Key Takeaways
- 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.
Facing a California Sales Tax Audit?
CDTFA audits can result in significant assessments — especially if records are incomplete. The direction of the audit is largely set by how you respond to the initial document request. If you’re at any stage of a sales tax audit, a brief review can clarify what you’re facing.
Discuss My Sales Tax Audit → Or call: (619) 378-3138
