PA Department of Revenue
Audits versus Desk Reviews
Arbitrary & Capricious? Business Owners Be Aware!
Is “tomato” pronounced “tomahto” (the British pronunciation) or “tomayto” (the American pronunciation)? Does anybody care? According to the DailyWritingTips.com, because of the song, tomayto, tomahto, the expression is often used to express an “unimportant difference.”
However, when it comes to the PA Department of Revenue (DOR), there’s a MAJOR difference between it conducting an audit and a desk review. The PA DOR alternatively refers to its underreporting program as a “review”, “desk review”, and “desk audit review”. On June 5, the Allentown Morning Call published an article about Business Tax Cheats Zapped for $6 Million of PA Revenue Investigators. The PA DOR is currently focusing its audit examinations on taxpayers who underpay their sales tax and income tax by using zappers. Zappers are software programs that delete selected sales from the business’s point of sales (POS) operating system. Some of the sophisticated zappers tell the business owner how many dollars in sales were zapped so the owner can pocket those sales, and some zappers adjust inventory numbers to support the under-reported sales. The use of zappers is FRAUD and the PA DOR is justified assessing and prosecuting tax cheats. Taxpayers who are audited by the PA DOR are subject to normal examination procedures and appeal rights.
The issue is whether assessments stemming from reviews are fair. The current reviews being conducted are of a Schedule C business’s gross receipts (to determine if the proper amount of income tax is being paid) and total sales reported per the business’s sales tax filings (to determine if the proper amount of sales tax is being remitted). The DOR has stated that it uses analytics to justify its findings of underreported sales. Due to the reporting of credit card sales by banks (IRS Form 1099-K), the DOR may extrapolate what the total sales are based on the credit card sales, the difference being unreported cash sales. The DOR also uses sales information gleamed from other taxpayers. So if you have a business in Western PA that experiences 10% cash sales, the DOR conceivably may find that your cash sales are really 40% of total sales based on (1) a similar business in the Philadelphia area (whose demographics are entirely different than yours) or (2) using analytics based on an unrealistic or flawed statistics. That’s comparing apples to oranges and not comparing tomaytos to tomahtos.
During these reviews, the DOR is requesting that the taxpayer prove that the underreported sales do not exist. This is logically fallacious! The DOR is asking the taxpayer to prove the non-existence of sales in place of providing adequate evidence for the existence of those unreported sales. The burden of proof should be on the DOR, the party making the assertion. Shifting the burden of proof is the fallacy of putting the burden of proof on the person who denies the assertion being made. The source of the fallacy is the assumption that something is true unless proven otherwise. So if the taxpayer is unable to convince the DOR (or another PA agency) that there were no unreported sales, PA assesses the taxpayer.
How does a taxpayer appeal the findings of a desk review? According to the DOR, when a review is performed, the taxpayer does not have the same examination procedure rights that are provided to a taxpayer who is audited. Defending against the review findings is difficult since [Read more…] about PA Department of Revenue – Audits versus Desk Reviews