If you sell goods online, you are probably aware of the “sales tax earthquake” that rumbled forth from the highest court last week in Washington.
In South Dakota v. Wayfair Inc., the court ruled that states and municipalities could now require online retailers to charge customers sales tax, no matter where that retailer was itself domiciled.
It is yet to be seen exactly what ripple effects of this decision we will see, but it is generally seen as a “win” for traditional Gladstone brick and mortar retailers (who were competing against “tax-free” online options), a loss for internet e-commerce businesses … and a HUGE win for sales tax compliance software makers.
Essentially, the Court ruled that in the 20+ years since the existing legal precedent was established (allowing online sellers to usually avoid charging sales tax), the world has shifted enough that new standards should be applied.
Now, my view — as with almost all things political and regulatory — is “wait and see”. Again, the ripple effects are unclear, and until actual guidance is established by various states and municipalities, and enforcement measures made clear, the merits and drawbacks of this decision are not yet definitive.
That said, if you sell goods online, it is probably a good idea to ensure that you begin investigating a good sales tax compliance solution. Each state and municipality will establish their own revenue “threshold” for when purchases from within their bounds will incur sales tax, and each will be scrambling to do so in the next few months.
But this much is clear: your Gladstone business WILL get into hot water if you sell online and don’t begin to plan for sales tax collection. Fortunately, there will be (and already are) effective, relatively-inexpensive softwares to make this easier for you.
And we’ll see what kind of guidance comes forth.
As always, we are on your side.
I do wonder if this decision will create a much larger population of businesses who might be subjected to enforcement audits. Sales tax issues are just one of many “juicy” problems that the IRS Enforcement Division likes to take a good hard look at.
So I thought I’d explain today, what really happens in the audit process…
IRS Audit Process – What Gladstone Businesses Should Know
Any man can win when things go his way, it’s the man who overcomes adversity that is the true champion. – Jock Ewing
Before the IRS can finalize an audit, they are required by law to give you rights to dispute it in federal Tax Court and with an IRS appeals officer.
Before any audit becomes final, the IRS must notify you of your rights to dispute it. This letter is called a “Notice of Deficiency”. This notice gives you the right to take the IRS audit to Tax Court and have an independent judge review it. You will have 90 days to file a petition to Tax Court after the IRS sends you the notice of deficiency.
And even if those 90 days have already expired, you may still qualify for “audit reconsideration” instead.
Now, before the IRS goes to trial, they typically send your case to an IRS Appeals Officer for settlement. The IRS Appeals Officer’s job is to settle the case based on how a judge might rule, not on how an auditor might rule. As a result, these IRS Appeals Officers have flexibility not always shown by auditors. Most IRS examination cases settle this way, with results not available when only going through the typical audit channels.
You see, Tax Court judges and IRS Appeals Officers perceive cases differently from IRS auditors. If you feel that you are being unnecessarily or over-aggressively audited (and have evidence or can make effective testimony thereof), you can summarize to the Appeals Officer what you will tell the judge. If the Appeals Officer — in preparation for trial — can see that their auditor was being unreasonable, they can often make different kinds of attempts to settle the case in anticipation of how an independent judge might rule.
The auditor often has a small view of your case and does not consider how outsiders would decide it; that changes when the final decision is not in the hands of the IRS, but in that of the Tax Court.
The tax law specifically places the burden of proof on you to back up what is on your tax return.
Proving the correctness to an auditor is not easy. The IRS wins over 80% of all audits, often because people are not able to properly verify data on their tax returns. Recordkeeping is the downfall of most audit victims.
That said, here is what an IRS Auditor CAN do…
Congress gives the IRS broad, but not unlimited powers, in auditing. The IRS, in the course of an audit, may:
1. Inspect your business premises,
2. View your home office,
3. Scrutinize your records, and
4. Summon records held by others.
Auditors look for personal expenses disguised as business deductions. With small businesses, the IRS Auditor is ever on the lookout for people who bury personal expenses in their business records. Cars, travel and entertainment are often targets. In these areas particularly, it quite literally pays to keep good records.
In all of this, and other instances … well, it’s helpful to have a pro on your side.
Feel very free to forward this article to a Gladstone business associate or client you know who could benefit from our assistance — or simply send them our way? While these particular articles usually relate to business strategy, as you know, we specialize in tax preparation and planning for Gladstone families and business owners.
Strategic Tax Partner