Sampling Strategies in Sales Tax Audits Selecting an Appropriate Methodology and Negotiating With Auditors TUESDAY, DECEMBER 9, 2014, 1:00-2:50 pm Eastern IMPORTANT INFORMATION This program is approved for 2 CPE credit hours . To earn credit you must: • Attendees must stay connected throughout the program, including the Q & A session, in order to qualify for full continuing education credits. Strafford is required to monitor attendance. • Listen on-line via your computer speakers. • Record verification codes presented throughout the seminar . If you have not printed out the “Official Record of Attendance,” please print it now (see “Handouts” tab in “Conference Materials” box on left -hand side of your computer screen). To earn Continuing Education credits, you must write down the verification codes in the corresponding spaces found on the Official Record of Attendance form. • Please refer to the instructions emailed to the registrant for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10. WHOM TO CONTACT For Assistance During the Program : -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.
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Sampling Strategies in Sales Tax Audits Seminar December 9, 2014 Martin Eisenstein, Brann & Isaacson Jason McGlamery, Ryan meisenstein@brannlaw.com jason.mcglamery@ryan.com John Calzada, California Board of Equalization john.calzada@boe.ca.gov
Today’s Program Planning And Negotiating A Sample Slide 7 – Slide 23 [Martin Eisenstein, Jason McGlamery] Sampling Fundamentals Slide 24 – Slide 48 [Jason McGlamery] Legal Issues And Background Slide 49 – Slide 60 [Martin Eisenstein] Avoiding the “Wheels Off” Sample Audit Slide 61 – Slide 79 [Jason McGlamery, Martin Eisenstein] Computer-Assisted Audit Process (Statistical Sampling) Slide 80 – Slide 91 [John Calzada] 5
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. 6
Martin I. Eisenstein, Brann & Isaacson Jason McGlamery, Ryan, LLC PLANNING AND NEGOTIATING A SAMPLE 7
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 8
Planning IV. Know the software and accounting records and 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. Records Retention F. 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 9
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 10
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 11
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 12
Planning: Use Tax Issues I. Use Tax: Determining Taxable Purchases and Tax Due II. Expenses A. Expenses: Accounts Payable Ledger & 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 or where expense incurred E. Fixed Asset Register does not identify location of Asset 13
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 Subledger 1. Date of Register and Disposals B. Completeness testing to tie purchases to total 14
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 15
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 16
The Life Cycle of Audit Data Understand the life cycle of audit data: Get Reconcile Data Data Define Sample Population Design Results 17
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 18
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!) 19
Planning the Sample Audit II. Definition of the audit sampling population A. Purchase audits 1. Selection of accounts of interest 2. 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 1. Taxed vs. non-taxed sales 20
Planning the Sample Audit II. Definition of the audit sampling population (cont.) C. Other considerations for grouping transactions into separate sampling populations 1. Accounting system changes 2. Significant tax law changes 3. Business changes (acquisitions, mergers, change in business structure) 21
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