The New York State Department of Taxation and Finance (NYSDTF) has the ability to conduct audits of businesses in many situations to ensure that they have paid the full amount of taxes. One common form of audit scrutinizes whether businesses have collected and remitted the full amount of sales taxes due to the state. This audit can have drastic financial ramifications for a business, so it is essential that you take it seriously if you receive notice that you are under scrutiny. You should strongly consider hiring a New York tax defense attorney to help you with your response to the audit.
How Sales Tax Audits Work
NYSDTF may initiate a sales tax audit when it suspects that a business is underpaying sales taxes. They may do so after spotting one or more of a number of red flags that include the following:
- There are high discrepancies between what you report as your sales and the industry averages
- There are significant fluctuations in what you report as your sales on an annual basis
- You often file your returns late, or you frequently amend your returns
In some circumstances, you can face an audit even without any red flags. NYSDTF may sometimes conduct random audits based on its own statistical sampling. Even if there is nothing that seems wrong on the surface, you can still expect significant scrutiny in a random audit, and it carries the same risks as any other type of examination.
An NYSDTF audit can take on several forms:
- A correspondence audit is when the agency conducts the examination by letter or email.
- A desk audit is a review based on records that NYSDTF requested and that you submitted.
- A field audit is the most intensive type of scrutiny when investigators visit your office in person to speak with you and review your records.
What Are the Potential Consequences of a Sales Tax Audit?
In any audit, NYSDTF can examine your receipts and payments going back as far as three years. If they suspect negligence, they can go back six years, which can lead to even more consequences.
The most obvious consequence is that your business is required to pay back taxes for any unpaid amounts. Here, back taxes do not mean that you are just obligated to pay the amount of sales tax alone. The amount you owe is increased by interest and penalties. For example, NYSDTF can assess the following penalties:
- For failure to file, a 10% overall penalty plus 1% of the amount owed per month that it is unpaid
- If there was negligence involved in an underpayment of sales taxes, NYSDTF can assess a penalty of 10% of the amount of the unpaid tax
- If NYSDTF finds that there was fraud, they can increase the amount owed by up to 50%
In addition, the agency will also add interest to the amount owed. Interest accrues on unpaid sales tax from the due date until payment. The interest compounds daily, which can increase the amount that you owe even more.
How to Respond to a Sales Tax Audit
If you learn that you are being subject to a sales tax audit, your first step should be to contact a New York tax defense attorney. There is simply too much at stake to try to deal with NYSDTF on your own. Any missteps or misstatements can mean that the agency imposes an additional penalty for negligence or fraud.
Early preparation is perhaps the next most important step that you must take. It is vital that your records are organized, given that they will be requested by the auditors. Incomplete or carelessly organized records can increase the possibility that NYSDTF may find that you were negligent, which will result in an extra penalty. You should organize your receipts and bank statements, so you are prepared to present them when requested. If there are any discrepancies in your records, you are better off identifying them on your own before the auditor does, because you may be able to obtain some type of leniency.
When you are dealing with an audit, you must be levelheaded and calm at every step. Auditors are trained to spot panic, and they can easily figure out if you have something to hide. Thus, it is better that a tax defense lawyer either communicates on your behalf or gives you advice before you communicate with them. When you do turn records over to the auditor, you should give them only the documents that they have requested and nothing more. As much as you want to be cooperative, giving more documents than necessary can lead to a worse outcome in your case.
Can I Challenge the Findings and Results of a Sales Tax Audit?
At the conclusion of the audit, NYSDTF will give you their determination and findings. These could include an assessment of back taxes and penalties that you are required to pay. In any case, you are entitled to due process if you disagree with the results of the audit.
If you disagree with the findings, you can request a Conciliation Conference with the Division of Tax Appeals’ Bureau of Conciliation and Mediation Services. You must do so within 30 days after receipt of the findings. If the conciliation conference does not resolve the dispute, you can appeal to the Division of Tax Appeals. If you are still unsuccessful, you can take your appeal to the state court, where a judge would issue a decision.
Contact a New York Tax Defense Lawyer
Facing a New York sales tax audit can be overwhelming, and we are here to help. At The Thorgood Law Firm, our experienced tax defense attorneys help businesses navigate audits, challenge incorrect findings, and minimize penalties. We provide personalized strategies, handle communications with the NYSDTF, and protect your business interests. Contact The Thorgood Law Firm today for a free consultation, which you can do by visiting our website or by calling us at (212) 490-0704.
FAQ Section
Frequently Asked Questions
What is a sales tax audit in New York?
A sales tax audit is an examination conducted by the New York State Department of Taxation and Finance (NYSDTF) to determine whether a business has properly collected and remitted sales taxes to the state.
Why would my business be selected for a sales tax audit?
Businesses may be selected due to red flags such as discrepancies in reported sales, unusual fluctuations in revenue, late filings, or amended returns. Some audits are also conducted randomly.
What types of sales tax audits can NYSDTF perform?
NYSDTF may conduct correspondence audits (by mail), desk audits (based on submitted records), or field audits, where an auditor visits your business in person.
How far back can a sales tax audit go?
Typically, NYSDTF can review records going back three years. However, if negligence or fraud is suspected, the audit period may extend up to six years.
What penalties can result from a sales tax audit?
Penalties may include a 10% failure-to-file penalty plus 1% per month on unpaid taxes, a 10% negligence penalty, or up to a 50% penalty in cases of fraud. Interest is also applied and compounds daily.
What should I do if my business is selected for an audit?
You should contact a tax defense attorney immediately, organize your financial records, and carefully respond to all requests from NYSDTF. Avoid providing unnecessary documents.
Can I challenge the results of a sales tax audit?
Yes, you can request a Conciliation Conference within 30 days of receiving the audit findings. If unresolved, you can appeal to the Division of Tax Appeals and potentially to state court.
Why is it important to hire a tax defense attorney during an audit?
A tax defense attorney can help you avoid costly mistakes, communicate with auditors, organize documentation, and potentially reduce penalties or challenge incorrect findings.