Bars and restaurants in New York could find themselves the target of an audit from the Department of Taxation and Finance for several reasons, including random selection. However, a restaurant’s cash-based sales and less than meticulous record-keeping can further complicate things and result in the auditor’s need to conduct a New York sales tax field audit. Here, we explain how a field audit works in New York. We also discuss field audit methodologies auditors will use to estimate your sales tax liability when necessary, a practice that could lead to overassessment for unprepared and unrepresented restaurant and bar owners in New York.
What Is a New York Sales Tax Field Audit?
Unlike a desk audit, a New York sales tax field audit is a more detailed review of your restaurant’s financials that involves a visit from the field auditor to your business’s physical location. The auditor will want to review available records during the audit, such as:
- Federal income tax returns
- Bank statements
- Sale ledgers
- Inventory logs
- Purchase receipts of materials and equipment
A key issue for restaurant business owners is knowing what and what not to provide when sharing your sensitive business records with a New York auditor. While cooperation with the auditor is generally helpful, remember that just because an auditor asks for a document, does not mean they have a right to it. Having a professional sales tax consultant available to manage record requests could provide a buffer during the audit process to avoid unnecessary disclosure of business information.
A field audit also presents an opportunity for an auditor to make observations about your business that the New York Department of Taxation and Finance could use to evaluate the legitimacy of your sales tax reporting. In the context of a restaurant or bar, the auditor may take note of items like:
- Stated hours of operation
- Menus and pricing
- Food storage
- Seating arrangements
- Payment systems
- Related sources of revenue within the restaurant or bar that could be taxable (e.g., vending machines, arcade games, pool halls, jukeboxes, and other entertainment)
The Different Types of New York Field Audit Methods
After a review of your financials, the New York auditor may find you have insufficient records to properly verify your taxable sales. As an alternative, the auditor may use one or more indirect methods for determining your New York sales tax liability. These testing methods involve the use of statistics and assumptions to generate an estimate of your taxable sales. The main methods available to New York sales tax auditors are:
- The test period method: The auditor reviews your past transactions over a period within the audit’s scope and uses that data to calculate taxable sales from missing periods (e.g., you are missing sales data from August 2020 but have available information from August 2021 and August 2022).
- The statistical sampling method: The auditor creates simulations of projected sales over a period through the selection of items in a population. Sometimes, the sampling is random or could involve other methods, including stratified, systematic, or clustered sampling.
- Observation Testing: The field auditor observes and documents your sales that occur over one or more periods to estimate taxable sales (e.g., your bar’s business on a Friday from 5 p.m. to 10 p.m.).
Specific Field Audit Sampling Method Issues for New York Restaurants and Bars
The problem with sampling and testing methods is they can never truly reflect your past sales because they rely on assumptions made from small and incomplete sets of data. Restaurant and bar owners should be careful when accepting or managing the results from New York field audit testing, sampling, or observation methodologies.
Consider the following factors that could result in a skewed field audit method result because of items not accurately reflected in the method being used:
- Changes in your menu or pricing
- Events that result in abnormalities with your restaurant’s operation during the testing period (e.g., unexpected closure or unusually busy traffic because of promotions or public activity like a concert or sporting event)
- Scheduled observation testing that happens during your busiest sales period or season (e.g., weekends and evenings)
When Your New York Restaurant Could Benefit from Sales Tax Field Audit Representation
Before executing a sampling or testing, the field auditor will likely seek your written agreement to the specific terms of the proposed method. Most restaurants and bar owners could benefit from having a sales tax representative experienced in New York audit defense review those terms before signing an agreement. The sales tax representative reviews the auditor’s proposal for issues that could cause gross overreporting of sales tax liability and works with the auditor to create a fairer representation of taxable sales by refining the methodology’s terms. If you or your client’s restaurant and bar received notice of an upcoming field audit or are unhappy with the results of an audit report, consider a consultation with our office.
Schedule your free consultation for help with a New York sales tax field audit today.