Learn how long it takes for the state to issue a formal audit assessment and how to check interest and penalty calculations. We’ve also included a sample penalty abatement letter and a checklist of what to do as the sales tax audit is finalized.
Many auditors view themselves as the final authority on the audit results. Because of this, they often push taxpayers to pay the tax assessment, interest and penalties. But you might not have to. You have rights.
Before making any protest decisions, you should verify that the assessment is correct. Even if you agree with the items assessed and the calculations, you should consider protesting if you received a penalty.
At the completion of the fieldwork, the auditor should have given you copies of all audit work papers and schedules. Review these documents to verify that they’re correct and that they reflect any agreements reached in your negotiations.
You should bring any errors in the assessment to the auditor’s attention immediately. Pay particular attention to any last-minute adjustments that were agreed upon. Make sure they were carried forward to the auditor’s final worksheets.
After all the required adjustments have been made, some states will issue a preliminary assessment while others will issue a final assessment. An assessment is a formal request for payment that imposes certain obligations on the taxpayer for payment or appeal of the audit results.
It can take anywhere from four to twelve weeks after completion of fieldwork to issue a preliminary or final assessment. Most states issue their assessments six to eight weeks after the auditor turns in the necessary papers.
It takes this long because the auditor’s work has to go through a review process before the formal assessment can be issued. Most states rely upon the auditor’s supervisor to perform the review. But some states have a formal committee or department that reviews and processes all assessments. The level of review can vary with the magnitude of the assessment — larger assessments generally receive closer scrutiny.
You should verify the accuracy of the interest or penalty calculations. Many states use simple interest, which makes the verification process relatively easy. If a penalty has been included in the assessment, you should consider asking for a waiver. These actions can reduce the total amount you owe.
The deadline for filing an appeal is usually thirty or sixty days after the date the notice was mailed or received. If the taxpayer fails to file an appeal or protest by the deadline, the assessment becomes final and the results cannot be appealed. If the taxpayer does not make payment or file an appeal by the deadline, an additional penalty may be assessed, and additional interest will be assessed.
States often allow the taxpayer to make a payment from the preliminary assessment to avoid incurring additional interest costs. If the audit is agreed upon, the taxpayer may wish to consider this alternative. In some states, if the audit is only partially agreed upon, the taxpayer may pay the undisputed portion to reduce interest costs on the overall settlement.
If you don’t agree with an aspect of the audit, there are many levels of review and appeal that you can pursue. As you would expect, protest procedures vary from state to state. A few agencies allow only one level of administrative appeal before requiring taxpayers to pursue their cases in court.
Most tax agencies provide two levels of appeal, although one is generally an optional informal conference. A few states provide three levels (again including an initial informal conference), and some also offer alternative dispute resolution or settlement programs outside the usual administrative appeal process.
If you don’t agree with any aspect of the audit, there are many levels of review and appeal that you can pursue. As you would expect, protest procedures vary from state to state. A few agencies allow only one level of administrative appeal before requiring taxpayers to pursue their cases in court.
During this phase of the audit, you need to be careful that you don’t compromise your rights to sue in court at a later date. Many states require you “to exhaust all administrative remedies” before proceeding to court. So you have to know what your “administrative remedies” are.
Typically the auditor will hold an “Exit Conference” with you at the end of an audit. You may not be aware that this meeting is an exit conference because the auditors usually don’t call it anything specific.
In that meeting, they tell you your options as far as appealing the audit. These can become quite involved depending on the circumstances of the audit. We won’t discuss all the available options. There are a number of them. But here are the most commonly used avenues.
Some states refer to an audit as a “Determination” of your tax liability. If you believe the tax assessed your company is overstated as a result of this “Determination” and you haven’t been able to persuade the auditor or his supervisor, then you must request a “Redetermination.” This is usually an appeal to the State Department of Revenue.
To request a redetermination you are usually required to file for one within 30 days of being notified of the official audit results. Typically, the request/appeal must contain a complete statement of the facts and the legal reasoning behind it. The deadline is critical.
At this point, the state will usually assign a state attorney to attempt to resolve the audit. (This often works in favor of the auditor/state).
There are many different avenues the appeals procedure could take depending on the circumstances. It is possible to handle it on your own. But to make sure you get the best results, it’s worth working with an attorney or CPA experienced in audit appeals.
If the state assessed you a penalty in any material amount, you should consider appealing it. Not only is the penalty an additional amount out of your pocket, but it’s also not deductible for federal income tax purposes.
Here’s how you should appeal the penalty.
First, make sure you understand why the penalty was assessed and how it was calculated.
When you get a satisfactory explanation of the penalty, formulate your arguments and assemble your evidence for waiving the penalty. Generally the penalty imposition laws state that penalties are imposed because the taxpayer failed to exercise “reasonable care”. This is what you will attempt to refute in your protest.
If the penalty relates to self-assessments of tax on fixed assets, explain your self-assessment procedure. Be sure to cite the dollar amounts self-assessed, the number of transactions reviewed and any other material fact that supports your argument.
Review department regulations, court cases and department of revenue publications to determine if there are any guidelines that support the State’s position.
The state may not always be specific in its reasons for assessing a penalty. For example, the State might indicate that you may have made errors in prior audits with self-assessments and that similar errors were found in the current audit. Or the State may cite the amount of the assessment or the number of errors in the audit as being greater than in the previous audit.
When the state provides general reasons for the imposition of penalty, you should also be prepared to respond in a broad manner. There are a number of general defenses you can use to justify a penalty waiver, if and when applicable.
Here are some of the defenses we use:
December 10, 2018
State Department of Revenue
123 State Capitol Street
Capitol City, USA 77777
RE: Penalty Abatement for ABC Company Taxpayer ID 123-45-6789
Dear Madam or Sir:
We have completed our review of the audit and are in general agreement with the results. However, we are not in agreement with the penalty imposed. Per state statute, penalty is imposed in cases where the taxpayer failed to exercise “reasonable care”. We feel that a penalty on this audit is inappropriate for the following reasons:
Based upon the facts presented above, we believe that we have established that we exercised the “reasonable care” required under the statute and as such, it would be inappropriate to impose a penalty. Therefore, we respectfully request a full abatement of penalty on the audit.
Please contact me if you have any questions.
If you’ve been over-assessed sales tax in your audit in any material amount, then you should strongly consider protesting the assessment. Don’t be overly intimidated by the process and don’t be put off by the auditor who has a strong motivation to avoid the protest phase.
Every state has a defined process for protest. It starts with trying to resolve it with the auditor and the supervisor and goes all the way to an administrative law judge.
In our experience, it’s easiest and least costly when you try to get everything possible resolved before ever going to the official protest route.