The Auditing Division of the Utah State Tax Commission is involved in conducting USTC audits on most taxes the Tax Commission is responsible to oversee. Through this overall audit effort, the division is working on a series of programs aimed at providing information to businesses in an effort to make compliance easier.
The USTC conducts tax audits generally in three-year intervals, at the time a permit or license is closed out, or in connection with an audit of another permit or license held by the taxpayer or feepayer. USTC Audits may also be initiated as a result of information that the USTC has received from outside sources. If you have been selected for a USTC audit, you will receive a notice in the mail. The notice will indicate who the auditor is and what tax periods are subject to the audit.
In a sales and use tax audit the auditor will generally attempt to determine the following about the returns you have filed:
- Did you report all gross receipts from sales of tangible personal property and taxable labor and services?
- Did you report the cost of all business equipment and supplies that you purchased without tax either from out-of-state vendors or for resale that would be subject to use tax?
- Did you properly claim deductions?
- Did you properly allocate local tax?
- Did you use the correct rate of tax when reporting sales in special tax districts?
- Did you properly apply tax to your sales and uses of tangible personal property?
USTC AUDIT STATUTE OF LIMITATIONS
The term “statute of limitations” in tax matters refers to the laws that limit the period of time for performing a certain action, such as a taxpayer filing a return to obtain a refund or the Tax Commission assessing additional tax. Moreover, it is the specified timeframe in which the taxpayer or the government is allowed to initiate legal action. Furthermore, once the statute of limitations has expired, then no matter how much merit a case may have it is generally not possible to perform certain actions.
Statutes of limitations are intended to encourage the resolution of legal claims within a reasonable amount of time.
The specified period of time in a statute of limitations is set by the Legislature.
Here are some specific points concerning statutes of limitations:
- A Utah overpayment of personal income taxes may only be claimed if an original or amended return is filed within three years from the original filing due date plus the extension period, or two years from the date the tax was paid, whichever is later as indicated in Utah Code Utah Code §59-1-1410. See Utah Code §59-10-529 for amended returns based on net operating losses and changes to federal income tax returns.
- The Tax Commission may only begin an audit of a Utah individual income tax return within three years of the later of the due date or the date filed, unless a substantial error is identified or fraud is involved.
- After the expiration of the statute of limitations for issuing a refund, the law not only prevents the issuance of a refund check, it also prevents any credits, including overpayments of withholding or prepaid taxes, from being applied to other tax years that are underpaid.
- The statute of limitations for the Tax Commission to assess and collect any outstanding balances does not start until a return has been filed. In other words, there is no statute of limitations for assessing and collecting the tax if no return has been filed.
WHAT DOCUMENTS WILL THE USTC AUDITOR REVIEW?
The USTC auditor will review business documents pertaining to cost of goods, gross receipts, and mark up. The USTC typically will contact third-parties. The USTC may obtain information about taxpayers from various sources including other state agencies, businesses, wholesalers, and data houses. Some of this information may include third-party proprietary data that cannot be shared with the taxpayer who is under audit.
Generally the auditor will conduct a sample examination to determine if a more detailed audit is required. For a sales tax audit, for example, the auditor may compare:
- The total sales recorded on your books to the total sales reported on your sales tax returns.
- The total sales recorded on your books to the total sales on your income tax returns.
- The amount for tax you collected to the tax reported on your returns.
- Claimed sales for resale to resale certificates
The USTC auditors use several unique statistical methods to assess a tax liability. These unique methods include a markup test. The mark up test compares total sales reported with a total sales figure that the auditor creates by marking up your cost of goods. Another statistical method used is a ratio of cash versus credit card transactions to determine if there are underreported cash transactions.
If the auditor determines that you owe additional taxes or fees, the USTC auditor will issue a notice of determination letter to you. You have 30 days from the date of the letter to file a petition for redetermination.
A Preliminary Notice in a USTC audit is a letter from the Auditing Division that describes the findings of the audit, and may contain a tax assessment if the audit discovered an underpayment of tax.
This notice is not a final assessment. The taxpayer has 25 days in which to review the findings and discuss them informally with the Auditing Division. If the taxpayer needs more than the 25 days allowed to review the findings with the Division, the taxpayer may request an extension of time.
Following the 25 days, if an extension of time has not been granted, a Statutory Notice will be issued. The Statutory Notice is a legal and binding assessment of the tax liability.
If the taxpayer agrees with the adjustments proposed in the Preliminary Notice, the taxpayer has the option of paying the tax assessment during this phase of the notice process and thereby stopping the accrual of interest.
Following the completion of an audit, the taxpayer will receive a Statutory Notice unless full payment was received on the Preliminary Notice. The Statutory Notice is a legal and binding assessment of the taxpayer’s tax liability.
Protecting Appeal Rights
If a taxpayer does not agree with the adjustments proposed on the Statutory Notice, the taxpayer must submit a USTC appeal in writing within the 30-day time frame. If an appeal is not filed with the Tax Commission’s Appeals Unit within the required 30 days, the Statutory Notice becomes a final assessment and full payment is due.
CONTACT A USTC TAX ATTORNEY
If you have received a notice from the USTC regarding a USTC audit, contact a USTC tax attorney for a free consultation.