Sampling method used in Illinois sales tax audits

Sampling method used in Illinois sales tax audits

Sampling? Does it make any sense at all that the Auditor would audit your sales, then, when it came time to look through all of your books and records, that they would only pick 1-3 months out of a given year and then estimate the sales and profits for the entire year? If you think this is an entirely unfair and incompetent method, you are right. If you think this is fair, then, you are probably an auditor for the State and are enjoy getting paid for doing at best half your job.

Below are a few examples of how sampling will determine your sales tax liability:

Sampling for gross revenue:

Sampling to determine gross revenue works like this. The auditor takes your gross sales for January, June, and September, for a given year. They will add up the three months and then take an average sale. For example:

January: $20,000.00

June: $2000.00

September: $2000.00

Average Sale: $8000.00

Do you notice the problem here? Our client in the example above is poised to make gross revenues of $96000.00 in sales; assuming the sales tax rate is 10.25%, their sales tax collection will be determined to be $9840.00. When the auditor takes the average sales figure, then, applies the sales tax rate for your county, you are left with the balance owed per the Auditor. Obviously, penalties and interest will apply to the difference in what you collected versus the Auditor’s findings.

Estimating prices:

Estimating your prices is even more ridiculous. It works like this. The auditor will looks to similar stores just like yours in your area, and there is no clear indication of what the “area” encompasses. However, they compare prices at other businesses and suggest that you should be selling the items at the same price. This does not take into account your clientele, sales, specials, giveaways – do you get the picture? However, the auditor will use these prices and profit margins of other businesses and compare them to yours. If you sell for less, then, the difference in estimated profits will be used to determine the difference in sales tax.

Estimating cash sales:

I intentionally saved the best for last. If all of your sales are on debit or credit card, then, you are out of luck. The Auditor will compare the amount of cash sales of similarly situated businesses to your cash sales. If they determine that the number of cash sales in the area is 5%, then, you have now lied to the auditor, as you are considered to be hiding an extra 5% of your gross sales. Again, tack 5% worth of gross sales to your liability and add penalties and interest.

As you can see, a sales tax audit can almost never go well without at least an appeal if not a managed audit by a sales tax attorney. You are guilty until proven innocent.

By: Mansoor Ansari J.D., LL.M. (TAX)

Sampling method used in Illinois sales tax audits