Sam Brotman, JD, LLM, MBA August 23, 2014 4 min read

Board of Equalization Audits - Accounting Techniques

An audit made on a taxable measure basis generally places emphasis on the verification or accumulation of taxable differences as compared to an audit performed on a total sales and claimed deduction basis using individual lead schedules. Auditor will verify that all sources of revenue and deductions have been examined.

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Taxable measure basis may be preferable for BOE in a number of cases. For example, when records are available, but verification of total gross receipts and deductions is not necessary because taxable transactions are few in number and and the taxpayer has reported taxable measure only based on a listing of these transactions, capitalizing tax reimbursement, or by mark-up of taxable purchases.

Another circumstance is where the total gross reported is not an important factor in determining taxable measure. For example, this is the case with to service enterprises, contractors, public utilities, manufacturers and wholesalers (applicable for sales tax purposes).

Other cases include circumstances when direct audit of records will not yield results for BOE and indirect audit is necessary or where the taxpayer has prepared returns on a taxable sales basis and audit time can be conserved by conforming to this method. For example, where a grocer has used a method other than the “grocers method” to arrive at the taxable measure or the overall mark-up, as reflected by recorded gross sales, is unfavorable, the audit might be conducted in a more efficient manner through a verification of taxable sales.

BOE makes a comparison between recorded and reported total gross an important procedure, for it may disclose that sales, gross receipts, or fuel used, for one month or one department or branch of a business was not included in the reported totals. Through this comparison BOE may discover classes of transactions or use erroneously considered nontaxable by the taxpayer.

If the taxpayer has reported on the basis of lists or tapes of taxable items, the auditor will verify the correctness of these lists by:

  • Verifying that the lists include all items regarded as taxable by the taxpayer, and
  • Determining if there were any items subject to tax not so regarded by the taxpayer.

If the taxpayer reported on a basis of the tax actually charged to he customer and has credited that amount, the clerical accuracy of the posting to that account, as well as the computations made in converting the tax accrued to taxable measure by the following tests:

  • The computations of tax charged on customer’s invoices.
  • The posting of tax charges to the sales journal or other record where such charges are summarized.
  • The clerical accuracy of the footings and the posting of the tax charges to the tax accrual account.
  • The mathematics of the conversion of tax charged to taxable measure reported

For example, debits to the accrual account will be scrutinized by the BOE to determine that these charges represent proper deductions from the amount of tax accrued. In addition, the auditor will determine the effect on the accrual account of allowable bad debts, tax-paid purchases resold and other adjustments which legitimately reduce the taxpayer’s accrued tax liability. A reconciliation of the tax accrual account and the tax reported will be made by BOE auditor.

Consideration also will be given to sales and use taxes collected for and paid to other states. Deductions claimed or netted will be tested by the auditor to ensure they are allowable.

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Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law

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