What I Learned From A Sales Tax Audit...

Debookkeeper

other than they are a HUGE pain in the A$$!
Was just reading another thread on red flags for the IRS got me thinking about the preparation work I had to do for a State Sales Tax Audit! IT S*CKS!!! (what made it even more challenging was I had only worked for the GC for 5 months, so I wasn't fully familiar with the vendor/customer history) So - for anyone who may possibly be subjected to a sales tax audit here are a few things I learned -
The auditor wanted a printed copy of EVERY single invoice to a customer, all the materials invoices, and all the subcontractor invoices related to the job, 3 years worth. Now I know sales tax is different state by state - but in CT the only jobs that we charge sales tax on are Commerical & Income Producing residential. (labor and materials) and it varies by industry.

Be careful how you label jobs! We use Quickbooks Pro - so when we do multiple jobs throughout the years for a customer we have sub-categories that we differentiate by a name, Ie: Tom Smith: Bathroom, garage, etc. Well a few names were like "customers name office". This was an office in his residential home that was not used on his IRS return for "home office" deductions. We had to get a letter from the homeowner stating such. We had a customer who owned two condos - one he lived in, the other his daughter - same thing again we broke it down by unit#... we had to track down this cutomer who had sinced moved to a different state to get a letter (there was 30G's worth of work and possible tax, penalties & interest we would have been on the hook for) A commercial job we did that had some new construction to existing construction. The new construction would not be taxable. We had pictures! The auditor was trying to say that the parking lot was existing - which in fact it was not and we had pictures to prove it.
Also remember.. when he was looking at our invoices from the subcontractors he was checking to make sure they charged US the appropriate sales tax - which could open them up for an audit. This process took 5 months from beginning to end. Pulling together the paperwork was torture and time consuming and expensive because the GC had to pay for my time to do that. End result - he plays by the book - and only a few small invoices in 3 years fell through the cracks and should have had tax charged. We are still waiting to see what the penalties and interest amnt to for approx 160.00 in tax missed, but I can't imagine it would come close to the auditors salary the state paid him to do this audit. Glad it's over.. I told everyone I work for that if they ever get audited I am going on a looooong vacation 2:

R&S Exteriors

That was one of my biggest points on the other thread. Even if you are doing your best to play by the rules an Auditor is not just an okey dokey nice guy. They could care less about you or your business.

Their job is to look through everything with a fine tooth comb and try to bring in more money for the government.


See Mike. Even though this GC did everything above board he still got raked through the coals. Luckily he only got a small hit UNLESS you figure in all the time and money spent over the 5 month period to gather documents and explain to the government your every action. And lets not forget the stress.

Here is a guy going by the rules and I'll bet it cost him thousands in payroll, etc to comply with this audit.

Just imagine what the result would have been if the GC had not been smart enough to document EVERYTHING. There are allot of people in our trade that pretty much go by the rules BUT guess what if they don't have the Proof, ( many of us do not document like we should), they went by the rules the Auditor will "assume" they did not and hit them for tens of thousands in taxes, penalties and interest.

He/She could care less if your guilty or not. Just the way it is . They are evaluated on the money they bring in and the number of "evaders" they nail.

Jon F

How big was this GC/Co.?? Huge?? What I've always understood regarding an audit, is that it is based upon your size, and what they may find. For instance, normally they sift/sniff around enough to see if they smell something afoul, and if they don't, they move on. I cannot believe this auditor still has a job if your GC was off $160 after a 5month investigation. I'd think this auditor should be fired for a grand waste of time/money/etc. Tell ya what, I'm surprised this GC didn't call cousin Vito to persuade the situation.

Double-A

Deb, is the burden of proof in your court or the states? Seems to me they cannot claim something is so without proof. Just because they claim the parking lot was 'pre-existing' doesn't make it so. They still have to prove it if that claim is disputed. Trouble is, is the paltry tax and penalty worth the price of a lawyer to dispute it?

__________________
"My clients’ wishes are the center of my attention." -- David Guido, a contractor in Woodstock, N.Y.
New York Times, July 20, 2006

R&S Exteriors

The Taxpayer has the Burden of Proof. You have to be able to justify your deductions


The IRS can also question third parties (Neighbors, Banks, Employee's, Sub-Contractors, ETC)

Double-A

We're talking about an audit by the state for sales tax collection and payment. Not the IRS nor a federal return.

Yes, you have to prove the deduction, but in the case of a dispute, the IRS or anyone else has to disprove your proof in order to disallow it and be able to defend it in court. Just saying that the parking lot in this case was pre-existing doesn't satisfy that position. DB was able to provide a picture as proof, but in a court of law, unless the burden of proof is on DB's GC, then the state has to prove that parking lot was there before DB says it was.

I've been through enough audits from all types of taxing agencies not to get scared or intimidated anymore. Auditors are just doing their job and I respect that, but I won't be railroaded. Knowing where you stand in such situations was the point of my reply.

The problem with disputes is who is going to blink first. The auditor knows its usually cheaper to pay the tax and penalties associated with the dispute than it is to take it to court. He also knows that in most cases, his is not the final judgement within the auditing agency, and therefore must substantiate his claim beyond "just because". This means that you can appeal his decision. Unless this "just because" attitude is systemic, he won't have a leg to stand on. If it is systemic, then lawyer up, you're going to court, or pay up, you lost your dispute. Simple as that.

__________________
"My clients’ wishes are the center of my attention." -- David Guido, a contractor in Woodstock, N.Y.
New York Times, July 20, 2006

Mike Finley

Sounds like CT sucks ass is what I got out of it.

Debookkeeper

Big time!! This GC has been through 4 sales tax audits in 18 or so years. I work for another contractor who has been in business for 25 years and has NEVER had one. Yes the burden of proof is on us, but it is also correct that we have time to dispute it. Now keep in mind that through the 5 month process he was auditing others, and during this time we were building a new house, it was year end tax time, and insurance audit time. Stress levels were VERY high for him and I, and if all the other stuff wasn't happening, the process probably would have taken 2 1/2 - 3 months. I just can't put enough emphasis on how important it is to keep an assessible paper trail, as tedious as it is and if you are doing business with subcontractors who suck paying their taxes...they are putting a flag up on you.

Debookkeeper

John - he isn't some giant corporation or anything, 5 employees, and the use of subs and is what I would consider "comfortable". The norm in CT is an automatic 3 year look - that is how they sniff... if there is enough out of order, than they open you up for up to 7 years.

Melissa

We got a re-sale license last year. Not sure what we're going to do with it yet, we haven't used it.

First part of this year, we got a form to fill out and for some reason I thought it got filed with our regular tax return, which we got an extension on, and since we didn't sell anything I didn't think too much of it until I got a very serious letter in the mail that we had to go to report to court!!! Thank God I had just barely filled it out and sent it in about 2 days prior and I called and they received it, and I didn't have to go, I was freaked out! They sure don't mess around with sales tax!!!!