New Jersey Sales and Use Tax Audits: A Basic Guide for CPAs
It is more important than ever that companies ensure they are in compliance with New Jersey sales and use taxes (S&UT). An S&UT compliance review is a great place to start. The review should be performed by someone qualified, as this is specialized area of taxation. Weaknesses may be revealed in the business’s current S&UT policies and procedures, which can then be timely corrected. Additionally, S&UT overpayments may be detected for which a tax refund may be claimed. Also, if the business is not registered for S&UT, consider filing a voluntary disclosure agreement as the lookback period may be reduced from 28 quarters to 16 quarters if audited.
While there are numerous educational resources and research services available, an excellent and free place to perform research is the New Jersey Division of Taxation’s website. In particular, the New Jersey Manual of Audit Procedures (nj.gov/treasury/taxation/njmap.shtml) and the Publications & Guidance page (state.nj.us/treasury/taxation/pubs.shtml) provide an abundance of helpful audit information and industry/business-specific S&UT information and guidance.
Typical Audit Procedures
Upon receipt of an audit letter from the New Jersey Division of Taxation, all appropriate personnel should be notified. Also, a qualified individual (internal accountant or external CPA) should be selected as the point person to represent and defend the business through all aspects of the audit engagement.
Initially, a pre-audit meeting is conducted with the auditor during which a tour of the business’s premises is conducted and the following forms are completed:
- Pre-Audit Questionnaire
- Consent Form
- Sampling Agreement
- Acknowledgement of Responsibility
Refer to the New Jersey Manual of Audit Procedures for information regarding these forms. At the conclusion of the meeting, the auditor will provide an Information Document Request (IDR) which lists a rather substantial number of records to assemble in continuing the audit engagement. In addition to the business’s primary records requested (e.g., tax returns, sales and purchases books and associated invoices, payroll records), the following records and information requested may present extraordinary audit issues as discussed later:
- Bank statements — four years
- Credit card statements — one year
- Exemption certificates — a sample period
- Categories and total amounts of gross receipts: Tax returns versus bank
- deposits versus books — four years
Next, the auditor reviews the business’s records over the next several appointments and may request additional records along the way. Finally, the auditor provides the representative with a set of S&UT audit work papers which list all of the questionable and potentially taxable nontaxed sales, nontaxed purchases and other audit issues for the selected sample/audit periods.
Helpful Tips for CPAs
- Obtain in advance and be familiar with the information required to complete the initial forms to be able to provide answers to the auditor’s questions at the initial pre-audit meeting.
- Scrutinize the auditor’s work papers intensely! This is the best opportunity to remove potentially taxable sales and taxable purchases (errors) from the auditor’s work papers. Ask questions and request explanations, especially concerning the tax ramifications and extrapolation of the item(s) in question. Support and document contentions. Remember: the remaining errors will each contribute to the overall tax/audit assessment.
- Negotiate an item or issue and the associated tax liability should uncertainty exist.
- Reconcile all differences in reported gross receipts to within $1,000 if possible.
- If providing the Acknowledgement of Responsibility form, consider seeking legal advice.
- Consider having the auditor’s work papers reviewed by a subject-matter expert.
- Provide the auditor with a timely/written request for an abatement of penalty and interest.
- Consider requesting a meeting with the auditor’s supervisor if not satisfied with the audit.
- Consider challenging the audit assessment with the Division’s Conferences section.
- Contact the Tax Practitioner’s Hotline or the Taxpayer Advocate when warranted.
- Best practice: Reconcile the business’s various categories of gross receipts on a monthly or quarterly basis to avoid differences from prior periods that are now difficult to reconcile.
- Best practice: Review all credit card statements on a monthly or quarterly basis to be sure the associated purchase invoices are retained and list S&UT when required.
- Best practice: Review all nontaxed sales along with their associated exemption certificates for their completeness and accuracy on an annual basis, or immediately if a new customer.
Victor P. Treglia
Victor P. Treglia, CPA, is the founder of NJ Sales Tax Audit & Refund Specialists.
This article appeared in the Spring 2022 issue of New Jersey CPA magazine. Read the full issue.