Today's Technology for Tomorrow's Firm.
Issue link: https://cpapracticeadvisor.epubxp.com/i/382390
24 September 2014 • www.CPAPracticeAdvisor.com A YEAR IN THE LIFE: SALT ACCOUNTANT • "Tis high profle, atention-grabbing color is not an issue for me;" • "I wear my seatbelt, drive slightly under the posted limit and never text." • "As a reasonable person I know that every deviation from the norm invites a moving violation." • "Law enforcement personnel like sales tax auditors look for things outside the norm, those red fags indicate non- compliance." H i stor ic a l ly, a bu si ness' g ross revenues follow seasonal patterns and even a sma l l change in g ross revenue shou ld resu lt i n a sma l l change in the associated accounts. In an atempt to discover why one established contractor was selected for audit, I reviewed their sales tax flings and created the below table. Te exact dollar amounts are not as i mpor tant as t he relationsh ips between them. Te chart illustrates two of the many red fags contained in this data set. How many red fags can you fnd? Red Flags 1. 2011 use ta xable purchases exceed gross sales by a million dol la rs each qua r ter. Establ ished businesses normally have some use tax but not 2 ½ times greater than revenues. • Could the accounts be backwards or the contractor be reporting labor sales as gross revenue and materials as use taxable purchases, thus understating gross sales? 2. Revenues double bet ween Q 2 & Q 3 - 2 0 1 1 , a g a i n bet we en Q3 & Q 4 - 2 011 a nd a fve-fold increase between Q4 - 2011 & Q1 – 2012, growth the stabilizes at over 10 times prior quarters. • Te doubling of revenues Q2 &Q3; 2011 is possible. (Note- as revenues doubled use tax doubled.) • Q4 - 2011 to Q1 - 2012 5x increase - hard to believe. (Note- use taxable amount stabilizes, why?) • Q1 - 2012 gross sales stabilize Note- lack of use ta x able purchases in remaining quar ters. That seems unlikely given prior period reporting. Attracting Attention S t a t e s u s e m a n y s o p h i s t i c a t e d techniques to identif y and target non-compliant companies, such as: • Erratic ratios of sales to use tax • Rapid growth • Zero returns • Large increase of sales Dat a , w h i le i mpor t a nt i s s t i l l reported by a person. Based on the above red fags the following ques- tions should be asked. • Did key personnel leave? • Was 5x growth delayed billing or prior period underreporting due to stafng issues? • Does the entit y need hand s on training and coaching? • Should I visit the entity and observe their operations? RED FLAGS: Are Your Clients Likely to Face a SALT Audit? By Judy Vorndran, CPA, JD, and David Casper, CPA, Eide Bailly A re you or your clients risk averse and totally rational? Judy Vorndran, CPA , JD, is State and Local Tax Director for Eide Bailly in Denver. David Casper, CPA , is a SALT associate with the Fargo ofce of Eide Bailly, a top 25 CPA frm with 24 ofces in 11 states. www. EideBailly.com GROSS SALES USE TAXABLE Q1 2011 330,172 1,968,518 Q2 2011 335,540 1,324,887 Q3 2011 768,663 2,450,371 Q4 2011 1,904,788 2,724,815 Q1 2012 11,994,786 2,420,044 Q2 2012 14,760,647 0 Q3 2012 18,557,313 0 Q4 2012 15,797,641 0