Comforting Clients Through New Jersey Sales Tax Audits
by Christopher R. Cicalese, CPA, MSTFP, Alloy, Silverstein, Shapiro, Adams, Mulford, Cicalese, Wilson& Co. –
February 28, 2018
Receiving a New Jersey audit notice in the mail frequently results in an immediate phone call from a client. They expect you to know why they were selected and how much this is going to cost them. While the “why” of the matter may not be known until the audit process is underway, the “how much” often depends on various things that are sometimes out of the client and CPA’s control.
Clients usually do not understand why they were selected from the taxpayer pool to be checked up on by the state to see if they are doing things correctly. Officially, the New Jersey Audit Selection Group uses established criteria, public records and information from other taxing authorities to select taxpayers for audit. New Jersey auditors are not supposed to reveal to taxpayers why they were selected for audit. However, CPAs often can build a relationship with the auditor over the course of the audit and may gain some insight as to what the taxpayer may have been doing wrong. If the auditor points out something clear, such as income tax return revenue not equaling the total of all sales tax returns, that most likely is the reason for audit.
Sometimes a taxpayer may think they are being picked on as they feel they get audited too often. If the same entity was recently audited, they should understand that the state is coming back to see if you made the necessary corrections. Any time a taxpayer is audited, it is almost guaranteed the state will come back in a few years. One of the official reasons for a New Jersey audit is even called something similar to a check back. During audits, the taxpayer is required to list all related entities. If the entity that originally was selected to be audited was found to owe money, the related parties could potentially get an audit notice within a few years.
How Expensive is an Audit?
Primarily, the costs of an audit focus on unpaid tax, penalties, interest and CPA representation. Upon hearing that, a client may immediately think they can handle the audit themselves without representation as a means to cut costs. However, what they may not understand is that without proper representation, they could potentially make the audit even more expensive. By answering an auditor’s questions incorrectly or providing too much information, the client could unintentionally encourage the auditor to expand the scope of the audit. At the same time, by providing poor or irrelevant records, the auditor may begin including things in their assessment that the original audit did not cover simply because they had the information in front of them and were able to make a conclusion that money was owed.
The best way to keep the costs of an audit down is to provide clean information to an auditor. Clients need to be educated prior to an audit about the importance of keeping records maintained at all times. As a start, they should save receipts, maintain vehicle logs, update tax exemption certificates, review invoices for sales tax and keep backup for paid use tax. These records need to be organized, easily accessible and legible so that an auditor can review them quickly and efficiently. Having good records often translates to less time the CPA needs to spend representing them before the state and helps build trust with the auditor.
Can an Audit Be Prevented?
There is almost no way to avoid being audited. Eventually, whether taxpayers are doing something wrong or not, they will be selected to be audited. Having a knowledgeable CPA with experience can help prevent taxpayers from being audited as they are more familiar with the criteria the state is reviewing to select who to audit. They can do their own checks while performing the normal course of work to see if there are any red flags. CPAs cannot prevent audits entirely, but they can decrease the likelihood of being audited simply from their expertise and experience.
Overall, audits are not always the best experience and sometimes can interrupt the normal course of business. As trusted advisors for clients, it is important for the CPA to work with clients to not only help them work through the audit unscathed, but also educate them and help them be more comfortable with the process.
This article appeared in the March/April 2018 issue of New Jersey CPA magazine. Read the full issue.