There is no denying that a sales tax audit is not a pleasant experience. As a tax attorney and CPA that helps clients navigate through the audit process with minimal pain (emotional and financial), I have gained a unique perspective on the motivations of the state to enhance their collections of tax. As awful as this sounds, it should be a reminder that the best defense to an audit is to have adequate business records. Often, a client does not have adequate records, since they were either unaware of the need for good records, or it was too much of a financial burden to maintain the records needed to avoid an audit adjustment. When a client does not have adequate records, the tax laws allow the state to start estimating the taxable sales, and as expected they never estimate on the low side.
Even when a client does have adequate records and is aware of the need to track sales and business transactions well enough that they can “back up” their numbers with actual receipts and invoices for all expenses, there is still no guarantee that an audit will not occur.
Since having good records is so critical to a successful audit, I spend a lot of time with my clients to organize and improve their sales tax records before the audit starts. We (my client and I) then sit with the auditors when they perform the audit to be available to answer questions. Most clients are initially uncomfortable being at the audit, but over time they understand the value of being there and helping influence the auditors, by showing our human side and showing that we will not be pushed around, in a friendly but productive fashion. If the auditor is being unreasonable, then we ask to speak to the persons supervisor and division head if we determine that would be productive.
In my opinion, the NYS sales tax audit process is not as difficult as it once was. In fact, I find that NYS is getting much better at their audits over time, and they are now easier to work with since they also obtain data from third parties to validate the numbers claimed by the taxpayer. However, there is still room for negotiation when the records are not perfect.
If all else fails, and the client has poor records and the state creates a large bill, an appeal of that sales tax bill is the next step. In the conciliation conference, a mediation occurs between the taxpayer, the taxpayer’s attorney, and state to negotiate a settlement. Often the result of this process is very good, and a fair result can be obtained. If that does not happen, the next step would be to go to the Division of Tax Appeals. However, from my experience settling at the mediator produces the best outcome for most cases. We would need to file a NYS POA form to represent you. NYS allows us to intervene on your behalf, and you can help by being proactive about making sure good sales tax record keeping before the auditor arrives and helping during the audit. To have a sales tax audit is not the worst thing in the world, and you do have the opportunity to keep it from being so burdensome by hiring a lawyer to assist you.
