Disproving Audit Assumptions
As a general rule, the auditor's assumptions are considered to be correct and it is up to the taxpayer to rebut the assumptions -- that is, prove that the auditor's assumptions are not correct. If you can knock out the assumptions, you may be able to knock out the assessment.
Taxpayers have said, and I cannot disagree, that this approach means that a taxpayers is considered to be "guilty" of making a sales tax mistake and must prove his/her innocence.
During a typical audit, the tax auditor interviews the taxpayer about his/her business operations and various factors that influence. The auditor should also review evidence in addition to sales tax journals, sales receipts and other tax documents. In most cases, the auditor understands the information that is provided. If the auditor exercises sound judgment, the information provided by the taxpayer to the auditor will be considered to be prima facie evidence. Assumptions based on that information may or may not reasonable in the circumstances. In any event, these assumptions will form the basis for most audit assessments. This begs the question - What if the auditor's assumptions are wrong?
Once the auditor makes a judgment call about the assumptions used in making an assessment, the onus (burden) shifts onto the taxpayer to prove the auditor’s assumptions are incorrect. The taxpayer must bring documentation to this exercise. Mere verbal bald statements will not suffice. The taxpayer may generate new documents (supported by existing documents/evidence) to explain his/her alternative position --- but their subjective approach (it is always subjective and self-serving) will be scrutinized. The taxpayer must be reasonable and methodical in disproving an auditor's assumptions. It can be done and is often done.
Sometimes it is possible to show that the auditor failed to gather sufficient information to make “reasonable” assumptions and, therefore, the auditor's assumptions are arbitrary and cannot be trusted. The key to refuting the auditor’s assumptions is evidence, evidence and evidence. The correct approach must be reasonable, transparent, and as subjective as possible. If you do not understand what constitute good evidence, an experienced sales tax practitioner can be a useful guide. Quite frankly, if you cannot sell an experienced sales tax practitioner about the merits of your case, you may not be able to win an objection or appeal. A fresh set of eyes who want to help may be just what you need.
Cyndee Todgham Cherniak is counsel to and in affiliation with the International Trade Law and the Tax Law (Commodity Tax
