Could a Virginia restaurant obtain review of an underreported-sales assessment by supplying deposit and loan records with its appeal?

Subject

Sufficient documentation not provided at audit.

Plain-English summary

Virginia returned the audit for review of documents submitted with the appeal, but did not yet reduce the assessment. The restaurant's bank deposits exceeded sales reported on its returns in all but four sampled months. During the audit, it did not provide sufficient information explaining the differences, so it failed to overcome the assessment's presumed correctness.

On appeal, the restaurant supplied a corrected deposit analysis, a stockholder-loan schedule, corporate return pages and rental-income statements, an individual Schedule E, and credit-card records. It argued that admissions, facility rentals, and direct stockholder loans explained amounts omitted from the auditor's calculation.

The Commissioner directed audit staff to review those records and revise the assessment if warranted. The restaurant had to provide any further requested information within 30 days. Its later bill would reflect either a revised or unchanged assessment plus accrued interest.

What this means for you

• Reconcile sales-tax returns to bank deposits before an audit begins.
• Keep records distinguishing taxable receipts from loans, rental income, admissions, and other deposits.
• An assessment remains presumed correct until the taxpayer substantiates an adjustment.
• New appeal evidence can trigger further audit review, but it is not the same as winning an immediate reduction.

Common questions

Did the ruling decide that the stockholder loans and rentals were nontaxable?

No. It ordered audit staff to review the documents and revise the assessment only if the evidence warranted it.

How long did the restaurant have to answer a further records request?

The ruling allowed 30 days from audit staff's contact.

Citations and references

• Va. Code § 58.1-205.
• Va. Code § 58.1-102.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-65

Original ruling text

April 25, 2011

Re: § 58.1-1821 Application: Retail Sales and Use Tax

Dear *:

This is in response to your letter submitted on behalf of * (the "Taxpayer") in which you seek correction of the retail sales and use tax assessment issued for the period December 2006 through October 2009. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer operates as a restaurant and bar. The Taxpayer was assessed tax in the audit on underreported sales and on transactions where the tax was included in the sales price without the permission of the Tax Commissioner. The Taxpayer contests the audit assessment, stating the underreported sales figure omits three items from the calculation - admissions, facilities rental, and direct loans by the stockholder. The Taxpayer provides for review the following: (1) a Deposit Analysis, correcting the analysis included in the audit; (2) a schedule of Stockholder Loans; (3) Pages 1 and 2 of the 2007 and 2008 Form 1120, along with Statements of Income reporting Facilities Rental; (4) Schedule E from 2007 and 2008 Form 1040, documenting the beach rental; and (5) copies of all credit card documentation.

DETERMINATION

Pursuant to Va. Code § 58.1-205, "Any assessment of tax by the Department shall be deemed prima facie correct." The burden of proving that an assessment issued by the Department is incorrect rests with the taxpayer. Virginia Code § 58.1-102 states:

It shall be the duty of every taxpayer to retain suitable records and documents substantiating all information contained on any return required by this subtitle and any such other pertinent records or documents as the Tax Commissioner may require by regulation. The records and documents shall be preserved for a period of three years from the required date for filing a return to which such records or documents pertain.

During the performance of the audit, the Taxpayer did not provide sufficient documentation to allow reconciliation of the sales tax returns with the deposits made to the Taxpayer's bank account. Specifically, the deposits exceeded the sales data reported on the returns, with the exception of four months in the sample period. Because the Taxpayer would not provide information to explain the discrepancies, it failed to meet its burden of proving that the tax assessed in the audit was incorrect.

With its appeal, the Taxpayer has provided documentation to support its contention that the assessment is incorrect. The audit will be returned to the audit staff to review the documents provided by the Taxpayer. Once the review of the documentation is complete, the audit assessment will be revised if warranted. If additional information is required by the audit staff as part of this review, the audit staff will contact the Taxpayer. The Taxpayer should provide such requested information to the audit staff within 30 days from the date of the contact.

Following the completion of the document review, the Taxpayer will receive an updated bill. If the audit assessment has been revised, the updated bill will reflect the revised assessment plus interest accrued to date. If the audit assessment has not been revised, the updated bill will reflect the original assessment plus interest accrued to date. No further interest will accrue provided the outstanding assessment is paid within 30 days from the date of the bill. Please remit payment to: Virginia Department of Taxation, 600 E. Main Street, 15th Floor, Richmond, Virginia 23219, Attn: *. If you have any questions concerning payment of the assessment, you may contact at **.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions about this response, you may contact * in the Department's Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4318922150.P