Sales Tax
Are Your Clients Likely to Face a SALT Audit?
Historically, a business' gross revenues follow seasonal patterns and even a small change in gross revenue should result in a small change in the associated accounts. In an attempt to discover why one established contractor was selected for audit, I reviewed their sales tax filings and created the below table.
Sep. 12, 2014
Are you or your clients risk averse and totally rational?
- “This high profile, attention-grabbing color is not an issue for me;”
- “I wear my seatbelt, drive slightly under the posted limit and never text.”
- “As a reasonable person I know that every deviation from the norm invites a moving violation.”
- “Law enforcement personnel like sales tax auditors look for things outside the norm, those red flags indicate non-compliance.”
Historically, a business' gross revenues follow seasonal patterns and even a small change in gross revenue should result in a small change in the associated accounts. In an attempt to discover why one established contractor was selected for audit, I reviewed their sales tax filings and created the below table.
The exact dollar amounts are not as important as the relationships between them. The chart illustrates two of the many red flags contained in this data set. How many red flags can you find?
|
Gross Sales |
Use Taxable |
|
|
Q1 2011 |
330,172 |
1,968,518 |
|
Q2 2011 |
335,540 |
1,324,887 |
|
Q3 2011 |
768,663 |
2,450,371 |
|
Q4 2011 |
1,904,788 |
2,724,815 |
|
|
|
|
|
Q1 2012 |
11,994,786 |
2,420,044 |
|
Q2 2012 |
14,760,647 |
0 |
|
Q3 2012 |
18,557,313 |
0 |
|
Q4 2012 |
15,797,641 |
0 |
Red Flags
1. 2011 use taxable purchases exceed gross sales by a million dollars each quarter. Established businesses normally have some use tax but not 2 ½ times greater than revenues.
- Could the accounts be backwards or the contractor be reporting labor sales as gross revenue and materials as use taxable purchases, thus understating gross sales?
2. Revenues double between Q2 & Q3 – 2011, again between Q3 & Q4 – 2011 and a 5 fold increase between Q4 – 2011 & Q1 – 2012, growth the stabilizes at over 10 times prior quarters.
- The doubling of revenues Q2 &Q3 2011 is possible. Note- as revenues doubled use tax doubled.
- Q4 – 2011 to Q1 – 2012 5x increase – hard to believe. Note – use taxable amount stabilizes, why?
- Q1 – 2012 gross sales stabilize Note- lack of use taxable purchases in remaining quarters. That seems unlikely given prior period reporting.
Attracting Attention
States use many sophisticated techniques to identify and target non-compliant companies, such as:
- Erratic ratios of sales to use tax,
- Rapid growth,
- Zero returns
- Large increase of sales
Data, while important is still reported by a person. Based on the above red flags the following questions should be asked.
- Did key personnel leave?
- Was 5x growth delayed billing or prior period underreporting due to staffing issues?
- Does the entity need hands on training and coaching?
- Should I visit the entity and observe their operations?
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September SALT Checklist
- Analyze your clients for tax audit red flags (see related article)
- Examine client internal controls relating to state and local tax issues and for future protection from audits
- Filings – in addition to current tax obligations, help clients get up-to-date on delinquent tax filings
- Reporting – review clients' year-to-date SALT expense and liabilities for accuracy
- Planning – estimate and schedule all state and local tax filings that will be due in Q4
- Legislation – recent legislation has affected taxes in Illinois, Utah, and California. Make sure you're up-to-date on SALT-related legislation in all states where you have clients
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Eide Bailly is a top 25 CPA firm with 24 offices in 11 states. Eide Bailly's National Tax Office serves as a resource for clients to help analyze complex tax issues related to business decisions. Our professionals are committed to helping clients stay informed about tax news, developments and trends through various specialty areas, including cost segregation studies, wealth transfer, state and local taxation, international tax, IRS controversy and procedures, tax-exempt organizations and tax legislation. For additional information visit www.eidebailly.com.