SALES AND USE TAX AUDITS: CONNECTICUT DEPARTMENT OF REVENUE SERVICES PROCEDURES AND ISSUES Felicia S. Hoeniger, Esq. Robinson+Cole Paul Greenfield, CT Sales Tax Solutions, LLC Introduction Procedures The Audit Process Audit Selection What To Expect Post-Audit Options Audit Techniques Most Effective Audit Recommendations The Worst Mistakes General Mistakes Mistakes a Sales Tax Expert Will Not Make 1
Why Should You Care? If you are doing business in Connecticut, it is likely you, have been, are being, or will be audited. If you have failed to collect Connecticut sales tax or failed to pay Connecticut use tax, any assessed tax, penalty and interest will likely come out of your pocket. Interest accrues at 12% per year, and penalties range from 15-25%. If you have failed to file sales and use tax returns there is no statute of limitations. Responsible person liability Sales & Use Tax Audit Procedures If it Was Easy We Wouldn t Be Here Audit Selection Notification of Audit Your Rights as a Connecticut Taxpayer Audit Letter of Understanding Power of Attorney Consent(s) to extend the statute of limitations Document and Information Requests Secure disclosure/virtual audits 2
The Audit Process Audit Selection Methods DRS Will Not Tell You And They Don t Have to Likely Sources Audits of your customers or suppliers Information from the Federal Government or another State Angry People (employees, competitors, neighbors, ex-spouses, audit personnel) Special Projects What To Expect During An Audit Audit Notice Agree on Test Periods Auditor s Guidelines Audit Letter of Understanding Information Requests Workpapers Informal Conference Final Bill 3
PRELIMINARY DOCUMENTS Audit Notice, Letter of Understanding and Your Rights as a Connecticut Taxpayer Power of Attorney Do you need to hire an outside accountant? Do you need to hire a lawyer? Waivers to waive or not to waive What if you don t want to extend the period to assess? DOCUMENT AND INFORMATION REQUESTS Standard Requests A taxpayer shall maintain all records that are necessary to a determination of correct tax liability under the affected tax law provisions. Each exemption certificate, whether resale or otherwise, should indicate the time period the acceptor must keep such certificate in his or her records. Safe practice is to retain all certificates and records until the taxpayer is next audited by the State. IP 2009(15) states that resale certificates should be kept at least 6 years. 4
Response to Initial Audit Request Common sense Timely comply with auditor s requests Let the auditor sort it out approach means you are paying 12% per year for the auditor to sort it out. The longer you wait to provide the information, the longer it takes the auditor to divine it. Accurately comply with auditor s requests Smart approach Anticipate auditor s questions/issues Resolve in advance auditor s questions/issues What To Expect After An Audit Right to Appeal to Appellate Division 60 Days After Final Bill Right to Appeal to Superior Court 30 Days After Final Determination 5
Audit Mistakes to Avoid Collecting tax from your customers that you do not remit to the State Ridiculous, but true Confessing a crime to the auditor: I m cheating my partner, so I keep two sets of books, which one do you want to see I pay myself a little extra in cash Bribes, Unethical Behavior Your auditor cannot accept coffee, donuts, etc. Whatever you do, do not offer to buy her lunch! Audit Recommendations Standard Good Business Practices Maintain decent books and records Good accounting internal controls Save documentation for large transactions Asset purchases Service contracts Obtain and maintain exemption certificates Resale Certificates 6
Common Reasons for Missing Information That Should be Supported with Insurance Claims, Police Reports, etc. Flood? Fire? Paper-eating rodents? Embezzlement? Nobody told me? What Happens If you Don t Have Records? The Examiner will estimate There are certain things you can expect The Examiner will analyze your sales tax accrual account The Examiner will compare your State and Federal Returns The Examiner will look at your bank deposits If you have business inputs that are easily tracked, e.g. liquor, the Examiner will check If you know the Examiner will find discrepancies, address/explain these up front. Credibility is important Once lost, credibility is hard to regain 7
Make sure you understand the audit process: Requests for information are more than requests Understand the Consent to Extend the Statutory Period/Audit Waiver What are workpapers? Review the Auditor s document requests and respond: Purchases Do these include other items? Bank Deposits Do these include non-business cash, loans, etc.? Respond promptly to everything from the audit notice to the final bill. If you ignore things, they will not go away Keep the audit moving If the Auditor is in no hurry, you are just accruing interest at 1% per month Audit deadlines are generally flexible as long as you have executed a waiver Hard deadlines start with the final bill LLCs, Partnerships, Corporations Are you protected? 8
What is a Test Period? Evaluate Whether You Want to Agree to A Test Period Pros Cons Why Test Periods Are Important Do not agree to a period that is not representative Changes in business, personnel, systems, other anomalies that produce a result that is not representative How Are The Test Results Extrapolated? A Sales and Use Tax Audit can be a long and slow process and can take years to complete. Speak to an Audit Supervisor if too much time passes without contact from the Examiner. Statutory interest accrues every month at the rate of 1% -- If your audit lasts three years, that s 36% added on to your assessment. 9
I ll get a better deal in Appellate I ll take it to court, no judge would ever think this is fair There s no way I can pay this, what am I going to do? When should you address this question Misuse of Resources Know when you need help Don t hire a lawyer to do a bookkeeping job Don t use your bookkeeper to make sophisticated legal arguments The State of Connecticut provides a number of resources available to Taxpayers. Use them. Managed Compliance Program Audit Refund Policy Audit supervisors: meetings, discussions, questions DRS Web Site - http://www.ct.gov/drs TAM Informal Conference Overlapping Audit Policy Cash Bond APL-004 10
Smart Audit Checklist Be prepared before the audit Know if your sales are subject to tax Understand your use tax liability Utilize Amnesty and Voluntary Disclosure Programs if applicable Good business practices During the audit Respond promptly to requests for information or documents Anticipate issues and ask questions Think about the audit methodology and its application. Keep the audit moving Utilize appropriate resources Connecticut DRS Resources Determine whether you need external help and if so, what kind of help After the audit Utilize cash bond to stop the running of interest Appropriate use of Appellate Division/Collections & Enforcement Division 11