Updated July 29, 2015
Wholesale Distributor Sales Tax Audit Chicago Illinois
Because of the cash that can be involved in the Wholesale / Distribution Industry of Chicago has always been a target for sales tax auditing.
As a top rated accountant in Chicago, we are constantly being referred into Sales Tax Audits in the Wholesale / Distribution Industry. The last numbers that I read showed that the State of Illinois was running at a 39.6% fiscal deficit. Naturally, with this sort of shortfall, the State is going to increase their auditing activities. Generally speaking, audits are a very profitable endeavor for most governmental agencies. Since Sales taxes go primarily, directly to Springfield, they are going to come after Sales Tax collecting businesses like yours.
Given the state of our economy, and no rational plan on the books to eliminate this deficit, we expect to see a continuation in this auditing activity.
Sales tax audits are very intimidating situations when you have a distribution business. You have to be able to prove on paper that the amount reported on your sales tax returns was the total amount of revenues received by your business over the period in question. Not just the sales taxable portion, but the total taxable and non-taxable sales of the business. You have to prove it. If you do not have all of the register receipts for the days, weeks, and months, or the invoices, receipts and sales journals which clearly and legibly prove that the amounts reported on your sales tax returns going back anywhere from three to six years are exactly correct, your in trouble.
Once again, its your job to prove that your sales tax returns are correct. If you cannot prove this, the state will generally assume that you are not reporting all of your income. Many customers and business owners over the years have said something like, “But I’m a cash business. How can they prove that I stole. There’s no records. If there are no records, then I have nothing to worry about.”
Nothing could be further from the truth.
What the state will do is called a cost of goods sold audit. It is very easy for an auditor to discover the names of your suppliers. They will then demand a number from your suppliers on the amount of money that you have paid them for resale-able goods, per year, over the one to six years that are being audited. The state will then establish a markup for those goods, usually high, and reconstruct your sales for the period. The assumption that the state generally makes is that everything purchased was resold at the exact, established mark up. They generally do not and cannot make a deduction for sales discounts, clearance items, dead inventory, damaged inventory, or theft. Once a sales figure has been reconstructed, it is simply compared to the sales tax returns that were filed. If there is a shortfall, then you are charged the tax, interest, and penalty.
Its not uncommon for sales tax audits in the distribution industry to generate well over $100,000 in additional taxes, interest and penalty for the state. If we didn’t handle the accounting in the first place and there’s a problem, then this sum or a substantially larger sum is quite common. Extreme situations can be referred to the Criminal Investigations Division where they have the option to seek jail time against the offender. It is important to note that the primary portions of Sales Tax Liabilities cannot be discharged in either corporate, partnership, or personal bankruptcy proceedings. The money collected on behalf of the state was never the offender’s in the first place. Your job is to collect and remit the State’s Sales Taxes to Springfield. It never belonged to you in the first place. As such, the primary tax collected cannot be discharged in a bankruptcy proceeding.
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Chris Amundson is the President of Accounting Solutions Ltd., a full service public accounting firm of Certified Public Accountants and Enrolled Agents handling the bookkeeping, accounting, tax preparation, and audit representation needs of Businesses, Estates, Trusts, and Upper Income Individuals.