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How NOT to handle a NYS Sales Tax Audit

As you scan the recent New York State Administrative Law Judge (ALJ) court determinations, it seems that there will always be cases involving sales tax audits of cash businesses. These include delis, salad bars or restaurants, and a common theme is that the business does not have complete records. A commonly omitted item is cash register tapes. It is very important to handle these audits properly, as it is very difficult for a taxpayer to win this type of case in court.

Over a period of many years, cases have gone to ALJ hearings and many of those have been advanced to the New York State Tax Tribunal. The decisions by the Tribunal set a precedence for future audit treatment. As such, it has been determined that, if your records are inadequate, the auditor is allowed to use indirect methods to estimate the amount that your actual taxable sales should have been and then calculate the sales tax due per audit. Indirect methods may include:

Conducting an observation of the business

Using published business ratios

Mark-up methodology

The difficulty in fighting these cases in court is that in using these indirect methods, the auditor doesn’t have to prove that the result is accurate.

It has been established in past Tribunal Cases:

“…The Division’s method must be reasonably calculated – exactness is not required.”

“In addressing the method of audit, considerable latitude is given to an auditor’s method”.

You can see what we‘re up against. The auditor doesn’t even have to be correct. Considerable latitude is given and the method must only be reasonable. This seems harsh, but don’t forget that the business owner is required to keep records. When presented with incomplete records, the auditor has no other option than to use estimates.

The Tribunal has also established that: “The burden is then on the taxpayer to demonstrate, by clear and convincing evidence, that the audit method was unreasonable”. This is how you can win, but it is a steep climb.

In a recent case, affidavits were submitted in lieu of records. The taxpayer’s representative rebutted the auditor’s findings with alternative estimates. That strategy doesn’t work because the requirement of the taxpayer is to produce records that will show that the sales were correctly reported. If you don’t produce records, the auditor is allowed to estimate – you are not allowed to. The aforemention taxpayer lost their case and, what makes matters worse is, there were substantial penalties added to the tax.

If you have a Sales Tax problem, I’d be happy to help you. Please call 516-938-5219 to speak with me.

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