Brotman Law

What Is an Indirect Method of Testing in a Sales Tax Audit?

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In a prior video we talked about the direct method of testing. The direct method of testing involves testing actual source documents, lining up and comparing them when you have a breakdown in the direct method. Then sales tax auditors will resort to what they call indirect methods. Indirect methods of testing is a fancy way of saying we’re going to play guessing games with statistics. So one of the indirect methods of testing is audit path sales. They look at current sales and they’ll do statistical comparisons between past sales and current sales. So one of the easiest ones they do is they do an observation test. They’ll send an auditor in a business for a couple of days to look at the sales that are being performed, whether the employees are ringing everything up correctly, whether they’re charging tax and then the auditor will sit there and literally record every single transaction and they’ll compare that against the POS system reports to see if there are any discrepancies. That’s called an observation test so if there is an error within that test, then they’ll do certain things based on

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Tax Issues for Multi-State Businesses

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Hi I’m Sam Brockman I am the founder and principal attorney at Brotman law here in San Diego. Today We’re going to be covering tax issues for multi-state businesses. I want to give you a little bit of a background on my background in order to better do some context to this presentation, so I am a tax controversy attorney here in San Diego which in plain English means I represent businesses and audits payroll tax sales tax and income tax and I help those who owe more money to the government than they can pay, so our firm does a variety of services but mostly we focus in on examinations and we focus in on collections work and in helping companies with compliance issues, so that they avoid those two issues increasingly a larger percentage of our business is with multi-state companies who are trying to stay out of trouble traditionally. We see a very large influx of businesses outside of California who tend to step into California tax issues, so I’m going to speak mostly from my cuts in the context of dealing with California tax issues but this applies to a variety of states California is one of the more aggressive states in pursuing businesses that are located outside of its borders for tax revenue California kind of smartened up to the fact that it can go after businesses and individuals that may have contact with the state of California, but who actually don’t reside in California and do don’t have voting power in California. So California has increased its base of operations and actually has offices in.

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What Is the Difference Between a Tax Attorney and a CPA?

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So we get asked this question a lot and a lot of taxpayers struggle in understanding what I do versus what a CPA does. In our firm we have tax attorneys who are both. We have tax attorneys who are attorneys and they are CPAs as well. Just to highlight why somebody would do that I want to draw the distinctions between what a CPA is and what a tax attorney is. So let’s start with a CPA. CPA stands for certified public accountant and what a certified public accountant is by definition is they’re somebody who is certified to provide financial statements and to the public that is what the term CPA stands for. When you go to accountant school and when you go through the process of getting your CPA license, the focus of your CPA license is naturally on reporting and preparing financial statements. It’s taking information, translating it to a financial statement and having the public have confidence in that statement. So within that process the focus is really on compliance. Accountants make sure that things are filled out and that they’re compliant so that’s why you go to an accountant to prepare your taxes every year. The accountant is charged with taking your information, putting it on a tax return, making sure that tax return is accurate and turning it in and that’s the basic function of what an accountant does. On the other side of things attorneys are focused on advocacy. When we go to law school, we learn about the law. We learn about how to argue, then learn about how to apply facts along and so there’s more of a back-and-forth with an attorney then there is in a compliance setting. With compliance, you are just focused on getting the right answer. On the advocacy side, oftentimes there’s not always a right answer so the two schools of thought are different between compliance and advocacy. Now that’s not to say that CPAs don’t advocate for their clients, although it’s a very rare characteristic.

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How Does the Government Evaluate Offers in Compromise?

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That’s a good question. So the government evaluates offers in compromises based on what a taxpayers reasonable collection potential is. Remember an offer in compromise is an agreement between the taxpayer and the government to forgive a past tax liability in exchange for future compliance. The government isn’t likely to forget about the liability. The government wants to make sure that the offer it’s getting from the taxpayer is fair to the government, so the government uses a formula called reasonable collection potential to determine that formula. The way reasonable collection potential works is the government looks at the taxpayer’s current situation, it projects a period of time between the state and federal government. They do it slightly differently but the question essentially is okay John’s taxpayer is submitting an offer in compromise: how much could we reasonably collect from John over the next five years and is that amount equal or lower than what John is offering? So you see how it works. They’re taking a five-year period, they’re saying how much can we get out of this guy and that amount is equal to or less than the amount of the offer. Then the government is inclined to take the offer so reasonable collection potential breaks down like this.

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What Are the Different Types of Offers in Compromise?

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So there’s three main types of offers in compromise at the federal level. There’s doubt as to collectability, there’s doubt as to liability and there’s effective tax administration. So let’s start with doubt as to collectability. It is the traditional offer or compromise that you may have heard of to settle your tax liability for pennies on the dollar and much like the name suggests, the reason that you’re submitting an offer of compromise is the doubt that the government will ever be able to collect that liability over the next X amount of years. So from a government’s perspective, the government has a lot of people that owe money. It’s not interested in going after a lost cause, so the government would rather cut its losses, settle the account, get you in compliance and move forward. So that’s essentially what the ask is and a doubt as to collectability offer in compromise. In a doubt as to liability offer in compromise you’re debating whether or not you actually owe the liability and you’re making a settlement offer to the government based on the fact that you don’t owe this liability and the risk to the government if they don’t take your doubt as to liability is that they won’t collect anything or will collect less than

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