Source: https://azdor.gov/businesses-arizona/withholding-tax/withholding-tax-audits
Timestamp: 2019-12-06 14:07:08
Document Index: 501311238

Matched Legal Cases: ['§ 42', '§ 42', '§ 42', '§ 41', '§ 41', '§ 41', '§ 42', '§ 42', '§ 42']

Withholding Tax Audits | Arizona Department of Revenue
In order for the Arizona Department of Revenue (ADOR) to live up to its mission of administering Arizona tax laws fairly, the department sometimes conducts audits to ensure taxpayers are complying with their responsibilities.
This is especially true with respect to withholding tax. In Arizona, it is the responsibility of the employer to withhold, report and remit personal income to ADOR.
When an employer collects or withholds the tax imposed by Arizona law from any employee and submits it to ADOR, the department will hold the collected tax amount in a special fund in trust for Arizona. The amount of these funds are assessed, collected and paid in the same manner and subject to the same provisions, limitations and applicable penalties.
What are my rights as an employer being audited?
During an ADOR withholding tax audit, taxpayers can correspond with the department through email and phone interviews, and they can usually provide documentation to the department in electronic format.
How am I notified that I’m being audited?
How do I provide records to the auditor?
What does ADOR examine during a withholding tax audit?
How does ADOR determine a tax audit assessment?
What are these penalties and interest amounts on my assessment?
What is the customer service survey?
Can I pay my audit assessment in installments?
How do I protest my audit assessment?
What happens in the case of a request for formal hearing?
The state of Arizona and the Arizona Department of Revenue are diligent in vouchsafing the rights of individuals and businesses. Taxpayers can review the following publications to learn more about these rights:
ADOR adheres to strict rules to ensure that no one views taxpayer information without proper authorization.
If representation is necessary, taxpayers can add a power of attorney (POA). ADOR will not impart information to anyone unless the taxpayer gives express permission to do so through a POA. A taxpayer may use Form 285 to authorize ADOR to release confidential information to the taxpayer’s appointee. A taxpayer may also use Arizona Form 285 to grant additional powers to the appointee. Please note that the Arizona Form 285 may only be executed by a principal corporate officer (corporations), partner (partnership) or an owner (sole proprietorship).
Power of Attorney (POA) and Disclosure Forms
General Disclosure/Representation Authorization Form (replaces 72-0105)
A taxpayer will be sent an “Intent to Audit” letter that explains ADOR’s intention to examine payroll records and other documentation for a specific audit period. Along with the letter, the taxpayer will receive a questionnaire about his or her business, focusing on employment issues.
The taxpayer will also receive a “Records Requirement List,” which indicates the types of documentation the department is requesting to begin its initial examination. The “Intent to Audit” letter explains that we expect to receive the questionnaire and requested documentation within 15 days from the day the taxpayer receives the letter; otherwise, an assessment will be created using the best available information.
Records Requirement List
An audit normally covers the most recent four-year period. However, if tax returns have not been filed or have been significantly underreported, the statute of limitations may be longer, and the audit period could be more than four years. There is no statute of limitations that prevents ADOR from including delinquent quarters in an audit examination.
During an audit, ADOR prefers taxpayers to provide records via electronic means. This improves the accuracy of the audit and reduces the time it takes to complete, minimizing the inconvenience to the taxpayer. Whenever possible, taxpayers will provide records to an auditor in excel (.xlsx) or PDF format.
An ADOR auditor will examine and compare various sources of data during an audit. These include payroll registries, ledgers and summaries; annual payroll reports; deposit statements; federal and state withholding tax and unemployment tax returns and annual reconciliation reports; corporate income tax returns; partnership tax returns; sole- proprietor tax schedule; W-2s, W-3s, W-4s, A-4s and 1099s; 941, 940 and W-2s attached to individual employees’ income tax returns; cash disbursements journal, employee expenses and reimbursements journal, chart of accounts and other payroll or financial records.
How does ADOR determine an assessment?
An ADOR auditor will look for discrepancies or incongruities by comparing different sources of data to determine if all of the wages and tax withheld from employees’ wages was properly reported to the department. Correspondence and phone conversations with the taxpayer or taxpayer’s appointee will often take place in order to answer questions, and to make sure the auditor understands the taxpayer’s payroll reporting practices and documentation.
The auditor will then share his or her findings with the taxpayer and allow taxpayer input into the process. The auditor will determine what amounts were underreported and discuss this with the taxpayer, and may provide a draft assessment for discussion.
Finally, a proposed assessment with accompanying work papers will be produced and sent to the taxpayer.
The Notice of Proposed Assessment informs taxpayers that the deficiency becomes final 45 days from the receipt of this notice unless an appeal is submitted to ADOR as indicated on the enclosed Taxpayer Response Form. Along with the response form, a survey form will be enclosed with the assessment as well.
Withholding Tax Audit Procedure
Withholding Audit Manual
Example Taxpayer Response Form
The Arizona Department of Revenue, charged by state law, imposes penalties in the cases of late filing and late payment, and is given the option to assess additional penalties at its discretion. According to statute, the department must also assess interest on any unpaid tax according to federal and state adopted interest rates compounded annually.
The late filing penalty is assessed at 4.5 percent per month on any unpaid tax from the due date of the return until the return is filed, not to exceed a total of 25 percent.
The late payment penalty is assessed at .5 percent per month on any unpaid tax from the due date of the tax to the date the tax is paid, not to exceed a total of 10 percent.
The combined late filing and late payment penalties cannot exceed a total of 25 percent.
The failure to furnish information penalty is imposed when a taxpayer proves uncooperative in providing requested documentation. A.R.S. § 42-1125 (C) allows the department to apply a 25 percent penalty to any deficiency tax assessed.
Other optional penalties can also be assessed if appropriate. Taxpayers can see the penalty statutes here:
A.R.S. § 42-1125
And they can learn more regarding interest here:
A.R.S. § 42-1123
With a proposed assessment, a taxpayer also receives a customer satisfaction survey. We hope the taxpayer can take some time to complete and return the survey to us. This is that individual’s chance to comment on ADOR’s overall quality of service on the audit process. The taxpayer can also make suggestions to help us improve as a state agency.
To determine payment arrangements, a taxpayer will have to contact ADOR’s Collections Department.
Taxpayers should note that if they return their Taxpayer Response Form indicating they agree with the audit assessment, then the 45-day protest period can be closed, allowing Collections to deal with a taxpayer regarding a payment plan. If a taxpayer fails to return the Taxpayer Response Form, a payment arrangement plan will not be able to be negotiated until the 45-day protest period has elapsed.
If a taxpayer disagrees with the audit findings, the individual has 45 days from the receipt date of the proposed assessment to file a timely appeal. This appeal should be filed using the Taxpayer Response Form, which will be included with the audit assessment. On this form, the taxpayer may check that he or she agrees with the audit and return it to the auditor in order to expedite the process. Or, the taxpayer may check a box disagreeing with the audit, and then provide a written explanation as to why he or she believes the assessment is incorrect.
Taxpayers can request to have an informal conference with the auditor and the audit manager, either at ADOR in person, or by phone. Or, the taxpayer can check a box requesting a formal hearing. The form is then returned to the auditor.
If the taxpayer requests an informal conference, the auditor will contact the individual to set up a date and time. If the taxpayer prefers a formal hearing, the response form will be forwarded to ADOR’s appeals unit. A representative will then contact the taxpayer. If an informal conference is conducted and the taxpayer still disagrees with the department’s findings, the taxpayer’s appeal will also be forwarded to our appeals unit.
At the conclusion of an audit, an auditor issues a notice of proposed assessment. A taxpayer has 45 days to protest the assessment. If a taxpayer chooses a formal hearing, or if he or she disagrees with ADOR at the end of an informal conference, the taxpayer presents his or her protest to a neutral fact-finder before an administrative law judge (“ALJ”) at the Office of Administrative Hearings (“OAH”).
These Arizona Revised Statutes (A.R.S) set forth a framework for administrative process:
A.R.S. § 41-1092.02 lists agency actions exempt from application of provisions of the Administrative Code
A.R.S. § 41-1092.02(A)(10) exempts actions by ADOR regarding income tax or withholding tax and any tax issues related to information associated reporting of income tax or withholding tax unless the taxpayer requests that this article apply and waives confidentiality under Title 42, chapter 2, article 1.
A.R.S. § 41-1092.03 applies to actions involving TPT and addresses procedures for a hearing or informal settlement conference.
A.R.S. § 42-1251 establishes time frames for appealing to the department (45- and 90-day periods) by filing a petition for a hearing, correction or redetermination, including an option of paying the total deficiency assessment, interest and penalties and filing a claim for refund within six months of the payment or the statute of limitations.
A.R.S. § 42-1255 addresses the burden of proof.
A.R.S. § 42-1254 addresses the process of appealing to the Tax Court.
Arizona Administrative Code, Title 15, Chapter 10: Department of Revenue – General Administration
R15-10-101: Definitions
R15-10-102: Scope of Article 1
R15-10-103: Taxpayer Hearing Rights
R15-10-105: Petition
R15-10-106: Incomplete Petition
R15-10-107: Timeliness of Petition
R15-10-110: Withdrawal of Petition
R15-10-115: Request for Hearings; Waiver
R15-10-116: Hearing Procedure
R15-10-117: Evidence
R15-10-119: Stipulations of Fact
R15-10-120: Official Notice
R15-10-121: Subpoena by Petitioner
R15-10-122: Transcripts and Records
R15-10-130: Decisions and Orders
R15-10-131: Review of Decision of the Hearing Officer or ALJ
R15-10-201: Closing Agreements Relating to Tax Liability.
For withholding tax audit contact information, click here.