The sales tax audit factor can also be referred to as the average tax error and/or audit factor. Since most auditors refer to this number as the Factor, we will also call it the Factor in this explanation.
Importance of the Factor
The Factor is the most crucial number in the entire audit. If the audit is determined to have a high Factor, then the liability will simply correspond with that number.
- A Factor of 8 was considered high until we just came across an audit recently where the audit Factor was 12.
- The difference is astronomical.
How the Factor is Calculated
For each stratum, the average tax error for the sample is determined by:
- Summing all the errors in the stratum sample
- Dividing by the stratum sample size
Sample Example
- 70 transactions from a stratum are examined.
- 3 transactions are found to have tax errors.
- The tax errors:
- Underpayment of $0.26
- Underpayment of $0.49
- Underpayment of $0.86
Calculation:
(.26 + .49 + .86) / 70 = .023
Using this method, one can deduce that the sales tax is understated by .023. Alternatively, one can say that the error rate in sales tax reported is .023.
Real-World Audit Example
In practice, the audit figures will look more like this:
- A 36-month period will be examined – typically 2015, 2016, and 2017.
- The stratum here is 36 months.
- The auditor will select 3 months from this period and sample them for error – for example: January, May, and September of 2016.
Findings
- January: $100 unreported
- May: $200 unreported
- September: $300 unreported
Calculation Steps
Step 1:
$100 + $200 + $300 = $600
Step 2:
$600 / 36 months (length of audit period) = 16.6 Factor
Conclusion
Therefore, the error rate and/or Factor = 16.6. The taxpayer is presumed to have underreported sales tax by 16.6.
Summary:
The Georgia Sales Tax Audit Factor plays a pivotal role in determining the financial liability resulting from an audit. Understanding how it is calculated and its implications is essential for accurate compliance and preparation.
Frequently Asked Questions
What is the sales tax audit Factor?
The Factor, also called the average tax error, is a number used by auditors to estimate sales tax liability during an audit. It represents the average rate of underreported tax based on a sample of transactions.
How is the audit Factor calculated?
The Factor is calculated by adding all tax errors found in the sample and dividing by the number of transactions in that sample. This average is then applied to the entire audit period to estimate total liability.
Why is the Factor important in a sales tax audit?
The Factor is crucial because it directly determines the taxpayer’s estimated liability. A higher Factor leads to significantly higher projected underreporting, which can drastically increase the financial consequences of the audit.
Can the Factor vary between audits?
Yes, the Factor can vary widely depending on the number and size of errors in the sample. While a Factor of 8 was once considered high, some audits have shown Factors as high as 12 or more, which substantially increases the liability.
What time period is typically used in a Georgia sales tax audit?
A Georgia sales tax audit usually examines a 36-month period. From this, auditors select a sample of 3 months to analyze for tax errors, which are then used to extrapolate the overall audit Factor.