Presenting a live 110-minute teleconference with interactive Q&A Sampling Strategies in Sales Tax Audits Selecting an Appropriate Methodology and Negotiating With Auditors THURSDAY, AUGUST 8, 2013 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Roger Pfaffenberger, Director of Audit Sampling Practice, Ryan , Dallas Martin Eisenstein, Managing Partner, Brann & Isaacson , Lewiston, Maine John Calzada, Assistant Chief of Field Operations, Second Equalization District, California Board of Equalization , Sacramento, Calif For this program, attendees must listen to the audio over the telephone. Please refer to the instructions emailed to registrants for dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Sampling Strategies in Sales Tax Audits Seminar Aug. 7, 2013 Martin Eisenstein, Brann & Isaacson Roger Pfaffenberger , Ryan meisenstein@brannlaw.com roger.pfaffenberger@ryan.com John Calzada, California Board of Equalization john.calzada@boe.ca.gov
Today’s Program Planning And Negotiating A Sample Slide 8 – Slide 24 [Martin Eisenstein, Roger Pfaffenberger] Sampling Fundamentals Slide 25 – Slide 49 [Roger Pfaffenberger] Legal Issues And Background Slide 50 – Slide 58 [Martin Eisenstein] Avoiding the “Wheels Off” Sample Audit Slide 59 – Slide 77 [Roger Pfaffenberger, Martin Eisenstein] Computer-Assisted Audit Process (Statistical Sampling) Slide 78 – Slide 90 [John Calzada]
Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
Martin Eisenstein, Brann & Isaacson Roger Pfaffenberger, Ryan PLANNING AND NEGOTIATING A SAMPLE
Planning I. Sampling only realistic way to audit in today’s world of big data II. But auditors still in 20 th Century for 21 st Century data A. See Exhibit 8 – New York State request for data and information III. Planning should be undertaken long before the audit takes place in order to produce the best results for your client/company 9
Planning IV. Know the software and accounting systems, billing system, and sales records A. Type of journals (sales, etc.) B. Chart of Accounts and G/L codes of relevance C. Type of ledgers (fixed assets/accounts payable) D. Extent of underlying records E. Knowing what documentation is and isn’t available may assist in determining the appropriate sampling plan V. Understand the business, including customers and products/services sold 10
Planning VI. Population characteristics to consider A. Availability of supporting documents B. Significant accounting changes within audit period C. Business model changes within audit period i. New service lines ii. New cost centers and/or general ledger accounts iii. New business segments (mergers & acquisitions) D. Range of invoice dollar amounts within population 11
Planning VII. Sales: How should taxable sales be determined? A. Sampling of invoices to determine state and local jurisdictions sales VIII. First step: Determining the population from which to sample A. Invoices or billing records B. Reach agreement with auditor re population from which to draw IX. Completeness testing: Assuring a good population A. Tying sales journals to G/L accounts B. Tying sales to corporate income tax returns 12
Planning: Sales Tax Issues I. Sales: Determining taxable sales and tax collected for state under audit A. Sourcing challenges i. TPP and services: Separate sourcing issues ii. G/L accounts not organized by state iii. Sales journals don’t identify TPP destination/benefit received for services iv. Invoices: Identify billing address but not destination or benefit of services location v. Many companies lack invoices but simply have billing data without address information. 13
Planning: Use Tax Issues I. Use tax: Determining taxable purchases and tax due II. Expenses A. Expenses: Accounts payable ledger and journals III. Challenges A. Accrual entries B. Control accounts (assets not put into service) C. Determining location of use D. General ledger accounts do not identify taxable expense. E. Fixed-asset register does not identify location of asset. 14
Planning: Use Tax Issues IV. Determining tax paid and comparing to purchases A. Accrued and paid by taxpayer V. Determining the population from which to sample expenses A. G/L accounts vs. accounts payable B. Completeness testing: Assure auditor that it is the right population to test VI. Determining population from which to determine fixed asset purchases A. Fixed-asset register or sub-ledger B. Completeness testing to tie purchases to total 15
Preparing For The Audit I. Review state’s website, CCH and other services for: A. Applicable laws, regulations, advisory opinions and cases B. Determine law regarding limitations on sampling C. Determine alternatives if you refuse to sign a sampling agreement II. Determine good periods for purposes of test periods III. Review prior assessments/audits from any state as a roadmap to vulnerability 16
Preparing For The Audit IV. Putting it all together: Devise a strategy to manage the audit and to respond to the state A. Develop roles and responsibilities B. Document, document and document C. Understand data provided D. Be prepared to propose your own sample E. Understand vulnerabilities 17
The Life Cycle Of Audit Data Understand the life cycle of audit data: Get Reconcile Data Data Define Sample Population Design Results 18
The Life Cycle Of Audit Data I. Understand the life cycle of audit data A. Getting the data i. Work with your IT department and auditor in extracting necessary data for the sample audit B. Reconciling the data i. Reconciling AP to GL to ensure that transactions are complete and appropriate transactions are sitused to jurisdiction correctly ii. Reconciling accruals to tax returns 19
The Life Cycle Of Audit Data I. Understand the life cycle of audit data (Cont.) C. Defining the sampling population i. Work with auditor in developing the logic to derive the sampling population from the taxpayer file ii. Perform additional reconciliations as needed to ensure that sampling population is complete and appropriate for the jurisdiction’s audit Message: Planning is the key; first three steps of life cycle require plenty of time (and patience!) 20
Planning The Sample Audit II. Definition of the audit sampling population A. Purchase audits i. Selection of accounts of interest ii. Selection of groups by types of transactions for separate sampling populations (e.g., assets, expenses, taxed, non- taxed, procurement cards, inventory stores, leases, contracts with installment payments) B. Sales audits i. Taxed vs. non-taxed sales 21
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