Pennsylvania Sales Tax Audits
- May 30, 2013 | Will Frei
What should you do if your business has been selected for audit?
The Department of Revenue just released a bulletin (2013-01) that gives guidance to taxpayers "involved in sales and use tax audit examinations." This is just another example of how understanding sales and use tax audits is key for those businesses that want to avoid unforeseen penalties and fines.
Is your business a target for audit?
To help answer this question, former state auditor, Lloyd Geggat advises:
. . . taxing jurisdictions need to have auditors pay for themselves. Therefore, the audit division will generally strive to identify businesses that have high risk or potential for assessments in order to generate a “profit.”
A high risk business generally meets one or more of the following criteria:
- a history of audits in which auditors have found inaccuracies;
- operates in an industry known to have poor sales tax compliance such cash-based industries or manufacturing; and
- has a high ratio of exempt sales to total sales.
It is important to note, however, that even if your business does not meet any of the above criteria, it will almost certainly get audited at some point if it continues to grow.
Pennsylvania tax audits and appeals: how the sausage is made
The new Pennsylvania tax audit bulletin states that businesses may be eligible for a refund, if they over paid sales tax, or a liability, if they under payed.
One way Pennsylvania auditors can determine whether a business gets a credit or a penalty is to use a stratified random sample, essentially grouping different transaction types within a certain time period and sampling each for error. Consult bulletin 2013-01 for more details about this method.
If a business feels it deserved a credit or should not have paid a liability, it can petition for a refund ". . . within 6 months after the date of the assessment or within three years of actual payment of the tax or assessment, whichever is later...."
The Pennsylvania Board of appeals judges the validity of such petitions.
How to prepare for a tax audit
The following can minimize a business' risk in the event of an audit:
- maintaining accessible records of past transactions;
- keeping accessible and up-to-date exemption certificates; and
- using software that guarantees accurate sales tax calculations.
Sales tax audits can cost businesses significant time and money. However, a proactive approach to your sales tand use tax process can save you hours and dollars that you would otherwise spend.
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