I want to talk a little bit about the types of records that are requested in a Sales Tax Audit and ways that you can use them to your advantage. The Auditor at the beginning of an audit can issue a big long list of everything that they’re looking for and basically they are looking for as much information as possible to verify sales and verify purchases in most cases. Now depending on why the client was audited you’re going to have different auditors looking for different things.
But I want to go over some of the records and we can talk about what the easiest way to combat any issues with those records is. The very first thing that they’re looking for is they’re looking for internal financial records and what they mean by that is they’re looking for a general ledger, general journals, cash previous receipts and disbursement records any accounts receivable ledgers, a purchased journals and then so on and so forth all this associated schedules with that. basically if you don’t have the information to produce in the audit there’s no need to worry about it. If it’s quick and easy and a great on quick works then the decision on whether to produce it or not produce it and of course the audit will depend on whether it helps or hurts you.
If you’re super organized and you’ve everything longed and in the corpus there’s no harm in giving the auditor the general journal or should I say sections of the general journal that well advocate your client’s position. You certainly if you decide on a scope of two quarters or one quarter you don’t want to give in the entire general journal you just want to produce the sections that are applicable to those specific quarters.
Basically the more data that you’ve to independently corroborate your sales data or your purchased data the more you want to produce to the auditor. The more pieces that you get sinking into play and corroborate in the total numbers that you’ve will likely lead the auditor no change. Again hard data is always preferable over any sort of statistical sampling because hard data eventually is what the audit is going to be judged on but has to go to the appeals or to the litigation stage. To the point that all your data matches there’s no harm in producing it to the auditor and getting all that information.
I would keep in mind that with the auditor is doing with that data the auditor is looking for places where you slipped up or where they’re under ported sales or potentially cash sales that are off the books or purchases that haven’t been properly reflected and that’s really important to know is know that everything the turn over to the auditor is going to be scrutinized with a fine tooth comb and compared to those other sources of data.
Being careful about the types of documents you’re producing as long as you’re careful there’s no reason why you can’t produce all the information but again just don’t give the auditor more than you need to because the more you give him the more threats he has to unravel.
Auditors will also look at tax returns and with the information with the idea of doing financial analysis on the underlying data. With the auditor is going to do as if the data does not sank or if there is a reason for doing so the auditor is going to try to reconstruct sales based on either the federal income tax return or based on the general journal or other piece of information but they’re also going to look at gross profit and net worth.
The auditor is going to try and pigeonhole the client based on who they are and what type of business they run and what the client should be making as into what the net profit should be and what the gross profit should be with the business. Again the way people get audited is the board takes a sampling of restaurants and they come up with a sample of a hundred data points. And it’s the people on the low end of the spectrum and the people on the high end of the spectrum that get hurt.
The people that fall in line with the boards agreed upon a market percentage are the ones that are less likely to get audited. Now you don’t have any control over that but what you do have control over is during the actual course the audit is counteracting the data that the board have because the board’s going to have a opinion on what your market percentage should be. And if there’s a different way that you run your business or if there are factors in your business that are industry specific or based on the demographics of where you are or whatever you can use those factors to defeat the board’s market percentages even if your data doesn’t sync perfectly.
For example, we were involved in an audit of a very high-end restaurant in a very high-end area in San Diego. In looking at the board’s markup percentage, we were able to defeat the presumption of the auditor by pointing out that the fact that because the client was a high-end restaurant that they relied on a variety of fresh ingredients, a lot of fresh seafood, a lot of fresh vegetables. Those fresh vegetables had to be kept to a certain standard as such there were a lot more purchases for a business like that than there would a normal business.
Whereas a business could keep a tomato for two or three days if that tomato wasn’t used on day one, then the tomato was tossed because the clientele of the high-end restaurant expected the very finest fresh produce and fresh meats of fresh fish to dine on. Even within the markup and in probing the auditor a little bit and saying where did you come up with your percentage? Oh well, we just came up with it based on restaurants in San Diego. Well, that’s not really specific to the type of restaurant that the client has.
In poking and prodding their assumptions based on their aggregate data, you can create your own doubts as to the underlying accuracy of that data and poke through some of the methods that the auditor is going to use to test you.
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