A sales tax audit is kind of what it sounds like. The sales tax audit is the government coming in and checking to make sure that sales tax was paid properly. The biggest problem that we see in sales tax audits is that when you’re auditing a business’s sales, it’s not very reliable. Meaning yes, you can go through a business’s records over three years and audit every single transaction, but the problem with a lot of businesses, particularly lot of retail businesses, is cash and so even if you were to go through and audit everything, it doesn’t necessarily mean that the records are going to align with the way that the auditor thinks that they should. So you can have differences of opinion where the auditor can claim that there’s unreported cash sales or that there should have been additional tax charged and a variety of different issues and the problem with sales tax audits again is the size of them. You’re dealing with all of these transactions, you’re dealing with three years of individual transactions day in and day out.
Key Takeaways
A sales tax audit is kind of what it sounds like. The sales tax audit is the government coming in and checking to make sure that sales tax was paid properly.
Some businesses can have tens of thousands, if not hundreds of thousands, even millions of transactions over a three-year period.
What is the direct method of testing in a sales tax audit?
The problems announce when you find discrepancies in those audits and then you have to move to an indirect method of testing, which we can cover in a later point.
What is the direct method of testing in a sales tax audit? So the direct method of testing is looking at source documents in the course of an audit and making sure that everything matches. That’s the preferential way of dealing with sales tax audits because it’s the most reliable because it’s based on actual data and not a guess.
So the direct method of testing, we can use restaurants for example, is looking at the bank statements for a given year, looking at the sales tax returns that were filed in that given year, looking at the 1099Ks, the merchant account processing statements for credit cards, looking at the internal accounting that was done during that year, and then looking at the POS system reports. You take those five or six pieces of data and you compare them across each other to make sure everything lines up.
So for example, one of the easiest things that we see in sales tax audits with people who are underreporting their sales tax, is their federal income tax returns and their sales tax returns don’t match. So to the extent possible, and particularly the client hasn’t done anything wrong, you want to keep everything to a direct method of testing. If the direct method of testing holds up and the auditors are unable to challenge it, then there’s no real reason to go towards any sort of statistical analysis. And the quickest and easiest way to wrap up an audit is to say, look, here’s six pieces of paper that prove I don’t have any sales tax liability and going from there.
The problems announce when you find discrepancies in those audits and then you have to move to an indirect method of testing, which we can cover in a later point.
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
Key Takeaways
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.
the error. The other thing they can do is they can take the POS system reports in a current period and do a cash to credit card ratio.
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.
So California has increased its base of operations and actually has offices in.
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.
But unfortunately, most of the big ones, and most of the ones you see on TV, in fact, almost all of the ones you see on TV, are not that legitimate.
So when you’re hiring someone to solve your tax problems, number one, you actually want somebody who’s knowledgeable and who’s an expert.
So the long and short of it is there are some good ones that exist out there, but you need to be really careful whom you’re dealing with and about who you’re engaging.
So you may have seen those ads on TV where a company will offer to solve your tax liabilities and you’ll pay pennies on the dollar or they’ll announce the start of a new fresh start program for taxpayers and make all these wow promises. And I don’t want to call out everybody in an industry by saying that they’re illegitimate, because there are a couple of them that are really good at tax relief.
But unfortunately, most of the big ones, and most of the ones you see on TV, in fact, almost all of the ones you see on TV, are not that legitimate. The biggest problem that they have is a lot of the people in those industries aren’t attorneys.
So, in order to practice in front of the IRS, you either need to be an attorney, you need to be a CPA, or you need to be what’s called an enrolled agent. And an enrolled agent sounds like you’re sworn into the government, but the reality of the situation is all you have to do is take a test, and once you take the test and you get your certification, then you’re free to practice.
The biggest problem with a lot of these tax debt relief companies is although they claim that they’re supervised by attorneys, there’s usually one attorney and they’re usually working all of these cases without any real oversight and without really doing anything. And I say that not to despair the industry, I say that from experience, because a lot of the clients that we get in here that come from tax debt relief companies, They get charged like 10 grand and the company doesn’t actually do anything for them, but just makes the situation worse.
So the biggest problem with tax debt relief companies is you don’t know who you’re dealing with. You talk to one person, that person usually is a salesperson. They’re trying to get you to do something. They’ll break down things in stages. They’ll promise to do an investigation and they’ll give you a small fee and then they quote some extraordinarily high price to get the thing resolved, which is called sucker pricing in the industry. And they’re just not scrupulous. And a lot of them operate with these huge advertising budgets, and they just prey on people.
So when you’re hiring someone to solve your tax problems, number one, you actually want somebody who’s knowledgeable and who’s an expert. You want to make sure that the person that you hire is the person that is actually going to solve the problem for you.
Number two is, why not have somebody with a professional license? Why not have somebody who is beholden to the State Bar Association or the Board of Accountancy or something where there’s an actual level of oversight. We still get clients who do this occasionally, some people will look me up on the State bar website, check my bar license, which I don’t have any problem with. But you can’t do that with a tax resolution company. You don’t know who you’re dealing with. You don’t know what qualifications they have. You don’t know if they have a background in tax resolution. All they have to do is pass a test.
So the long and short of it is there are some good ones that exist out there, but you need to be really careful whom you’re dealing with and about who you’re engaging. Be careful about promises and be careful about pricing that sounds too good to be true.
So what serious means is serious usually means liabilities of $50,000 or more that have gone unresolved.
The biggest problem with this is number one, nobody likes to be inconvenienced by having somebody revoke your passport.
So for anybody with a liability, we strongly encourage you to get in compliance so that your passport is not addressed.
So recently the government passed a program and the program states that if you have seriously delinquent tax debt and if you don’t have a resolution in place or otherwise in compliance, then the IRS can report you to the State Department and the State Department can essentially revoke your passport. So what serious means is serious usually means liabilities of $50,000 or more that have gone unresolved. The biggest problem with this is number one, nobody likes to be inconvenienced by having somebody revoke your passport. So for anybody with a liability, we strongly encourage you to get in compliance so that your passport is not addressed. But the bigger problem is with people who live overseas. So expats who live in various countries, if their passport gets revoked, then technically they can get deported and they can either be held indefinitely or for an extended period of time and/or pay huge fines and/or other things. So for people who live overseas, this is a huge problem. You want to make sure that you’re in tax compliance, you want to make sure that you’re taking active steps to resolve your tax issues because if you don’t, there is the risk that you will get reported to the State Department and your passport will get revoked and then you won’t be able to travel overseas.
How can you protect a new startup business from personal tax debt?
Once a business entity is created, the personal tax liability associated with somebody else should not impact that business.
How can you protect a new startup business from personal tax debt? So, to be clear, people and corporations are separate. If I’m sitting in front of you with a piece of paper right now, I draw a circle that represents a person and a circle that represents a business. So those two are separate.
Once a business entity is created, the personal tax liability associated with somebody else should not impact that business. It’s not like when you get assessed a tax liability, it can just skip over into an entity unless you had a pizza shop and you shut down the pizza shop and you opened up another pizza shop. That would be what we call a trans -reliability or an alter ego.
But in a case of a new business that doesn’t have anything to do with a delinquent personal or business tax liability, liabilities just don’t skip into businesses. The risk is when you have a situation where you have multiple partners, and one of the partners has a delinquent tax liability. The problem is, is when the IRS takes collection action against that person, they generally put a lien on them and when a lien does in the context of somebody owning a business is it attaches technically to the shares of that business.
Now that doesn’t necessarily have to prevent somebody who has a tax lien from owning a business, but it does potentially have consequences if and when that business is sold. So when you’re dealing with this It’s obviously very fact -specific. It depends on the size of the business, depends on the consequences, and the nature of the partners. But you want to make sure that you plan this out appropriately and that the person who has the tax liability is appropriately dealing with it.
And even if a lien is in place, the business can still be started. It just takes a little bit of time and effort and planning to get it done. So I encourage anybody starting a business, and particularly anybody who has historical tax issues, reach out to an attorney, do a consultation. Most of these issues can usually be resolved very quickly. But it’s important to do a little bit of planning work at the beginning so you understand what the impact would be on the corporation.
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.
Key Takeaways
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.
A lot of CPAs just focus on filling out the forms and getting it done and you’d be surprised – the CPAs that we work with in our firm have that advocacy focus, they’re focused on saving their clients money.
Read the full article below for complete details on this topic.
What Is an Offer in Compromise? So an offer and compromise is sort of what it sounds like you make an offer you offer the government the sum of money in order to compromise a pass tax line in making an offer a compromise and say I understand that I owe $100,000 I’ll give you five grand the government takes your offer and they say do we want to accept this or not I know what you think five grand on one hundred thousand no way the government would take that well actually you’d be wrong I mean we’ve gotten offers and compromises accepted on multi-million dollar liabilities for like the size of the liability doesn’t matter and they offer compromise context it’s more about the factual situations involved here so what the government asked for in exchange for forgiving the taxpayer is they’re asking for the taxpayer to be compliant in filing and paying over a period of time usually five years so there’s an agreement that’s being put in place and the reason the government is willing to forgive past tax liabilities is because where I’m a policy perspective it’s much more valuable to get clients to get tax payers back in the fold you want people back in compliance you want them paying and and paying forward, because if you got a guy who is 100 grand he doesn’t have a lot of incentive to come back in the system he’s just gonna keep pulling liability so to the government it’s much more valuable to stop the and to get somebody compliant going for and with that said the offer and compromise process it’s a lot of variables to it, so I really encourage you to consult an attorney or somebody who’s knowledgeable in how financial analysis works because there’s a very high percentage of offering compromised they can reject it but the good news is if you structure them correctly you can basically get them through.
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.
Key Takeaways
That’s a good question. So the government evaluates offers in compromises based on what a taxpayers reasonable collection potential is.
A reasonable collection potential, RCP is equal to the quick sale value of any assets that the taxpayer has plus income minus expenses over that period of time.
