Avoid Costly Sales and Use Tax Overpayments, Underpayments and Penalties

A simple $100 underpayment of tax could cost your company thousands of dollars.

The company is undergoing a sales and use tax audit. The auditor chooses (you do not have a choice) to use block sampling as part of the audit process. Block sampling is the most commonly used type of non-statistical sampling.

In block sampling, the auditor chooses a block of time (weeks, months, days) and examines invoices, sales, and vouchers. The auditor assumes the block of time is representative of the company’s entire sales and purchasing transactions. An error rate is determined from the sample chosen and then extrapolated over the entire audit period.

Do the Math
In this example, the audit period is three years. In the block sample, the auditors find $100 in underpayments. That $100 underpayment mistake would be extrapolated over the three years of the audit and be viewed as an underpayment of $3600 for the period. ($100 per month over a 3 year or 36 month period)

The state would then assess penalties and interest.

Each state has it's own penalties. Using the state of Texas for our example, an entity who fails to file a report or to pay sales tax when it is due, is subject to a penalty of 5% of the amount due; if the entity fails to file or pay within 30 days after the tax is due, an additional 5% penalty is imposed. In addition, delinquent tax draws interest beginning 60 days after the due date of the taxes.  Effective January 1, 2000, the rate of interest charged to the taxpayer is the prime rate, as published in the Wall Street Journal on the first day of each calendar year that is not a Saturday, Sunday, or legal holiday, plus 1%.

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