New Audit Procedures For Convenience Stores And Related Issues

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New Audit Procedures For Convenience
StoresAndRelated Issues
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Sohail Ali Director, Sales Tax Group H R Shaikh,
Seyar, LLP Tel [phone]
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WHY IS AN AUDIT ESTIMATED

• ABSENCE OR UNRELIABLE SALES RECORDS i.e. Z-TAPES
  DO NOT MATCH REPORTED SALES.
• INCOMPLETE / MISSING PURCHASE INVOICES
• OR PURCHASE RECORDS NOT VERIFIABLE.
• LACK OF INTERNAL CONTROLS

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AUDIT ESTIMATION METHODS

• BASED ON COMPLETE PURCHASE RECORDS PROVIDED
  MARKED UP TOTAL SALES 85 TAXABLE SALES
  MINUS TAXABLE SALES REPORTED ADDITIONAL TAXABLE
  SALES
• Actual Sales 60,000
• Taxable Sales 48,000
• Reported 25,000
• Under Reported 23,000
• Tax 1,900
• Tax For Audit Period - 48 mths 91,000
• Tax Assessment with Penalty / Interest 162,000

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AUDIT ESTIMATION METHODS

• BASED ON BEER, CIGARETTE AND SODA TAKEN AT 70
  OF TOTAL SALES. BEER AND CIG SALES TIMES 1.42
  TOTAL SALES 85 TAXABLE SALES MINUS TAXABLE
  SALES REPORTED ADDITIONAL TAXABLE SALES
• Beer Sales 24,000 Cig Sales 18,000 Soda
  Sales 6,000
• Total Beer, Cig Soda Sales 48,000
• Total Estimated Sales 69,000
• Taxable Sales 56,000
• Reported 25,000
• Under Reported 31,000
• Tax 2,500
• Tax For Audit Period - 48 mths 120,000
• Tax Assessment with Penalty / Interest 212,000
  

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AUDIT ESTIMATION METHODS

• BASED ON BEER AND CIGARETTE TAKEN AT 54 OF TOTAL
  SALES. BEER AND CIG SALES TIMES 1.85 TOTAL
  SALES 85 TAXABLE SALES MINUS TAXABLE SALES
  REPORTED ADDITIONAL TAXABLE SALES
• Beer Sales 24,000 Cig Sales 18,000
  Beer/Cig Sales 42,000
• Total Estimated Sale 78,000
• Taxable Sale 63,000
• Reported 25,000
• Under-Reported 38,000
• Tax 3,000
• Tax for Audit Period - 48 mths 144,000
• Tax Assessment with Penalty/Interest 264,000

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AUDIT ESTIMATION METHODS

• BASED ON BEER TAKEN AT 27 OF TOTAL SALES BEER
  SALES TIMES 3.7 TOTAL SALES 85 TAXABLE
  SALES MINUS TAXABLE SALES REPORTED ADDITIONAL
  TAXABLE SALES.
• Beer Sales 20,000 therefore Total Estimated
  Sales 89,000
• Taxable Sales 72,000
• Reported 25,000
• Under-Reported 47,000
• Tax 3,900
• Tax For Audit Period - 48 mths 187,000
• Tax Assessment with Penalty /Interest 328,000

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PRODUCT MIX AS PER STATE ( AP 92 )

• BEER 27 (100 / 27 3.70 )
• CIGARETTE 27 (100 / 54 1.85 )
• SODA 16 (100 / 70 1.42 )
• CANDY 09
• OTHER TAXABLE 06
• TOTAL TAXABLE 85
• NON TAXABLE 15
• TOTAL SALES 100

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ACTUAL ESTIMATED AUDIT RESULTS AND SUBSEQUENT
ADJUSTMENTS

• Example 1
• Original Revised
• Beer Sales 26,000 22,000
• Cig Sales 26,000 10,000
• Soda Sales 16,000 5,400
• Other Taxable 15,000 8,000
• Non Tax 15,000 8,000
• Total Sale 98,000 53,400
• Tax Assessed 6,150 2,780
• Audit period months 47 47
• Tax assessed total 298,000 131,000
• Penalty 174,000 79,000
• Interest 39,000 17,000
• Total 502,000 227,000
• Settled For 150,000
• Total reduction in audit 352,000

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ACTUAL ESTIMATED AUDIT RESULTS AND SUBSEQUENT
ADJUSTMENTS

• Example 2 Original Revised
• Beer Sales 34,000 27,000
• Cig Sales 31,000 14,000
• Soda Sales 19,000 5,500
• Other Taxable 18,000 12,500
• Non Tax 18,000 10,000
• Total Sale 120,000 69,000
• Tax Assessed 4,125 1,145
• Audit period months 48 48
• Tax assessed total 198,000 55,000
• Penalty 119,000 5,500
• Interest 37,000 11,500
• Total 354,000 72,000
• Settled For 72,000
• Total reduction in audit 282,000

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HB 11 BASED ASSESSMENTS

• As a result of House Bill 11 Comptroller receives
  sales information from wholesalers and
  distributors of alcohol and tobacco products.
  Based on the information received it appears that
  taxable sales for this entity were under
  reported. Therefore we have estimated additional
  sales tax due.
• This assessment is not an audit. All exam periods
  are open to future audits..
• We encourage you to disclose all under reported
  taxes, otherwise ,you may be subject to an audit.

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HOUSE BILL 11 ESTIMATES

• ASSESSMENT PERIOD - JANUARY 2008 THRU SEPTEMEBR
  2008
• BEER PURCHASE DATA FROM VENDOR 160,000
• MARK UP AS PER AP 92 25
• BEER SALES 200,000
• CIGARETTE PURCHASE PER DATA FROM VENDOR 85,000
• MARK UP AS PER AP92 17.65
• CIGARETTE SALES 100,000
• BEER AND CIGARETTE SALES 300,000
• SALES TAX _at_ 8.25 24,750
• SALES TAX REPORTED 15,000
• ADDITIONAL TAX DUE 9,475

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EXTRACT FROM SALES TAX POLICY/PROCEDURES MANUAL

• II.  FRAUD
• Definition
• The federal definition of fraud
• "...implies bad faith, intentional wrong doing
  and a sinister motive. It is never imputed or
  presumed and the court should not sustain
  findings of fraud upon circumstances which at
  most create only suspicion."
• To successfully sustain the additional penalty
  due to fraud, it is necessary to establish, in
  detail, that the deficiency is due to a
  deliberate misrepresentation of facts by the
  taxpayer. There must be knowledge of the falsity
  or deception that reduces the tax liability. It
  must be the taxpayer's intention that the falsity
  or deception be acted upon as truth.

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EXTRACT FROM SALES TAX POLICY/PROCEDURES MANUAL

• Civil Fraud versus Criminal Fraud
• Under civil fraud, the penalty is limited to
  assessment of the additional 50 penalty. In
  criminal fraud cases fine and/or imprisonment may
  be imposed. The evidence requirements and
  referral procedures previously stated must be
  followed. The evidence to show fraud must meet
  the federal standard cited above..

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