Manufacturer: Importance of Sound Representation at Beginning of Audit
A Colorado company, a cutting-edge technologies manufacturer for fuel, combustion, fluid, actuation and electronic control systems for the aerospace and energy markets, had just completed a sales & use tax audit with the City of Fort Collins, CO – a home-rule city within the State that enacts and administers its own sales & use tax laws, when it received an audit notice from the Colorado Department of Revenue for a state-level sales & use tax audit. The company had initially filed a refund claim through another consulting firm, which they felt triggered the State audit. According to the company’s State Tax Manager, the consulting firm did not seem to be managing the audit process very well.
Altus Group was engaged to assist the company in the final negotiations of the Colorado State sales and use tax audit, as well as, appeal the audit assessment of the City of Fort Collins through the review of the jurisdiction’s sampling/projection methodologies, as well as, to assist with taxability determinations rebuttals for both audits. We were also engaged to review and help facilitate the approval of a refund claim filed on their behalf by another consulting firm.
Our review of the Colorado preliminary workpapers discovered several transactions that qualified for exemptions in the State which had not been challenged by the prior consultant. Additionally, on the company’s behalf, we contacted vendors for additional purchase documentation for missing transactions as well as transactions where the auditor noted that he had not received sufficient information. Our efforts to rebut the preliminary findings resulted in a $39K reduction in the tax liability.
Before the assessment was issued, we proposed challenging the findings further under an appeal specifically to argue for a waiver of both the audit penalties and the interest imposed by the State. Once the assessment was issued, the client agreed to the appeal. Noting the ambiguities in Colorado law that led to part of the assessment, ambiguities which were noted in prior rulings, and the company’s reliance on its prior consultants which led to a portion of the refund, we obtained full penalty relief along with a partial interest reduction, totaling an additional $98K in savings for the client. Concurrent with the appeal, we also reviewed the prior consultant’s refund claim and obtained additional documentation to support the claimed amounts. Unfortunately, the original claim contained errors that we could not overcome. However, of the original $80K refund request, we were able to substantiate over $50K, which was applied against the net audit liability.
Unfortunately, our efforts to appeal the Fort Collins audit assessment were not as successful. During our review, we discovered that the client agreed to a sampling methodology that focused on a period after the company implemented a new ERP. Unfortunately, the implementation did not include the use tax module that the client used in its prior ERP (a home-grown solution). The error was not detected for over a year. Unfortunately, this information was not presented to the auditor and the sampling methodology not adjusted before the company signed the sampling agreement. Furthermore, due to the lapse in time, the company could no longer obtain detailed records from its prior ERP. Therefore, we could not present the full audit population for reconsideration at the appeal. With the signed sampling agreement and the lack of full population data, we were unable to successfully challenge the sample projection. We were, however, able to obtain a full waiver of the $25K penalty.
While handling an appeal with internal resources may be acceptable with sufficient bandwidth, understanding the intrinsic pitfalls that may arise – such as sampling errors and use tax omissions – can prove critical in avoiding overstated liabilities. When engaged at the beginning of an audit, we can provide representation anywhere from full representation before the jurisdiction to back-office review of transactions and governmental forms and agreements to ensure that our clients aren’t locked into potentially adverse findings without understanding the risks. Unfortunately, without sound advice, companies run the risk of receiving inflated tax bills with no legal recourse.
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