This financially corrupted and bankrupt state, in conjunction with the Internal Revenue Service, has adapted to the computer high tech age with a new highly effective audit technique.
Because individuals and businesses now use credit cards extensively, both of the government agencies have new audit techniques that have been adapted for both sales tax and income tax non-compliance.
In the good old days, the retailer or restauranteur wishing to hide sales from the taxman would pay cash for merchandise delivery at the back door and hide the corresponding marked-up sales from the cash register and bank deposit sales totals.
This is an age-old technique, to keep the cost of sales constant, learned from Arab trader’s centuries ago. Now, the government has a countermeasure which is highly effective and sure to close much of the trillion-dollar uncollected tax debt [while shutting down the economy as well].
The old venerable shelf test to compare markup to reported cost of sales or counting pizza boxes has been replaced by credit card sales. A new 1099-K form [ as in Credit Kard] has been created for 2012.
This form will be issued by all credit card companies to businesses using their service. I wonder if the Post Office will get one. Effective January this year, credit card sales must be broken out in all financial reporting from businesses.
The essence of the new data was uncovered in a recent restaurant audit where the auditor, a pleasant educated fellow, who once resided in India or Pakistan, spent considerable time in our offices to compile data from the corporate client records and tax returns.
Then he visited the business location. Correction, he actually spent a whole day at the business location from opening to closing. He was there earlier than the opening bell, however, to record individual sales receipts for the rest of the week.
He seemed surprised at the long hours the restauranteur spent with his business. While there he recorded every single sale made that day and listed them as cash or credit card. Afterward, he compiled the ratio of sales by cash or credit and went back for three years to find unreported cash sales.
The results were analyzed by me and my client and a defense of an unseasonal week or statistical error factors didn't hold. They will send the big bill for unpaid sales taxes and penalties to the restauranteur who has the option of paying it or going out of business [by a revocation of the Seller's Sates Tax Permit]. Also, if the restauranteur doesn't show honest records for the next periodic audit, his Sellers Permit can be revoked.
This is one audit not to be appealed because I like to win. Now, the killer application. Like being shot with a triple barrel shotgun, the restauranteur will Franchise Tax Board [FTB, as in-state income tax. Then the FTB will notify the IRS about the newfound income and another bill will follow. A true triple whammy on unreported income and sales taxes.
During the audit, I asked the auditor why they charge sales tax on coupons. For example; you go to Costco for a $1OOO television set which has a hundred dollar off coupon.
The store charges you the grand, calculates the sales tax on the full list price, then gives you a credit of $100 against the total. Note that the BOE has collected sales tax on the $100 you never paid for the television.
The auditor said that it is the law. It seems that I have heard that argument before, something about soldiers following orders.
* Phillip B Chute is an Enrolled Agent, tested, licensed, and appointed by the IRS directly. He has prepared or supervised over 25,000 tax returns over 30 years.