The following provides an overview of the procedures that will be conducted for restaurants selected for audit in 2022:
The department will make advanced purchases prior to conducting an audit. This enables the department to streamline the audit process and efficiently verify records for compliant taxpayers or identify potential underreporting including sales suppression.
- The auditor will select a month in the current year to verify recordkeeping requirements and review the following with the taxpayer:
- What type of records are maintained?
- How gross and taxable sales, sales tax collected are reported on the sales and use tax returns?
- How are wages and withholding are reported on the employer withholding return?
- How are income and expenses recorded for income tax returns?
- The auditor will examine daily/monthly sales reports, bank statements, monthly merchant credit card statements and 3rd party delivery statements to verify the accuracy and completeness of the sales and use tax return for selected the month.
- Transactional sales records will be examined to verify:
- The department's purchases were properly recorded in the daily/monthly sales reports.
- Any unusual voided, cancelled, and missing sales.
- All sales tax collected was recorded and reported on the sales and use tax return.
- Exemption certificates will be examined for customers claiming an exemption from sales tax.
- If the taxpayer meets the requirements of the limited scope audit, the department will only assess invalid exemption certificates or any nontaxed sales subject to sales tax that were identified in the selected month.
- Payable invoices for the selected month will be examined to verify that sales or use tax was paid on all taxable items. If the taxpayer meets the requirement of the limited scope audit, the department will only assess errors identified in the selected month.
- The business's payroll will be examined for the most recently completed quarter to verify that all wages were properly recorded and reported, all tax withheld was reported, and the tax was properly determined.
The review will be used by the department to establish a baseline for the business's activities that will be tracked to verify that the business remains compliant in the future.
If the examination reveals the requirements for a limited-scope audit were not met, this will result in an audit being performed for the standard audit period.
If the examination of the selected month identifies the under-reporting of sales tax, all sales summary records for the standard audit period will be requested and examined to verify all sales tax charged and collected was reported. If complete and accurate summary records are not available, the department will estimate the tax due for the standard audit period.
If the department's purchases are missing, reindexed, or altered or there are unexplained voids, cancellations or missing receipts in the selected month, the department will estimate the tax due for the standard audit period using a ratio determined by the department based on reported information from similar restaurants. The ratio is commonly referred to as an "industry average" and is determined by comparing credit card totals to gross sales reported on the sales and use tax returns for restaurants of a comparable size in similar counties in Pennsylvania. Any willful attempt to evade the tax that is due by suppressing sales will also be referred to the Office of Criminal Tax Investigation for potential criminal review.
If the requirements of the limited scope audit are not met, any nontaxed sales, invalid exemption certificates or purchase errors identified in the purchase month will be projected back to January 1, 2019 using an error rate that will be explained on a form presented during the audit.
Other procedures may be required based on the issues identified during the review. These procedures will be discussed with the taxpayer and additional documentation may be requested.
When the audit work is completed, a meeting will be held between the taxpayer and the auditor. During the meeting, the auditor will explain the results of the audit, provide records showing the work completed, and review the procedures for filing an appeal if necessary.
When the audit is complete, the taxpayer will be provided with an audit report that will contain a written narrative of the procedures performed, any issues identified, and a discussion of how the issues were addressed. The audit report will also contain the audit schedules that detail any audit findings. If the audit results in a tax deficiency, a Notice of Assessment will be sent to the taxpayer that summarizes the additional tax due and applicable interest and penalty and provide the date that an appeal must be filed by.