NY Sales Tax Audit: What Happens After You Respond

Cooperating More Is Not the Same as Cooperating Better

Responding to an auditor increases the likelihood of receiving additional requests for information. Responding quickly, on the other hand, increases the probability of receiving requests for information relating to a wider scope of the organization. Think about it, if the auditor has a finite time to do the audit, and you respond immediately, it just invites more rounds of questions and keeps your audit top of mind for the state.

One of the unintended consequences of business owners providing timely and thorough responses to requests for information is that it expands the auditor's area of interest and results in the business owner receiving additional requests for information and generally increases exposure.

Speed does not buy goodwill, it buys more questions and sales tax due.

Why Faster Responses Invite More Questions

The New York State Department of Taxation and Finance (DTF) audit policies permit the business owner to request a reasonable extension of time to respond to information requests, and in my experience DTF usually grants these requests. It is to the business owner's benefit to exercise this right to request an extension. During this extension, the business owner should review the information to ensure that they are not providing extraneous information to the auditor.

I have witnessed first hand that the more and quicker you respond to an auditor, the broader the scope of the next set of requests. There are many cases where a business owner received an IDR and responded within 48 hours, often resulting in the auditor making subsequent requests within a week and broadening the scope of the audit.

The New York State DTF audit guidelines allow reasonable extension requests, and the DTF is known to grant extensions. Taking an extension request is warranted. Before responding to a DTF request, it is good practice to review the request to ensure you are not providing the DTF with information outside the request.

What Pace Control Actually Means in Practice

Pace control doesn't mean you've ignored the IDR. Rather, it means you've only provided what the IDR has requested, in the format requested, within the time constraints given. Any additional information should be disregarded. It is also a solid strategy to provide records to present your business in the most favorable light, not a purely objective one.

One client experienced this when her accountant responded to IDRs within 24 hours. He also provided documents he believed to be relevant to the audit. By the fourth IDR, the auditor had formulated questions regarding three different product categories that had nothing to do with the original notice. Suppliers often believe they're helping the auditor by providing additional information; however, everything supplied to the auditor should be produced based on the IDR.

Does Your Accountant Know What They Are Handing Over?

There are many issues that can arise when document requests are submitted and irrelevant documents or documents that are not accounting records are provided. I have seen this numerous times and it normally is not due to a bad faith effort to obstruct the audit. It is normally someone trying to be helpful by providing what they think are accounting records, but are, in fact, something else.

Some companies provide estimates or draft invoices in QuickBooks, edit the proposal, send another, and then issue a final invoice, without deleting any of them. The multiple invoices doesn't mean multiple sales really occurred, but it can look that way if provided incorrectly.

The sales tax liability account is another common trap. Many businesses do not reconcile this account and it just grows, even though the proper sales tax has been remitted. From an audit perspective, a growing sales tax liability account can look like tax collected not remitted, which can create harsh penalties, personal liability and even criminal exposure.

What Over-Production Looks Like

Over-production doesn't always look like the thousands of pages of documents we typically see in the media. Sometimes, over-production looks like an email with an attached Excel sheet that contains a pricing decision. Maybe you included a template with sample language for quotations, but your client typically issues statements with language different from your samples. These minor inconsistencies can technically lead to claims of over-production.

If your document production likely includes information beyond what is requested, have your sales tax attorney look at the production before the next IDR. Seeing what information you produced and likely provided outside of the request gives you the opportunity to adjust and help mitigate risk.

Your Accountant Is Trying to Help. That Can Make It Worse.

Processing IDRs and handling DTF exams are extremely different things, even for CPAs. A sales tax specialist who has done numerous DTF exams is not the same as a general practitioner CPA. As the saying goes, you shouldn't have a heart doctor doing brain surgery.

A NY DTF auditor is an employee of the State of New York instructed to assess additional tax. They are auditors, not colleagues or employees. Be aware that what may look like helpful cooperation in producing tax return documents to a general practice accountant may look like an invitation to produce other documents to a DTF auditor.

When additional documentation requests are being made to your accountant, it suggests that the DTF examiners are using document production strategically. So, your representative needs to know when to draw the line between being helpful and being over-helpful. Considering the situation, it may be advisable to take a cautious approach.

Having done thousands of audits, we certainly know how to draw the line, what to provide and the pace of an audit to minimize exposure.

$40,000 Can Become $120,000. Here Is What Triggers It.

The audit shifts from a financial problem into something more serious at two specific points.

Tax Collected But Not Remitted

Under New York Tax Law section 1133, sales tax that your business collected from customers is held in trust for New York State. It is not business revenue. If a DTF auditor discovers that tax was collected but not remitted, the legal character of the audit changes immediately.

A routine audit that turns up an underpayment is a business-entity problem. Collected-but-not-remitted tax triggers personal exposure. Officers, owners, anyone with control over the payment of taxes can be held personally liable for what was collected and not sent to the state. That is a different conversation than a corporate tax assessment. Responsible Person Status for New York Sales Tax covers exactly who DTF pursues and how.

If your business has collected sales tax and you are not certain it was fully remitted, this is the most important thing to resolve before the auditor gets to it.

The Taxability Mistake That Locks In Your Liability

If what your business does falls in a gray area for taxability, IDR responses that describe the business activity in a particular way may cause DTF to take that position on all transactions during the audit. The reverse can also be true.

One year, we showed an auditor that our client's service was the development of custom software, which is a nontaxable service, and therefore not taxable SaaS. The auditor agreed and backed up several years of invoices. We took this position because our client never acknowledged in their IDR responses that the SaaS service was taxable. If they described the service that way in their IDRs, we would have had to contest a concession. Describing taxable services in IDRs would lock in the taxable position. This is usually not a good idea. In short, sometimes providing a narrative is the right approach, the trick is knowing when to do so.

This situation can happen to any business. If you are not sure how DTF views your business, it is better to not answer IDRs to explain your business to get DTF's position.

Getting In Early Changes the Outcome

We usually get involved at one of two moments: at the brink, when someone realizes the audit is getting out of control, or just after it already has. Earlier is better.

What Getting In Early Actually Changes

Outcomes during the active examination are the most consequential. Before the Notice of Determination is issued, flexibility remains to change the scope and methodology. Characterizations of specific transactions can be revised as well.

There was recently an unpleasant development during an audit of a restaurant. The scope of the questions during the initial (and subsequent) request for information (IDRs) expanded beyond the audit guides, and document requests were issued to the restaurant. When we were retained, we edited the document production process to align with the recommendations of the restaurant's external accounting advisors, and worked with the auditor to explain the subject transactions. The end result was the favorable resolution to the audit. The outcome is not guaranteed, but possible, prior to the auditor finalizing her findings.

Not all situations turn out the same way if a Notice of Determination is issued.

If It Gets to a Notice of Determination

If the active examination produces a Notice of Determination, you have 90 days from the mailing date to file a protest. That clock runs from the date on the notice, not the date you received it, per 20 NYCRR 535.5(a)(1). Per the NY DTF protest page, more than 98% of protests start as BCMS conciliation conference requests, and over 90% resolve there. Filing BCMS also suspends the 90-day DTA deadline. For the full walkthrough, read Filing a BCMS Appeals Conciliation Conference in New York, and for deadline specifics, New York Notice of Determination: Understanding Your 90-Day Deadline.

The active examination is when the most options exist. That window does not stay open.

Reach out to Sales Tax Helper or call (866) 458-7966. If the follow-up IDRs are multiplying, do not treat it as normal progress.

Frequently Asked Questions

I'm curious about the procedure that happens after the first IDR response is sent to a NY DTF auditor. What happens next?

The auditor looks over the information you provided, determines what is still open or inconsistent, and creates a new information request. This is expected behavior and the examination stage of an audit consists of you providing information to the auditor, who then determines what information is still lacking. With the NY sales tax audit, it is uncommon for the audit to conclude with the first information request. The information requests let you know what part of your business the auditor focuses on.

Is it legal to control how quickly a NY sales tax audit progresses?

Yes. There is a difference between controlling the pace and obstructing an audit. Pace control consists of requesting an extension on the due date for the IDR, which is allowed and common. Ignoring the extension request is not allowed. You are also not allowed to refuse to provide records to the auditor. There are specific records that can be provided to the auditor at a later date to minimize the information given to the auditor.

What types of records should not be sent to the NY DTF auditor?

Records that are not explicitly requested or required under the law. Providing records that go above and beyond what is asked should be avoided. A NY DTF auditor will always look through records that are provided. Providing too many records can be harmful.

My business collected sales tax. However, I'm concerned that not all of it was turned over to the State. What if the auditor finds that?

Under N.Y. Tax Law § 1133, sales tax collected by a business is considered trust funds for the State of New York. If sales tax is not remitted to the State, and an audit reveals that fact, the character of the audit changes. A person, either an employee or owner of the business, can be found personally liable for the sales tax. This is independent of the potential legal liability of the business. The best defense to this situation is to take a proactive position and resolve this issue prior to the auditor identifying the sales tax that was not remitted to the State.

My accountant is preparing responses to the IDRs. Is that a problem?

Not necessarily. It depends on the accountant's experience. A CPA with a general practice may respond to requests for information in a manner that provides the audit team with information that goes beyond the scope of the information or documents requested by the audit team. New York state is obligated to collect sales tax. It is in the state's interest to determine whether or not sales tax has been under-reported. A sales tax specialist may be in the best position to evaluate the information and documents that have been prepared prior to responding to the state's information document request.

Can I make changes to a taxability position given to the auditor by my accountant?

This largely hinges on the auditor's response. If the auditor articulated what your business does in a manner that makes it clear what position they were given on taxability, and that position is wrong, you may be able to fix that during the audit with the auditor. If that is not the case, or if the auditor has already issued a Notice of Determination, you would have to file a formal protest to correct the position. It is hard, but not impossible to unring the bell, but the better approach is to get it right at the beginning.

When is it too late to get help for a NY sales tax audit?

It is typically too late to get help once the 90-day window to file a protest of the Notice of Determination has passed. There are some back door options, but it makes it much more difficult. After this window, it is unlikely that the position of the audit would be changed, however, you may still want to get representation for the appeal of the tax assessment. Generally, the best time to get represented is during the sales tax audit.

About the Author

Gerald J. "Jerry" Donnini II is a sales tax attorney and the founder of Sales Tax Helper, a national platform that helps businesses find, fix, and prevent sales tax exposure before it becomes a problem. Over a 15-year career, he has represented businesses in more than 5,000 sales tax audits, appeals, and disputes across 40+ states. He holds an LLM in Taxation from New York University, is co-author of a CCH treatise on state sales and use tax, and serves as an adjunct law professor. Jerry has saved businesses more than $500 million in sales tax assessments. His framework, Find It. Fix It. Defend It., guides businesses from initial nexus diagnosis through voluntary disclosure and, when necessary, full audit defense.