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Sampling has been used in sales and use tax audits to project tax liability for a very long time. Prior to the introduction of statistical sampling, measuring the accuracy of block sampling was difficult at best. The risks associated with block sampling were often overlooked by both the taxing jurisdiction and the taxpayer because the benefit of not looking at all the records outweighed any potential sampling risks.
To address the potential problems with block sampling, many states have adopted statistical sampling as the norm to project audit liability for sales and use tax purposes. The benefits of statistical sampling are numerous including:
the ability to measure the accuracy of the results;
the ability to increase the sample size to reach desired accuracy;
gains in efficiency – it is not uncommon to review in excess of 80% of the dollars while reviewing less than 2% of the records; and
comfort level of being representative since items are randomly selected from the entire period or business cycle thus eliminating seasonal or cyclical concerns.
In addition to projecting liability in a sales and use tax audit, statistical sampling has been used in completing voluntary disclosures and implementing effective compliance agreements.
Along with the benefits, there are inherent risks and issues when using statistical sampling including:
Should you use AP or GL activity?
Are the electronic records adequate for a statistical sample?
How much data do you provide to the taxing jurisdiction?
What scope of accounts should be included in the audit or voluntary disclosure?
How many strata should be utilized?
How do you address credit activity or reclassifications?
Will overpayments be allowed as offsets?
At what level do you set the comprehensive review?
What is an adequate sample size?
Are the results accurate?
How do you account for missing documentation?
The answers to these questions can be different based on the taxing jurisdiction involved. Understanding the ins and outs of statistical sampling can help you manage these inherent risks. Our ZHF professionals have the necessary experience to help you navigate statistical sampling when it is used in audits, voluntary disclosures and effective compliance agreements. Our professionals also have the necessary audit experience to manage block sampling (if statistical sampling is not right for you) to help minimize the impact of block sampling risks.
If you would like to discuss sampling (statistical or block), please contact John Trippier, Brad Tomlinson or any Zaino Hall & Farrin professional.