must be referenced to specific sales transactions.

l      For sales that are exempt from sales tax, an exempt sales certificate must be on file for the customer.

You may choose to keep records with more detail than this. The list above establishes the minimum requirements.

By proving that the store’s records in the above case were adequate according to NYS Sales Tax pronouncements, the markup information was not allowed to be used to calculate unreported sales. The assessment was reduced to zero.

     

            If you or someone you know is involved in a sales tax audit,

            get expert assistance…before it is too late.

            Contact Joel Peck today!

 

 

Joel Peck, CPA

[email protected]

212-382-2455

 

Jewelers - Protect yourselves and your customers

I had the “privilege” of defending a retail jeweler client of mine in a recent sales tax audit. After reviewing my client’s records and finding that they were properly kept, they sought to send letters to the jeweler’s customers requesting information about purchases that were shipped to them. It wasn’t enough in the mind of the auditor that my client kept excellent records.

You can foresee the negative reaction a business' customers would have to a letter asking questions about a purchase they made. They might even decide to take their business elsewhere attempting to avoid confrontation. Many retail jewelers have already been placed in this uncomfortable position.

There is a way to fight back. According to leaders of the task force, I am the only CPA in New York State

who knows how.