New York – Audit Based on External Indices Upheld

SALT Report 1967 – A New York Administrative Law judge upheld the Division of Taxation’s use of alternative methods to estimate the sales and use tax liabilities of a Taxpayer because the Taxpayer failed to provide and keep adequate books and records.

The Division began an audit of the Taxpayer in February 2004. The Division sent several written requests for all books and records relating to the Taxpayer’s sales and use tax liability for the audit period.  In response to the requests, the Taxpayer produced three federal income tax returns, one New York corporation franchise tax return, sales and purchase invoices, a reconstructed general ledger, bank statements, and bank reconciliation schedules.  The Division found these records inadequate and made more than 15 oral requests for additional records.

The Taxpayer did not comply with the requests and as a result, the Division was forced to rely on invoices and bank statements to identify the Taxpayer’s customers.  Once the customers were identified, the Division sent out third-party confirmation letters to determine the Taxpayer’s sales.  What became apparent from the customer’s responses was that the Taxpayer was underreporting its New York sales.  The Division also found that there were discrepancies between the sales invoices, bank statements, and the federal returns.

Further, because the Taxpayer had not filed any sales and use tax returns until well after the audit period, the Division determined that a detailed audit of the Taxpayer’s books and records was impossible.  This forced them to rely on an estimated audit methodology using the records generated or produced by the Taxpayer, its suppliers, and customers.  The Taxpayer filed a request for review regarding the Division’s audit methods and assessments.

Upon review of the case, the ALJ determined that because the Taxpayer did not file sales and use tax returns, maintained inadequate records, and provided bank statements that contradicted the total sales, the Division’s audit methodology was appropriate and reasonably calculated the Taxpayer’s tax liabilities.  Therefore, the ALJ denied the Taxpayer’s petition for review and upheld the Division’s judgment of sales tax as well as the imposition of penalties for fraud.

For Further Information:

New York Administrative Law Judge Unit – DTA No. 824207