Are you currently involved in an audit? A little worried about the assessments that follow, and the penalties that could come up? That’s understandable – audits are a scary thing. Or have you received an unexpected bill or notice of a lien on your property? Let us help you analyze the reasons and resolve these matters.

So, what are sales tax penalties and assessments? We’ll unpack these matters here:

  1. Sales Tax Penalties
    • Fines and charges imposed for sales tax non-compliance, crucial for compliance and risk management.
  2. Common Types of Sales Tax Penalties
    • Late filing and underpayment penalties incurred for various non-compliance scenarios.
  3. Understanding Tax Assessments
    • Official determination of tax owed by a taxpayer, distinct from punitive charges. The difference between penalties and assessments.
  4. Strategies for Disputing Tax Penalties
    • Dispute resolution involves reviewing notices, gathering documentation, and exploring negotiation or appeals.

Can’t find what you’re looking for? Let’s talk. Reach out to us at info@milesconsultinggroup.com.

1. What Are Sales Tax Penalties?

Sales tax penalties are fines and charges imposed by state tax authorities due to non-compliance, by businesses, with sales tax regulations. It is crucial for organizations to comprehend and effectively manage these penalties to ensure future compliance and minimize potential risks to their operations.

2. Common Types of Sales Tax Penalties

Late Filing Penalties

  1. When They Apply: As the name suggests, late filing penalties are incurred when businesses fail to submit their sales tax returns by the specified deadline. This deadline is  set by the tax authority and varies depending on the jurisdiction. Failure to meet this deadline constitutes non-compliance with sales tax regulations and may trigger penalties. Note that most states require monthly or quarterly filings for sales tax returns. Typically, a return is due between the 15th and 31st day of the next month. If not filed timely, or for the correct amount, penalties can apply.
  2. Calculation and Rates: The calculation of late filing penalties often involves a percentage-based approach applied to the unpaid tax amount. The specific rate varies across jurisdictions and may also depend on factors such as the duration of the delay. Typically, late filing penalties are in the range of 10-15%. But some states have a flat late fee, like Texas which charges $50 for a late return, even if no tax is due.  Washington can charge penalties of 39% on some delinquent filings.

Underpayment Penalties

  1. Causes of Underpayment Penalties: Underpayment penalties occur when businesses do not remit the full amount of sales tax owed to the tax authority. Several factors can contribute to underpayment, including calculation errors, failure to accurately track taxable sales, or misunderstanding of tax regulations. In some cases, businesses may unintentionally underpay due to changes in tax rates or exemptions. Sometimes we also see intentional underpayments when a company doesn’t have the funds available to pay on time. (The most “dangerous” scenario is where sales taxes have been collected, but not remitted.  Sales taxes are, like payroll taxes, fiduciary in nature, and states take huge exception to taxpayers collecting and not remitting them!)
  2. How They Are Determined: Underpayment penalties are typically determined based on the shortfall between the actual amount of sales tax owed and the amount paid by the business. The penalty calculation generally involves applying a predetermined rate to the underpaid amount for each period of non-compliance. Additionally, some jurisdictions may consider factors such as the taxpayer’s compliance history or the presence of mitigating circumstances when determining the severity of underpayment penalties.

3. Understanding Tax Assessments

A tax assessment refers to the formal determination of the amount of tax owed by a taxpayer, conducted by tax authorities based on available information. It is essentially the calculation and establishment of the taxpayer’s liability to the government for taxes owed. Tax assessments are crucial steps in the tax compliance process, providing a clear picture of the taxpayer’s financial obligation to the authorities. Assessments are often generated as a result of an audit or other examination. However, we also see states levy what is called a jeopardy assessment. This happens when a state has sent several notices ignored by taxpayers and finally sends a bill – based on the state’s estimate of liability. In dealing with clients who have indeed been ignoring previous notices, we find that the jeopardy assessment does seem to get their attention! As an aside, we always recommend answering the notice before getting the jeopardy assessment. The next step is often a lien against a personal bank account.

Penalties and Assessments

Penalties and assessments are two different parts of an audit. Here’s a breakdown:

  1. Penalties: Penalties are punitive charges imposed by tax authorities as consequences for non-compliance with tax regulations. They are separate from the actual tax liability and serve as deterrents against behaviors such as late filing, underpayment, or failure to report taxes. Penalties are applied in addition to any taxes owed and are meant to encourage adherence to tax laws.
  2. Assessments: Assessments, on the other hand, represent the state’s  determination of the taxpayer’s tax liability. They are based on various factors such as income, sales records, deductions, and credits. Assessments provide a quantified amount of taxes owed by the taxpayer and serve as the basis for tax collection efforts by the authorities. Unlike penalties, assessments directly reflect the taxpayer’s financial obligation to the government and are integral to the tax compliance process.  Note that assessments can be appealed at various levels of the audit process. See our recent article on Preparing for a Sales Tax Audit: Tips and Best Practices for Middle-Market Business Owner, for a little more on this.

4. Strategies for Disputing Tax Penalties

When a state taxing authority demands you pay up, there is hope to be found in this systematic response to penalties. We’ll help you complete these steps:

Reviewing the penalty notice:

  1. Thoroughly examine the penalty notice provided by the tax authorities to understand the basis of the penalty and the specific regulations allegedly violated.
  2. Identify any discrepancies or errors in the penalty assessment, such as incorrect calculation or misinterpretation of tax laws. Yes, states make mistakes too!

Gathering supporting documentation:

  1. Collect relevant documents and records to substantiate your position, including sales records, financial statements, invoices, and correspondence with tax authorities.
  2. Ensure that the documentation clearly demonstrates compliance with tax regulations or provides explanations for any discrepancies.

Effective communication with tax authorities:

  1. Maintain open and constructive communication with tax authorities to address any misunderstandings or discrepancies regarding the penalty assessment. It’s key to respond as soon as possible.
  2. Provide clear and concise explanations backed by evidence to support your case and facilitate resolution.

Exploring dispute resolution options:

  1. Negotiation: Attempt to negotiate with tax authorities to reach a mutually acceptable resolution, such as reducing the penalty amount or agreeing on a payment plan.
  2. Formal Appeals: If negotiation proves unsuccessful, consider filing a formal appeal with the appropriate tax appeals board or administrative tribunal. Miles can help.
  3. Litigation as a Last Resort: As a last resort, pursue litigation through the judicial system to challenge the penalty assessment in court. This option should be considered only after exhausting all other dispute resolution avenues.  Also, litigation is very expensive and doesn’t guarantee victory either. Try to resolve issues before contemplating litigation.

The best strategy is to not go it alone. Come to Miles – we assist clients with state sales tax audits, notices, assessments, jeopardy assessments, and penalties that may result.  If you have assessments and penalties tied to your business’s tax affairs, we can help you understand them, and if need be, dispute them.

Did you get that audit notice this month? Not quite sure how to handle it? Book a consultation with Miles Consulting, drop us a line, or send us an email at info@milesconsultinggroup.com.