Department of Revenue Tax Audits Licensee Reviews
Audit Selections Licensees are chosen for audit by computer or manually • Type of business • Previous audits • Tax filing history • Effort is made to achieve wide geographic coverage • Includes businesses where non-compliance has previously been found or suspected • Some audits are randomly chosen to test compliance
Audit Process 1. Contact & Schedule Appointment 3. Send Notice of Intent 4. Opening Conference 5. Examination of Records 6. Present Findings 7. Complete Audit 8. Submit for Review 9. Closing Conference 10. Certificate of Assessment
Type ofAudit After a preliminary discussion of your business, the auditor will decide whether to conduct a: • Detailed Audit or • Sample Audit • Statistical Random Sample • Judgmental Sample
NOI The Notice of Intent to Audit • Must be received prior to the commencement of the audit. • NOI should be mailed 30 days prior to commencement date of audit. • State the audit period, commencement date, license numbers, contact person and scope of the audit. • A confirmation letter generally accompanies the NOI confirming the appointment and the records requested to complete the audit .
Records Preserve Records for a Period of 3 Years Any documents evidencing reduction, exemption or deduction of the tax ~ presented within 60 days of the commencement date of audit Rule of Thumb: Keep records for the past 3 calendar years plus the present year.
Audit Periods • Audit back three years from the date the NOI was mailed to lock in the three year time period. • Extend the audit period up to the most current return filed.
Opening Conference • Held on the commencement date of the audit. • Often is the most essential part of an audit in gathering information necessary to determine audit procedures. • Should be conducted at the onset of the audit with the appropriate personnel in attendance that has the authority to work with the auditors.
Examination of Records The purpose for examining taxpayer records is: • To verify that the taxpayer’s reported amounts are correct; and, • If not correct, determining what amounts should have been reported. An examination of taxpayer records includes: • Reconciling the reported amounts with the taxpayer’s accounting records. • Verifying that transactions are accurately reflected in the accounting records. • Verifying that transactions are in compliance with the sales and use tax laws.
Examination of Records There are four types of reported data to be verified during the examination of taxpayer records. • Gross Sales • Tax • Deductions • Use Tax
Examination of Records Verify Gross Receipts/Sales • Sales and billing invoices • General ledger • Cash register tapes - Journal tapes, detail tapes, • Z tapes, guest checks • Bank deposit slips and statements • Sales and/or cash receipts journal • Contracts • Pricing and portion / service size information - menu prices
Gross Receipts Includes: • Taxable and Nontaxable Sales • Indian Reservation Sales • Barters • Freight Charges • Reimbursable Expenses Except Accountants and Attorneys • Lottery Receipts • Does not include: • Sales Tax Collected • Trade-Ins • Late Charge for Overdue Accounts • Bad Debt Fees • Cash Discounts • Luxury Tax
Examination of Records Deductions/Exemptions • Exemption Certificates • Proof of Exemption (Governmental Funds) • Bills of Lading/other proof of delivery • Credit Memo • Bad debts eligible to claim on federal income tax
Examination of Records • Use Tax ~ Detail • Purchase Invoices • Cash Disbursement Journal • Fixed Asset Schedule • Inventory Withdrawal Records • Depreciation Schedules
Machine Sensible Records • Generated and maintained in an electronic format • State regulation requires all businesses utilizing machine-sensible records to make those records available to the auditor upon request • The format should be commonly used by the business.
Present Findings • Present listings • Review differences on Gross Receipts Analysis • Review listing of purchases and equipment relating to use tax • Give Taxpayer time to present additional records.
Closing Conference Finalize audit: • Send final letter certified mail if an assessment • Certificate of Assessment (COA)
Appealing an Audit • Within 60 days after the COA is mailed • Request a hearing before the Secretary of Revenue in writing • Based on a Mistake of Fact • An Error of Law
Top 10 Errors found in SD Tax Audits • Under-reporting of sales, use and/or excise tax due to poor record keeping • Not remitting use tax on goods and services purchased/used. • Not remitting use tax on items taken from inventory and used for construction projects. • Not remitting use tax on items taken from inventory for business or personal use. • Not remitting use and/or excise tax on Owner Furnished Materials (OFM).
Top 10 Errors found in SD Tax Audits • Not remitting use tax on materials stored in state and taken out of state for construction projects. • Not remitting use tax on equipment brought in from out-of-state. • Exempting sales to taxable customers such as churches and clinics. • Not having valid exemption certificates on file. • Municipal tax and Municipal Gross Receipts Tax (MGRT) reporting errors.
License Review An educational meeting between a Revenue Agent and a taxpayer. The purpose of the meeting is to provide education on South Dakota tax laws, and To correct any errors in reporting.
Procedures • Schedule the review at the taxpayer's place of business • Discuss tax issues with the taxpayer • Review a limited number of records • determine if there are any problem areas
Problem Areas Complete self-audit worksheets
Benefits • Less time-consuming - a limited amount of time is spent analyzing records. • One-on-one education at the taxpayer's place of business. • Opportunity to correct problems without having to go through the audit process.