NJ Tax Audit Times
Why Me, Why Was My Company Selected For Audit?
Imagine for a moment that its about 3:00 in the afternoon and you're having a reasonably good/productive day. In walks your admin to deliver today's mail and one of the envelopes immediately catches your eye as the return address lists the New Jersey Division of Taxation. You wonder what the envelope might contain as you believe that all of your tax returns have been properly filed and all taxes fully paid. However, your curiosity wins out and you hastily open up the envelope. BAM, you have just been notified that your business has been selected for audit. Well, isn't that just wonderful news! Unfortunately and similar to most businesses, the audit catches you a bit off guard as you have not adequately planned for this day. You begin to wonder "why me, why was my company selected for audit" and more importantly, how should I best proceed?
Generally most state taxing authorities, like the NJ Division of Taxation for example, have over time developed a rather sophisticated and complex set of audit selection criteria that are used to select and recommend businesses for audit. The exact reason(s) may be something as simple as it's a "random audit" and its just your turn, should your company have never been audited in the past. However, there may be a host of reasons as to exactly why your business was selected for audit, with some of the reasons being of a much greater complexity and significance. Listed below are several of the more common reasons why state tax agencies might select a business for audit.
1. While conducting an audit of one or your customers, a NJ State Auditor may have detected an issue or something of a questionable nature, per review of one of your customer's purchase invoices (your sales invoice to your customer). Accordingly, the auditor may recommend your company for an audit.
2. Possibly an auditor, while conducting an audit of one or your suppliers, may have detected something questionable per review of one of your supplier's sales invoices (your purchase invoice from your supplier). Accordingly, the auditor may recommend your company for an audit.
3. Generally, state tax agencies perform follow-up audits on businesses that have been previously audited to verify that corrective compliance measures have been properly implemented. Thus, if your company was previously audited, then be forewarned that a follow-up audit is probable, especially when the initial audit resulted in a sizeable audit assessment.
4. Occasionally, state tax authorities target businesses for audit that operate within specific types of industries and that are associated with the sale of certain types of products and/or services. For example, the New Jersey Division of Taxation has previously selected numerous businesses for audit within the landscaping industry, medical professions (doctors, dentists, and other licensed entities), and cash businesses like pizzerias & bar/restaurants.
5. Bulk Sales: Often times state tax agencies may audit a business prior to its sale to verify that the company has met all of its tax filing and payment responsibilities, prior to issuing a Tax Clearance Certificate. This is especially true when a liquor license is being transferred as a part of a business/bulk sale.
6. Sometimes the information, as provided to the state tax authority, simply doesn't match up. For example, if a business's gross receipts as reported on its Corporate Business Tax Return (annual total) are significantly different that the gross receipts as reported on the Sales Tax Returns (total of 4 quarters), then the resulting discrepancy could trigger an audit.
Certainly there are hundreds, and possibly thousands, of audit selection criteria a state taxing authority may review and evaluate when selecting the businesses for its next audit cycle. While there are numerous practices and procedures that can be implemented to help reduce your chances of being audited, there is no magical wand that can be waived to completely remove the on-going and ever increasing possibility of a an audit at some point down the road.
Best Practices: Be proactive. Business owners and those responsible for the business's financial affairs (internal and external accounting/tax personnel) should meet and discuss the firm's sales & use tax issues and concerns at least once a year, or sooner should the nature of the business change. Don't just sit around hoping not to get audited, why not plan for it!
Generally most state taxing authorities, like the NJ Division of Taxation for example, have over time developed a rather sophisticated and complex set of audit selection criteria that are used to select and recommend businesses for audit. The exact reason(s) may be something as simple as it's a "random audit" and its just your turn, should your company have never been audited in the past. However, there may be a host of reasons as to exactly why your business was selected for audit, with some of the reasons being of a much greater complexity and significance. Listed below are several of the more common reasons why state tax agencies might select a business for audit.
1. While conducting an audit of one or your customers, a NJ State Auditor may have detected an issue or something of a questionable nature, per review of one of your customer's purchase invoices (your sales invoice to your customer). Accordingly, the auditor may recommend your company for an audit.
2. Possibly an auditor, while conducting an audit of one or your suppliers, may have detected something questionable per review of one of your supplier's sales invoices (your purchase invoice from your supplier). Accordingly, the auditor may recommend your company for an audit.
3. Generally, state tax agencies perform follow-up audits on businesses that have been previously audited to verify that corrective compliance measures have been properly implemented. Thus, if your company was previously audited, then be forewarned that a follow-up audit is probable, especially when the initial audit resulted in a sizeable audit assessment.
4. Occasionally, state tax authorities target businesses for audit that operate within specific types of industries and that are associated with the sale of certain types of products and/or services. For example, the New Jersey Division of Taxation has previously selected numerous businesses for audit within the landscaping industry, medical professions (doctors, dentists, and other licensed entities), and cash businesses like pizzerias & bar/restaurants.
5. Bulk Sales: Often times state tax agencies may audit a business prior to its sale to verify that the company has met all of its tax filing and payment responsibilities, prior to issuing a Tax Clearance Certificate. This is especially true when a liquor license is being transferred as a part of a business/bulk sale.
6. Sometimes the information, as provided to the state tax authority, simply doesn't match up. For example, if a business's gross receipts as reported on its Corporate Business Tax Return (annual total) are significantly different that the gross receipts as reported on the Sales Tax Returns (total of 4 quarters), then the resulting discrepancy could trigger an audit.
Certainly there are hundreds, and possibly thousands, of audit selection criteria a state taxing authority may review and evaluate when selecting the businesses for its next audit cycle. While there are numerous practices and procedures that can be implemented to help reduce your chances of being audited, there is no magical wand that can be waived to completely remove the on-going and ever increasing possibility of a an audit at some point down the road.
Best Practices: Be proactive. Business owners and those responsible for the business's financial affairs (internal and external accounting/tax personnel) should meet and discuss the firm's sales & use tax issues and concerns at least once a year, or sooner should the nature of the business change. Don't just sit around hoping not to get audited, why not plan for it!
Pro-Active Compliance Equals Comfort.
Now What! Please read our next issue: Circling The Wagons!