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Call our office to get an understanding of a sales tax audit and how it applies to your business.
Here is our process:
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.
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.
For each stratum, the average tax error for the sample is determined by summing all the errors in the stratum sample and dividing by the stratum sample size.
For example, 70 transactions from a stratum are examined. Three transactions are found to have tax errors. For one transaction, the tax error is an underpayment of 26 cents. The other two transactions also have under payments of .49 and .86. So the average sample error for the stratum is .26 + .49 + .86/70 = .023. Using this method, one can deduce that the sales tax is understated by .023. Or, one can say that the error rate in sales tax reported is .023.
However, in the real world, the audit figures will look more like this: A 36 month period will be examined – 2015, 2016, and 2017.. The stratum here is 36. Then, the auditor will select 3 months out of that period and sample those three months for error – let’s use January, May, and September of 2016. When the auditor finds that $100 was unreported in January, $200 in May, and $300 in September, we use the following formula:
Step 1: $100 + $200 + $300 = $600
Step 2: $600/36 months (length of audit period) = 16.6 Factor
Therefore, the error rate and/or factor = 16.6; the Taxpayer is presumed to have underreported sales tax by 16.6.
GA, TX, & IL, licensed attorney
Mr. Ansari’s practice focuses primarily on Federal and State tax matters, and Federal government appeals for the USDA. He is also an Adjunct Professor of Taxation at Reinhardt University.
Mr. Ansari received his B.A. from York University in Toronto, Canada. Upon graduating, he worked as an analyst in the Ministry of Finance with the government of Ontario. He then went on to receive his J.D. from Thomas M. Cooley Law School in Lansing, Michigan. After completing law school, Mr. Ansari began working for a large bankruptcy law firm in Chicago, IL where he handled numerous cases dealing with secured and unsecured debt, tax-debt discharge and tax-debt restructuring through Chapter 7 and Chapter 13 bankruptcy. Mr. Ansari then went on to receive his LL.M. (Masters in Tax Law) from DePaul University College of Law in Chicago, IL.
”Mansoor Ansari is like a tax encyclopedia and knew more than the auditors of four states.
Jim Schoene
