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.