Doug Stucker

The number of business taxpayers being audited by state and municipal governments is increasing at what seems to be a record rate—with sales and use tax audits generally leading the way.  Many states justify hiring additional auditors by pointing to the estimated revenue generated from the audits.

According to the Rockefeller Institute of Government, the recent drop in state tax collections is the largest decrease in 50 years.  The Wall Street Journal reported that sales tax revenue fell 9% in the second quarter of 2009 alone.  At a recent national sales tax conference, aggressiveness of state tax audits—both in the number of audits and issues being addressed—was the theme.

In order to raise desperately needed revenue, taxing authorities have increased their audit activity while attempting to shorten the completion time of audits.  Even in the best of times, sales and use tax auditors often focus only on transactions where sales or use tax has NOT been paid.  They are generally not examining all purchases or sales where tax HAS been paid or may have been paid in error (refund/credit).

Auditors also are utilizing sampling methodology and estimates to reduce the number of records examined.  This may result in situations where incorrect methodology is used and the corresponding results may not accurately reflect a company’s true liability.  Experience and sophistication of sampling methodologies varies dramatically by state.  Knowing how to evaluate the methodology and sample may save you significant headache and reduce exposure.

More audits and more aggressive auditing are a sign of the times.  Auditors are pressured to complete audits quickly.  As a result, taxpayers are allowed less time to provide requested information and documentation.  Those who do not have the time or resources to provide the requested information or documentation quickly face assessments simply because they cannot meet the short turnaround time.  They must then consider whether it is practical to appeal or to pursue an expensive court proceeding.

For more information on this topic, please contact your BKD advisor.