NEW JERSEY TAX AUDITS — WHAT TO EXPECT By NEIL BECOURTNEY, CPA
COHNREZNICK LLP
The New Jersey Division of Taxation conducts its fair share of tax audits. Its approaches to auditing businesses and individuals are quite different.
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BUSINESS AUDITS Businesses often face a simultaneous audit of the “big three” taxes: corporation business tax (CBT), gross income tax withholding (GITW) and sales and use tax (SUT). This article will not address any of the many other taxes administered by the Division of Taxation, such as cigarette tax, inheritance tax, litter control fee and motor fuels tax, to name a few. Typically, one auditor will conduct an audit of all three of the big three taxes (other states have separate audit functions for corporate tax versus sales and use tax). After the taxpayer — or their outside CPA representative(s) that has executed Form M-5008-R, Appointment of Taxpayer Representative — has responded to the examination letter announcing the selection of the taxpayer for audit, a pre-audit conference is usually scheduled to kick off the audit. At the pre-audit conference, the auditor first announces which taxes and tax periods are going to be examined. For CBT, it is typically the past four tax years, for GITW the past three years and for SUT the past 16 quarters (four years) if filing, which grows to 28 quarters (seven years) if a non-filer, all coinciding with the applicable statutes of limitations. The auditor will look to complete a multipage questionnaire, gaining knowledge of the business operations while completing it. A tour of the facility often takes place. An initial Information Document Request is presented, and the auditor will seek to schedule the official start of the audit within a few weeks. GITW usually results in few issues, especially if the taxpayer is current with its GIT remittances and filings. CBT issues
JANUARY/FEBRUARY 2021 | NEW JERSEY CPA
can be varied. For smaller taxpayers that receive some of their revenue in cash, an auditor will often search for unreported income by totaling bank account deposits and comparing the sum to the gross revenue reported on the CBT return, as well as cross-checking the total revenue reported on the SUT returns. Support for the allocation factor, which is now single-factor receipts, might be sought if significant. And modifications from federal taxable income may be questioned, including the addback of state and local income taxes and decoupling from federal depreciation. SUT is frequently where the auditor focuses much of their time. For use tax, a sample period, often the most recent calendar year, is chosen for review of expense invoices. In addition, all fixed-asset invoices for the audit period are looked at since fixed-asset purchases do not lend themselves to extrapolation as is the case with recurring expense items. If one can convince the auditor that an expense invoice is truly non-recurring — for example, the taxpayer’s area code changed or the taxpayer moved, requiring a large order of new business cards, envelopes, labels, stationery, etc. — if sales tax was not charged, the auditor will likely not extrapolate that item in calculating a use tax assessment. Credit card statements with no supporting invoices often are a problem as there is no proof that the vendors charged sales tax. For sales tax in a situation where the business is required to charge sales tax, the auditor is going to need to be provided with exemption certificates where sales tax was not charged, aside from shipments out of state, which are automatically exempt from New Jersey sales
