“Estimated” Sales Tax Audit

This client owns a bar that does not serve food. The bar had not been remodeled in years, and the only real tax exposure for the state was in the mixed beverage area. However, there are some overly zealous audit supervisors who insist their auditors spin off sales tax audits “in order to protect the state’s interest.” The client did not initially provide any records related to the sales tax audit, so the auditor “estimated” the sales tax audit.

Wes Boullioun – Former Texas Comptroller State Tax Auditor, 8 Years

Wes Boullioun – Former Texas Comptroller State Tax Auditor, 8 Years

Our client was ABSOLUTELY WRONG not to provide whatever records they had in order to prevent the auditor from being forced to estimate the audit. However, even estimated audits are supposed to have some basis in reality. Reality to this supervisor was to estimate this bar purchased $5,000.00 per MONTH in expense purchases (things such as cash register tape, envelopes, janitorial services, etc. all purchased under the assumption tax was not paid) and $10,000.00 per MONTH in fixed asset purchases (things which have a useful life of over one year like computer systems, high dollar software, sound systems, etc. also assumed to have been purchased tax free). The state estimated the audit at $60,000.00 in sales tax due, plus penalties and interest.

It goes without saying that the estimated numbers were not based on any true “good faith” effort on the state’s part to get the audit right. Some auditors have actually quit over instructions like this from supervisors, but those type people are few and far between. Most auditors will just follow instructions and tell the taxpayer to work it out in hearings. Working it out in hearings is ALWAYS more expensive than getting it right (or at least close) in the first place.

We got some, but not all the records which needed to be provided. We ended up settling on tax due of $7,500.00. This is more than what was rightfully owed, but we had incomplete records and the state had us leveraged in the negotiation process. Had we been in front of this, the sales tax audit most likely could have been a no tax due.

There are three morals to the story:
1) All estimated audits are expensive to repair.
2) Some records are better than no records.
3) Do not expect the state to “do the right thing.” You do that at your own peril!!

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