Did your sales tax auditor ask to see 'all' of your accounts and records?
If you answered 'yes,' you are not alone. If put in this position, what do you do? Well, ask yourself the following questions:
- Are your records so detailed, complex or voluminous that an audit of all detailed records would be unreasonable or impractical?
- Would the cost of an audit of all detailed records to the taxpayer or to the state be unreasonable in relation to the benefits derived and sampling procedures would produce a reasonable result?
If you answered 'yes' to any of these questions, the state should work with you to determine a reasonable method of performing the audit. Unfortunately, this is not always the case. Sometimes auditors dig their heels in, and you have to ask to speak with their manager, and then the manager's manager. It can be very frustrating. Especially if the taxpayer has been audited by the state in the past using 'reasonable' methods.
Let's face it, an auditor should not ask or reasonably believe it can review all of the records of a Fortune 500 company. Even with the best systems in place, it is a monumental task. Yet, some state auditors or states have adopted policies to push this requirement.
The ironic part of this request and requirement is that auditors don't really want all of these records because if they did, they would have to review them. Auditors don't have the time.
So why do states attempt to impose this burden?
If records are not provided, some states threaten to calculate an audit assessment using estimates (which are essentially based on bad numbers) or a 'jeopardy assessment.'
It seems like states are simply using this strategy to be able to issue an assessment based on estimated numbers.
Why would the state do this?
Perhaps it is because they are understaffed. They don't have the resources to perform a reasonable audit. Thus, they impose an unreasonable requirement that can't be met so they can simply issue an estimated assessment and move on.
We Don't Live in a Perfect World
Common sense and reasonableness should apply on both sides of the table. In a perfect world, a taxpayer would be able to supply all records. State auditors would be able to review all records. Tax law would be simple, clear, without any room to argue or interpret. Simply push a button and 'boom,' you know what your tax is. No questions asked. No need for auditors. No need for large tax departments. No need for a tax profession. But wait, we don't live in a perfect world.
Action
The next time this happens to you, try to have a reasonable discussion with the auditor, the auditor's manager and the manager's manager (if necessary). If that doesn't work, be prepared to appeal an unreasonable audit assessment or supply all of your records. The good news is that a state's Appeals Division is usually a great place to receive a reasonable result after bad audit policies were followed. I have seen this firsthand.
Do you have any audit horror stories?
Do you have any audit strategies?
If so, feel free to share them here, or to remain confidential, contact me at strahle@leveragesalt.com.