Was Virginia's projected sales-and-use-tax audit sample valid when its error factor included deposit payments from outside the sample month?

Subject

Percentage of error in sample invalid

Plain-English summary

Virginia invalidated the sample's error percentage and ordered the audit recalculated. The Department sampled one month of the contractor's expense purchases but included deposit payments made in earlier periods as errors.

An audit sample is supposed to measure errors inside a representative selected population and period. Because the deposits were not part of that population, using them to compute the error factor made the projected result invalid.

The auditor had to remove the deposit payments, calculate a new error factor, adjust the assessment, and issue a revised audit and bill.

What this means for you

• Confirm that every sampled error belongs to the defined population and period.
• Trace deposits and later invoices to the correct transaction date.
• An audit-sample challenge should identify exactly how an item falls outside the population.
• Successful sample correction can reduce an assessment without eliminating all liability.

Citations and references

• The ruling's audit-sampling determination; no statute or regulation was cited in the body.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-45

Original ruling text

March 23, 2011

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This reply is in response to your letter in which you seek correction of the retail sales and use tax assessment issued to * (the "Taxpayer") for the period April 2002 through May 2005. I apologize for the Department's delay in responding to your inquiry.

FACTS

The Taxpayer is a general contractor and construction management firm. As a result of the Department's audit, the Taxpayer's expense purchases were sampled for one month. The errors found included deposit payments made in previous periods. The Taxpayer protests the inclusion in the sample of transactions from periods outside the sample month.

DETERMINATION

Sampling is an audit technique of significant value that is widely used in the public and private sector in all types of audits where a detailed audit would not prove beneficial to either the auditor or the client. When sampling techniques are understood and properly applied, the final result should be within a narrow percentage range of the actual amounts that would be determined by a detailed audit.

The purpose of the audit sample is to determine a factor for errors within a representative select period. For an item to be removed from the sample, a taxpayer must prove that the transaction was isolated or unusual in nature. Unusual Items invalidate the sample results as they do not reflect the true nature of the transactions reviewed for the sample period. Because the deposit payments were not part of the sample population, the inclusion of these transactions in the computation of the error factor renders the resulting percentage of error and the sample invalid. Therefore, the audit will be returned to the auditor for removal of the deposit payments from the sample. The error factor will be recalculated and the assessment adjusted. A revised audit and bill will be provided to the Taxpayer. The Taxpayer should pay the revised bill within 30 days of receipt to avoid the accrual of any additional interest charges.

If you have any questions about this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4326983073.M