Audited By Washington State Department of Revenue DOR | Sales Tax Audit | Business and Occupation B&O Tax Audit | Excise Tax Audit December 2, 2012Posted by Insight Law Firm in Income Tax, IRS, Tax.
Tags: B&O Tax Audit, DOR Audit, Sales Tax Audit, Use Tax Audit, Washington State Business Tax Audit, Washington State Department of Revenue Audit
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The Washington State Department of Revenue collects numerous taxes, including two which are likely to be paid by most businesses in the state: the business and occupation (B&O tax) and local sales tax.
The B&O tax is imposed on all parties doing business within the state. Even service providers, non-profit, and tax-exempt organizations are responsible for B&O taxes. These taxes are based on your total revenue – not your profit. This means state expects you to be reporting and paying taxes on your revenue regardless of whether the revenue is sufficient to cover all of your expenses. The rate of your B&O tax varies depending on the classification of your business activities. Thus, it’s important to not only report your revenue from business activities but also to classify it properly.
In addition to B&O tax, nearly all sellers of tangible goods are required to collect sales tax. There are some limited exceptions. For example, businesses making sales to out-of-state customers, conducting certain wholesale sales, or providing services may be exempt from collecting and remitting sales tax.
What To Expect
The scope and size of your audit can vary. At a minimum, your auditor will want to verify all of your income was reported and properly classified on your tax returns. Expect a request for all of your business bank account statements throughout the audit period. Your auditor will also want to substantiate the amounts of any deductions and/or exemptions you claimed. Don’t expect your auditor to “take your word” during the audit. Substantiation is almost always required, and your auditor may not be forthcoming as to what documentation may or may not be acceptable.
I’ve Never “Cheated” On My Taxes, So I’m Safe, Right?
Not necessarily. Many taxpayers may still see discrepancies arise during the audit phase. It’s important to act quickly when these discrepancies arise, so that you can correct any issues with the auditor before you are assessed a balance.
For example, are there any deposits in your bank account that are not revenue? Your auditor will probably take the position that all income passing through your bank account is revenue subject to B&O tax. If you disagree, it will be up to you to gather substantiation showing exactly why some deposits are revenue and some deposits aren’t revenue.
Or, are some of your activities exempt from sales tax? While most retail sales are subject to sales tax, there are some exceptions. If you conduct a mix of activities, the Department might presume the revenue of your business is subject to sales tax until you prove otherwise.
In addition to these issues, you may find the Department intends to assess large penalties against you and charge interest on the balance.
After The Audit Ends, Collection Begins.
Once your audit has concluded and balances have been assessed, the Department can (and often does) act fast to collect the balance. If you can’t pay the balance, the Department may decide to file a tax warrant against you in court. Once filed, this warrant enables the Department to seize money and other property to satisfy the liability. Worse yet, if the liability still remains unpaid, the Department can hold a hearing to revoke your tax registration number, leaving you unable to continue operating your business. Additionally, business owners can be held personally liable for some outstanding taxes. In those cases, the Department can (and likely will) continue to pursue the tax debt against individual business owners even after a business is forced to close down.
How Can An Attorney Help?
As the above suggests, timing is key. The best chance to address issues in your audit is early on in the audit. Misclassified revenue, unresolved disputes over the substantiation for your deduction, and related penalties can leave you with a large tax liability that can threaten your business and you personally.
After your tax is assessed, your appeal periods have passed, and your tax warrant has been issued, you have very limited options…
If you are being audited by the Washington State Department of Revenue for unpaid sales and/or B&O taxes, call Insight Law today for a confidential and free consultation. Remember: there are many more options at the beginning of the process than there are later.
Insight Law handles State of Washington Department of Revenue Audits in Snohomish County, King County, and Pierce County. For a free consultation, call (206) 397-4780 or visit the Tax Attorney links below to visit our firm website.
Author: Amanda R. Stach