So in the context of a sales audit, an observation test is kind of what it sounds like.
You’re observing something or more specifically the auditor’s observing something.
So an observation test is when an auditor visits a client’s business to verify the total sales and the taxable sales that the client is conducting during a period of time.
So in the context of a sales audit, an observation test is kind of what it sounds like. You’re observing something or more specifically the auditor’s observing something. So an observation test is when an auditor visits a client’s business to verify the total sales and the taxable sales that the client is conducting during a period of time. The most common example is with a restaurant. So let’s say they send an auditor into a restaurant between ten o’clock in the morning and four o’clock in the afternoon. The order is sitting over there in a corner recording every sale that comes through the place and then at the end of the day the auditor is taking their notes and they’re taking the POS system reports and they’re making sure that all sales are being recorded properly. They’re doing this on an aggregate basis. So they’re looking at what total sales are, what taxable sales are but they can also do observation tests for the purposes of doing a cash to credit card ratio or establishing a frequency count or a variety of different things. So an observation test is just a method for the sales tax auditor to use and verifying the information that they’re being presented in the POS system report is accurate and that it’s telling a consistent story. If the observation test doesn’t go well, then it really creates problems with the audit because the auditor is left to rely on the data that they’ve gathered with their own two eyes versus records that they’re not able to verify.
So we try and avoid markup tests whenever possible.
Market tests are very common, particularly in retail settings, with restaurants, in a variety of other businesses, and they really should be avoided at all costs.
What is a markup test? So in the context of a sales audit, a markup test is kind of what it sounds like. A markup test is a test to determine the markup in the aggregate of taxable products that are being sold.
So what the auditor does is, let’s take a restaurant, for example, they’ll look at all the menu items and they’ll have somebody break out food cost and say, okay, if you’re selling burritos, tell me all the ingredients that go into the burrito and give me a cost of how much it costs you to make that. And then let’s see what your markup is.
So markup tests are really dangerous because markup tests generally vary across different products. So a restaurant selling beer can have a certain markup. A restaurant that’s serving shots coming out of a bottle is going to have a higher markup on liquor than with beer. So when trying to take an average of those two things, it’s really difficult to get an appropriate average markup.
So we try and avoid markup tests whenever possible. If we have to go through them, we will try and limit the scope of the market test to make it as easy as possible on the client and to make sure that the results that we’re getting are really consistent.
Market tests are very common, particularly in retail settings, with restaurants, in a variety of other businesses, and they really should be avoided at all costs.
So statistics, just to give you a brief lesson, are about the integrity of the data that you have. So what you’re doing with statistics is you’re taking a representative population or an entire data set, let’s call it a business’s sales over a three-year period, and then you’re taking a representative sample, you’re trying to create a fair and accurate sample of that population. So if we were to look at the business of sales over a three-year period, the goal would be how do we take a smaller subset of that that we feel is going to be fair and accurate? So here’s where CDTFA audits often get into it as we have what we call a data file. So CDTFA and your sales tax auditors have very limited resources. When they do an observation test, when they do a mark of test and when they’re using the indirect methods of testing, they’re only going to do it for a certain period of time usually two to three days max. And so obviously the challenge is if you’re going to take a three day sample or a two day sample, how can that possibly be representative of over a thousand days over the course of a three-year period. Three days, a thousand days, it’s not very representative because you can have a variety of things that would go into those three days that could heavily tip the scales in one way or the other. Hopefully in the favor of your taxpayer anyway.
Key Takeaways
So statistics, just to give you a brief lesson, are about the integrity of the data that you have.
So the way that we counteract this very limited sample is through gathering a better sample. In the course of a sales tax audit, we feel that it’s going to come down to one of these indirect methods.
So aside from discrepancies between the client’s reported taxable sales and the taxes due, with CDTFA’s calculation the the biggest problems that we see are in little technical areas. So the first one is sales for resale in California. When you sell a product for resale and obtain a valid resale certificate, that product is not taxable to you so the important thing here is number one, the product is being sold for resale. So it’s moving down the supply chain because from the state’s perspective, the state doesn’t want to tax it in the middle of the supply chain, it wants to tax it at the end of the supply chain. So if you’re manufacturing baseball bats and somebody is buying them to resell them to consumers, the state wants to tax it when it’s sold to the consumer at a higher market price versus when it’s sold to the retailer. So with sales for resale, the actual resale itself is an exempt sale but it’s only made exempt by the attainment of a resale certificate. For that particular transaction, the problem that we see with clients and one of the biggest discrepancies
Key Takeaways
So aside from discrepancies between the client’s reported taxable sales and the taxes due, with CDTFA’s calculation the the biggest problems that we see are in little technical areas. So the first one is sales for resale in California.
that we have is when clients don’t maintain accurate resale records. They’ll have a resale certificate on file for a client and they’ll get it once and they’ll never have it again.
A levy is a forcible taking of property. So in the context of a collections case when the government levies you it takes your property in the satisfaction of your tax debt. The government can levy a variety of different things. They can levy bank accounts, they can levy brokerage accounts, they can levy retirement accounts in certain cases, anything that is a large cash asset they can take from it. So levies are the most common thing that the government uses in collection cases because it’s easy, it’s going after low-hanging fruit, it’s going after liquid assets and they’re very quick to execute. You don’t even need a person to execute them, you can have a computer do it so that’s what a levy is and you should be aware of them and take appropriate steps to mitigate them in the course of your collection.
Key Takeaways
A levy is a forcible taking of property.
So in the context of a collections case when the government levies you it takes your property in the satisfaction of your tax debt.
The government can levy a variety of different things.
So the first thing to do when you haven’t filed taxes is you need to get your taxes filed. If you can arrive at how much you owe the government, you can begin fixing the problem. So the first thing you need to do is establish your filing compliance: how many years haven’t you filed, what information do you need to get it filed and then get your returns filed. So in some cases we’ve had situations honestly where clients don’t remember what years they have and have not filed for, so the appropriate solution in those cases is to call the IRS and to do what we refer to as an analysis. An analysis is a comprehensive review of your account to determine what returns you filed, what returns you haven’t filed, what returns the government has filed for you and any other pieces of information that you would need in order to get in to compliance. Like what information does
Key Takeaways
So the first thing to do when you haven’t filed taxes is you need to get your taxes filed. If you can arrive at how much you owe the government, you can begin fixing the problem.
the government have on record for you. In doing the analysis you’re going to start to create a roadmap of everything you need to do to get in filing compliance now.
So IRS revenue officers are notoriously difficult to deal with.
So number one, IRS revenue officers only get involved in cases that the IRS feels are particularly serious.
How do you negotiate with a revenue officer? So IRS revenue officers are notoriously difficult to deal with. So number one, IRS revenue officers only get involved in cases that the IRS feels are particularly serious. For individual liabilities, usually that has to be a quarter million dollars or more. For payroll tax liabilities, the amount can be much smaller. If the business is continuing to accrue payroll tax liabilities, revenue officers will step in much sooner.
Revenue officers are not like other collection agents. Usually what happens with collections is collections is centralized into what’s called ACS, which is automated collection systems. There’s one in San Diego and it’s like a big, big call center and agents work out of there and are initiating collections and taking collection actions and getting taxpayers on installment agreements and so on and so forth.
A revenue officer is a local collection agent. They’re assigned to a particular region in San Diego, they’re across the street from us, and the revenue officers are charged with locating taxpayers, locating assets, and getting as much money as they can and satisfaction of those assets. So revenue officers are usually very senior. They’re usually trained. Some of them have accounting backgrounds, and they’re particularly good for finding taxpayers, locating their assets, and taking those from taxpayers.
Now, there are a variety of revenue officers. Some are revenue officers that work criminal cases, some are revenue officers that were principal in the businesses or who work with difficult assets to collect and so on and so forth. But when you’re dealing with a revenue officer, always know that you’re going to deal with somebody who has a very superior knowledge base when it comes to collections. This is what they do. They have 40, 50, sometimes more cases, and they’re dealing with collections issues all all day, every day. We’re just dealing with delinquent taxpayers over and over and over again. So not only do they understand a lot about tax, but they understand a lot about how this process goes. They’ve usually dealt with a variety of representatives and a variety of taxpayers, so they’re very knowledgeable.
So the trick to negotiating with a revenue officer is understanding what result you want to get at the beginning, so you start with the goal. Understanding, let’s say I have a client who wants to pay $500 a month on their IRS liability. I know that I’m working towards that end goal with the revenue officer. The first thing you do in a revenue officer case is contact the revenue officer and tell them that you can agree, you think you can agree to a solution and tell them what the solution is. You want to get a number in their mind and say look I know you have to work your case, I know you have to do your investigation, I know we have to go through the steps but here’s what my clients looking to pay. Five hundred dollars a month, I’ll get you everything to make your determination, so on and so forth. So right there what you’re doing is you’re setting a target. You’re setting an expectation with the revenue officer.
The second thing you do is you gather all the things the revenue officer is going to request. Revenue officer may send you a short list, and it’s a laundry list, but in working towards the financials and in developing your financial statement, you know what your target is. When you do the income minus expense analysis, you know you need to get it to about $500. And if it doesn’t work at $500, you’re going to have to figure out how to get it there. Taxpayer’s circumstances change all the time, but you at least have a target.
Hopefully at that point you’re producing financials and other information that’s consistent with the taxpayer having an ability to pay $500 a month. And then if you do that, and you show deference to the Revenue Officer, and you work through the motions, that’s the end goal. And so essentially what you’re trying to do when you present all the financial information is to gift wrap the Revenue Officers case form. You’ve stated that you’re trying to pay $500. You’ve given them consistent financials that show a $500 ability to pay. They’re well organized, they’re well presented, and you say, look, I know you got 50 cases, let me just go ahead and take care of this one for you. And so by putting together this package and negotiating with the revenue officers, it’s not going to work 100 % of the time, because Revenue officers are still people. You get good revenue officers, you get bad revenue officers, but you’ll have more success than not by taking this negotiation tactic. Because what you’re doing is you’re creating a goal, and then you’re leading the Revenue Officer along in satisfaction of the goal. The Revenue Officer goes off course, you show them more information and we get them back to that $500 a month payment.
And then if negotiations totally fail with the Revenue Officer, you want to exit in the best way possible. You can go to Appeals to negotiate an installment agreement or another collection’s resolution. You can submit an offer and compromise. You can talk to the revenue officer’s manager. But the goal is you’re trying to maintain a good and fluid relationship with them. You’re trying to get on their good side. You’re trying to make their life as easy as possible. And that will lead to the biggest avenue of success when you’re dealing with revenue officers.
Topic: How Do I Beat IRS Examinations at Its Own Game?
Read the full article below for complete details on this topic.
How Do I Beat IRS Examinations at Its Own Game? So here are some of the tactics that we used when dealing with IRS examinations in order to get the best results for our clients and I’m not necessarily recommending as a layperson that you try and effectuate these strategies by yourself I’m simply letting you know because I want you to see the playing field in terms of how IRS audits actually work and some of the tactical maneuvers that we use to get the best results for our clients again with an IRS audits particularly a field audit you want to make sure that you’re handling the situation with an appropriate amount of deference and usually with field audits you want to get an attorney involved as quickly as possible however here’s the way that we handle the situation number one when dealing with an examination issue we’re trying to be at least a step ahead of the auditor so we’re creating a very defined path and we’re trying to lead the auditor down the path that we want to detect so what this takes is it takes two things number one you need a clear indication on where you’re starting at a point that on so number one what are the facts what documents do I have available to me how are my documents going to line up in accordance with the auditors expectations why is the client being audited what information can I gather about my current situation based on the information I have about my current situation what are the likely outcomes when I get to the end am I gonna pay a tax I know how much tax.
Okay so with IRS collections, here’s the thing to keep in mind. IRS collections is really about what’s the best end result for the client. How much can the client afford to pay? How much does the client want to pay? And what is the IRS going to come back with based on those inputs. So the easy thing about collections is you know exactly the direction it’s going to go. With collections for example, you know how they’re going to do financial analysis, you know the way that they’re going to look at certain items of income, you know the way they’re going to look at certain business expenses, so it’s very easy to understand. It’s very easy to take your client’s circumstances or take your own circumstances and to go through and audit your financials and line them up on a financial statement and say this is what the auditor’s going to look at. So anybody can really fill out a financial statement. There are some traps on that financial statement, there’s probably some information you don’t want to give out but at least you’ve got a baseline for where your financials are and where they might need to be in order to hit your desired results. The best thing that you have in the course of an IRS collections case is time, especially for the ability to control some of the inputs on your bank statements. So for example when we’re negotiating an IRS collection resolution and we have a period of time that passes, we will instruct
Key Takeaways
Okay so with IRS collections, here’s the thing to keep in mind. IRS collections is really about what’s the best end result for the client. How much can the client afford to pay? How much does the client want to pay.
the client to limit the amount of fun that they’re having over three months. Why do we limit the amount of fun.
So imagine that you’re a company and you’re based in Texas and you go to work every day in Texas.
Your employees are in Texas, sure you sell products outside of Texas but a lot of companies sell products outside of Texas, and over time as your business grows and scales you begin to have more an…
Maybe you have clients in Oklahoma or California or Florida.
So imagine that you’re a company and you’re based in Texas and you go to work every day in Texas. Your employees are in Texas, sure you sell products outside of Texas but a lot of companies sell products outside of Texas, and over time as your business grows and scales you begin to have more and more contacts with other states. Maybe you have clients in Oklahoma or California or Florida. Maybe you sell something that requires installation and so you have to send either employees or independent contractors to various states to help install products. Maybe you offer complimentary services. You sell software, you need somebody to help train your clients or to teach them things. Maybe you send salespeople to two different locations. Maybe you have an employee and she’s been with you for ten years and she gets a job offer and she wants to move to San Diego. The problem that we see with a lot of businesses in this digital age and in the age of routine domestic airline flights and the ease of travel is companies start to develop more and more of an interstate web and for a company that’s been based in Texas, that has ownership that’s been based in Texas their entire lives,
