Ever Wonder How a Business is Selected for a Sales Tax Audit?

I am frequently asked how a business is selected for a sales tax audit. I generally say it could be the result of an audit of one of the business’s clients where the auditor sees no sales tax on an invoice. Or it could be related to a particular industry that is being targeted. Or perhaps an unlucky winner of the “audit lottery”. Here’s a unique situation that I stumbled across when reviewing the taxability of telecommunications services in Illinois for a client.

The Illinois Department of Revenue received a “complaint” from a citizen that a business was improperly charging sales tax and 911 fees on a prepaid calling plan. As part of the citizen’s complaint, he cites a different store where he has been recharging his phone for years that doesn’t charge the same tax rate and also doesn’t charge the 911 fees.

The citizen is hoping to get the one business arrested for charging taxes and fees erroneously and commends the other business who is not charging the same taxes and fees. However, the reality is that the business charging the higher taxes and fees is correct and the other business is undercharging sales tax and not collecting 911 fees at all.

In the informational letter there’s no reference about this triggering an audit, but I would be certain that the business that was undercharging taxes and fees received a phone call, letter, or audit request of some kind. Here’s the letter:

“I'm writing this letter to report fraud. I went to the police department and they said they couldn't help me and I had to write to you. There is a business in CITY1 that is charging customers extra taxes and claiming the state of Illinois makes them. I have been recharging my PHONE at STORE1 in CITY2 for 3 years and they have always charged me $2.00 sales tax each month. My bill is $50.00 per month and I always pay $52.00 total.

I recently moved to CITY1 and went to the STORE2 in CITY1. I was shocked when they told me my payment would be $55.13. I explained to them that my payment is always $52.00 and asked to speak to the owner. He told me the state of Illinois requires him to collect sales tax and 911 tax. I told him that the sales tax has always been $2.00. He said that I was wrong and the sales tax is 8.75 percent and the 911 tax is 1.5 percent. He was very rude and I could tell he was lying because he wouldn't listen to what I was telling him. I never had to pay all this tax before. The sales tax is $2.00 for a recharge.

The next week I went to STORE1 IN CITY2 and spoke with the owner there. I told him that the STORE2 was charging me $55.13 for my recharge. He told me they had a lot of complaints about the STORE2 over charging customers and claiming it is sales tax. The owner of STORE1 told me he has been in business for 20 years and the sales tax was always $2.00 for a recharge. He laughed when I told him the STORE2 was charging 911 tax. He said 911 is free and there is no such thing as 911 tax. I cant [sic] believe the STORE2 in CITY1 can stay in business and charge customers fake taxes.

Now I have to waste all my gas to drive down to CITY2 and go to STORE1 to get my PHONE recharged because the STORE2 is ripping people off. I would like you to go and investigate the STORE2 and arrest the owner for fraud. People are having a hard time paying bills and shouldn't have to pay extra in fraudulent charges so the owner in CITY1 can make extra money. I hope he goes to jail for fraud.”

I can picture this business owner receiving an inquiry from the state and getting audited. In the back of his mind, he’s wondering…..”How was I identified for an audit?” The lesson is that you may never know what triggered an audit but you should prepare in the event there is one. Check out our latest white paper on Managing Sales Tax Audits for some tips.