Sampling Strategies in Sales Tax Audits: Selecting an Appropriate - PowerPoint PPT Presentation

FOR LIVE PROGRAM ONLY Sampling Strategies in Sales Tax Audits: Selecting an Appropriate Methodology and Negotiating With Auditors TUESDAY , OCTOBER 3, 2017, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours . To earn credit you must: • Participate in the program on your own computer connection (no sharing) – if you need to register additional people, please call customer service at 1-800-926-7926 x10 (or 404-881-1141 x10). Strafford accepts American Express, Visa, MasterCard, Discover . • Listen on-line via your computer speakers. • Respond to five prompts during the program plus a single verification code . You will have to write down only the final verification code on the attestation form, which will be emailed to registered attendees. • To earn full credit, you must remain connected for the entire program. WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations : -Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10) For Assistance During the Live 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 Oct. 3, 2017 Martin Eisenstein, Managing Partner Jason McGlamery, Director – Audit Sampling Brann & Isaacson, Lewiston, Maine Ryan, Dallas meisenstein@brannlaw.com jason.mcglamery@ryan.com Brad W. Tomlinson, Senior Manager Zaino Hall & Farrin, Columbus, Ohio btomlinson@zhftaxlaw.com

Today’s Program Part I: Planning And Negotiating A Sample Slide 7 – Slide 22 [Martin Eisenstein] Part II: Sampling Fundamentals Slide 23 – Slide 45 [Jason McGlamery] Part III: Legal Issues And Background Slide 46 – Slide 57 [Martin Eisenstein] Part IV: Auditor Perspective for Statistical Sampling Slide 59 – Slide 65 [ Bradley Tomlinson ] Part V: Avoiding the “Wheels Off” Sample Audit Slide 66 – Slide 88 [Martin Eisenstein, Jason McGlamery, Bradley Tomlinson] 4

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. 5

Martin I. Eisenstein, Brann & Isaacson PART I: PLANNING FOR AUDIT 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 7

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 8

Planning VI. Population Characteristics to Consider A. Availability of supporting documents B. Significant accounting changes and systems within audit period C. Business model changes within audit period 1. New service lines 2. New cost centers and/or general ledger accounts 3. New business segments (mergers & acquisitions) D. Range of invoice dollar amounts within population 9

Planning VII. Sales: How should taxable sales be determined? A. Sampling of invoices to determine state and local jurisdictions sales B. First Step: Determining the population from which to sample 1. Invoices or billing records 2. Reach agreement with auditor re population from which to draw C. Completeness Testing: Assuring a good population 1. Tying Sales Journals to G/L accounts 2. Tying sales to corporate income tax returns 10

Planning: Sales Tax Issues D. Sourcing challenges for sales tax determination 1. TPP and Services: Separate sourcing issues 2. G/L Accounts not organized by state 3. Sales Journals don’t identify TPP destination/benefit received for services 4. Invoices: Identify billing address but not always destination or benefit of services location 5. Many companies lack invoices but simply have billing data without address information 11

Planning: Sales Tax Issues VIII. Use Tax: Determining Taxable Purchases and Tax Due A. Expenses: Accounts Payable Ledger & Journals B. Fixed Asset Register or Subledger IX. Use Tax 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 12

Planning: Sales Tax Issues F . Determining Tax Paid and comparing to purchases, including accrued and paid by taxpayer G. Determining the population from which to sample expenses 1. G/L Accounts vs. Accounts payable 2. Completeness testing: Assure auditor that it is the right population to test H. Determining population for fixed asset purchases 1. Date of Register and Disposals 2. Completeness testing to tie purchases to total 13

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 D. Determine good periods for purposes of test periods II. Review prior assessments/audits from any state as a roadmap to vulnerability 14

Preparing for the Audit III. 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 15

The Life Cycle of Audit Data Understand the life cycle of audit data: Get Reconcile Data Data Define Sample Population Design Results 16

The Life Cycle of Audit Data I. Understand the life cycle of audit data A. Getting the data 1. Work with your IT department and auditor in extracting necessary data for the sample audit B. Reconciling the data 1. Reconciling AP to GL to ensure that transactions are complete and appropriate transactions are sitused to jurisdiction correctly 2. Reconciling accruals to tax returns 17

The Life Cycle of Audit Data I. Understand the life cycle of audit data (cont.) C. Defining the sampling population 1. Work with auditor in developing the logic to derive the sampling population from the taxpayer file 2. 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!) 18

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 19

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) 20

Planning the Sample Audit III. Treatment of special situations A. Credits (i.e., negatively-valued transactions) B. Tax only transactions C. Duplicate transactions D. Bad debt E. Installment payments F. Missing documentation G. Overpayments 21

Jason McGlamery, Ryan PART II: SAMPLING FUNDAMENTALS

Topics For This Section I. Ten Commandments of audit sampling II. Block sampling vs. statistical sampling III. Stratified random sampling IV. Statistical sampling terminology V. Sample size determination VI. Sampling population definition VII. Refund claims based on samples 24