Businesses must make sure to keep accurate records or an auditor will use general rules, which do not necessarily match the business’s actual revenues or expenses, to identify “missed” tax. Lack of adequate records can result in businesses paying taxes, interest and penalties out of their own pockets even though they actually collected and remitted tax accurately, if they can’t prove it.
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New York: Use of Observation Test Audit Method Upheld
The New York Tax Appeals Tribunal has affirmed an administrative law judge’s holding that it was proper for the Division of Taxation to use an indirect audit methodology (observation test) to determine a delicatessen’s unpaid sales and use taxes, because the taxpayer’s books and records were inadequate. The record established the division’s clear and unequivocal written request for books and records of the taxpayer’s sales. The records provided by the taxpayer were clearly not sufficient for determining whether the taxpayer’s sales were correctly reported. Under the circumstances, the division was entitled to resort to the use of indirect methods, including an observation test, to determine the taxpayer’s tax liability. Since it was concluded that the audit method was reasonable, the taxpayer had the burden of proof to show, by clear and convincing evidence, that the result of the audit was unreasonably inaccurate or that the amount of tax assessed was erroneous, which the taxpayer failed to do. Although the taxpayer objected to the use of a one-day observation test, it offered no evidence to establish that the particular day on which the test was conducted was unusual in any way. Further, the tribunal found no support in the record for the taxpayer’s arguments regarding its purchase invoices or beer sales.
South Carolina: Partial Penalty Waiver Granted
A partial waiver was granted on civil fraud penalties imposed on a South Carolina tavern owner for the willful underpayment of sales tax and nonpayment of the liquor excise tax because significant mitigating factors were present. The taxpayer fully cooperated with the department and paid the taxes in full, allowing the department to avoid a lengthy and costly investigation. During the audit, he provided point of sale computerized records where he could have submitted paper receipts. Furthermore, the taxpayer appeared remorseful and testified that his reason for not paying taxes was to keep his business open during the economic downturn. Consequently, the penalties were reduced from seventy-five percent to fifty percent. However, the interest could not be modified as there is no statutory authority for the waiver of interest.