The USTC conducts sales tax audits generally in three-year intervals, at the time a permit or license is closed out, or in connection with an audit of another permit or license held by the taxpayer or feepayer. USTC Audits may also be initiated as a result of information that the USTC has received from outside sources. If you have been selected for a USTC audit, you will receive a notice in the mail. The notice will indicate who the auditor is and what tax periods are subject to the audit.
In a sales and use tax audit the auditor will generally attempt to determine the following about the returns you have filed:
- Did you report all gross receipts from sales of tangible personal property and taxable labor and services?
- Did you report the cost of all business equipment and supplies that you purchased without tax either from out-of-state vendors or for resale that would be subject to use tax?
- Did you properly claim deductions?
- Did you properly allocate local tax?
- Did you use the correct rate of tax when reporting sales in special tax districts?
- Did you properly apply tax to your sales and uses of tangible personal property?
STATUTE OF LIMITATIONS
Statute of Limitations in general, for all taxpayers filing returns, is three years. However, if you do not file a tax return, the statute of limitations is eight years.
WHAT DOCUMENTS WILL THE USTC AUDITOR REVIEW?
The USTC auditor will review business documents pertaining to cost of goods, gross receipts, and mark up. The USTC typically will contact third-parties. The USTC may obtain information about taxpayers from various sources including other state agencies, businesses, wholesalers, and data houses. Some of this information may include third-party proprietary data that cannot be shared with the taxpayer who is under audit.
Generally the auditor will conduct a sample examination to determine if a more detailed audit is required. For a sales tax audit, for example, the auditor may compare:
- The total sales recorded on your books to the total sales reported on your sales tax returns.
- The total sales recorded on your books to the total sales on your income tax returns.
- The amount for tax you collected to the tax reported on your returns.
- Claimed sales for resale to resale certificates
The USTC auditors use several unique statistical methods to assess a tax liability. These unique methods include a markup test. The mark up test compares total sales reported with a total sales figure that the auditor creates by marking up your cost of goods. Another statistical method used is a ratio of cash versus credit card transactions to determine if there are underreported cash transactions.
If the auditor determines that you owe additional taxes or fees, the USTC auditor will issue a notice of determination letter to you. You have 30 days from the date of the letter to file a petition for redetermination.
CONTACT A USTC TAX ATTORNEY
If you have received a notice from the USTC, contact a USTC tax attorney at Tax Defense Counsel for a free consultation.