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Getting Sales Tax Audits Right (The Reason I Love My Job)

I’ve been a tax consultant in Texas for over ten years. I was never an auditor for the State of Texas. I never tire of helping taxpayers!

Most Texas taxpayers are just good folks trying to run an honest business and make a living to support their families and the families of those who work for them. But sometimes good folks make mistakes and sometimes those mistakes can mean the difference between staying in business or not staying in business. The mistakes range from hiring the wrong bookkeeper who doesn’t know anything about taxes and entrusting him or her to make sure they are reporting your sales properly and keeping you compliant with tax laws to misunderstanding how the tax laws apply to your business. You think you’re doing the right thing and then along comes an audit and you find out you’ve been wrong all along.

But sometimes, the taxpayer is doing everything right. They have the right staff, they have the right processes and they understand the tax laws but the auditor that is sent to audit them doesn’t understand their business, doesn’t take the time to understand their business, doesn’t understand the tax laws and how they apply to their business or is just too lazy, poorly trained or angry to care if they do a good job. I’ve seen taxpayers sell their dream home to pay an assessment that was incorrect. I’ve seen taxpayers fire their entire staff because of an impending audit and their fear of the outcome.

Don’t get me wrong, there are a whole lot of good auditors out there and we prefer to work with them. To assist our clients in working through the audit with as little stress as possible. We actually have a good reputation with most of the auditors in Texas. They like to work with us because they know that we will help our client get through this audit as quickly as possible. Some consultants market that they will “drag the audit out” for their client. That’s not what taxpayers want. Audits are stressful and disruptive to business. They’d rather not deal with it at all but since it’s happening, they want it over with quickly and with as little distraction as possible! We have been successful when the audit is completed quickly, with little stress, the assessment is accurate and our client has a complete understanding of how the tax laws apply to their company operations. Our overall goal is to make sure the audit is right. To fight for our client’s rights and insure that the auditor follows proper procedure and applies the tax law appropriately.

Today I was working on preparing for a hearing for a client that came to us recently and had used another consultant to help them reduce their audit. That’s what prompted this blog / rant….This particular audit is a Mixed Beverage Gross Receipts audit of a bar and grill in El Paso. In this audit, the bookkeeper didn’t have summary records so the auditor started entering the data from the z-tapes.  Z-tapes are the “end of day” printouts from the cash registers that show the sales for that day.  As you can imagine, the auditor creating his own summary reports leaves a lot of room for error.  In addition, because the bookkeeper didn’t know there were summary reports available on the system, she was probably making mistakes adding up the tapes at the end of each month too.  Well the auditor got tired of creating summary reports after two years and used the error rate from those two years to estimate the other two years and told the client in order to fight it, he would have to have someone else finish the data entry and create the summary reports.

Enter the consultant.  Instead of asking what kind of system they have to determine if there was reporting available, this consultant set out on creating the last two years of summary reports and billed the client over $4,000 for that data entry madness!  Of course, when this data was provided to the auditor in the Redetermination Hearing, the auditor denied it and sent it to the Administrative Hearings Division.

Enter Streamline. After reviewing the audit and the auditor’s notes and a very short conversation with the client, we ascertained from the client what type of POS system he has (Restaurant Pro); we did some research and watched a couple YouTube videos and now we have our answer.  The client is now providing us summary reports from his POS system which we can then compare to what the bookkeeper reported. This client may still owe some tax because we’re not sure that the bookkeeper knew what she was doing but at least we know we have the right data. The State will have sufficient proof of the actual sales during the audit period and our client now knows how he should be preparing his returns going forward.