Opinion ID: 1190387
Heading Depth: 1
Heading Rank: 4

Heading: the audit test period

Text: Shetakis contends that the use of an audit test period is unjustified when the taxpayer has sufficient records to conduct a detailed, daily audit. Shetakis argues that NRS 372.435 allows an estimation to be made only where no return has been filed. NRS 372.435 provides in relevant part: 1. If any person fails to make a return, the department shall make an estimate of the amount of the gross receipts of the person or, as the case may be, of the amount of the total sales price of tangible personal property sold or purchased by the person, the storage, use or other consumption of which in this state is subject to the use tax. However, under NRS 372.400, the Department has authority to conduct an investigation. NRS 372.400 provides in relevant part: 372.400 Recomputation of tax; determination on discontinuance of business. 1. If the department is not satisfied with the return or returns of the tax or the amount of tax required to be paid to the state by any person, it may compute and determine the amount required to be paid upon the basis of the facts contained in the return or returns or upon the basis of any information within its possession or that may come into its possession. ... (Emphasis added.) The Department asserts three reasons why the language of NRS 372.400 should be broadly construed to allow an audit using a test period. Without such authority, the Department would then be effectively prohibited from auditing any business which filed returns but which kept no records. Second, in the case of inadequate records, the Department would be unable to assess a tax deficiency beyond what the inadequate records indicated. Third, if the Department was held to estimating deficiencies only where no return had been filed, the Department would be left with no choice but to disallow all claimed exemptions and make the taxpayer prove every exemption. We agree with the Department. The authority granted the Department under NRS 372.400 is not limited to a simple investigation of the taxpayer's records. Rather, by express statutory language, the Department may use any information which it may come to possess. We interpret this language to mean that the Department may conduct an investigation using any reasonable and fair means. The Department notes that the Nevada Tax Commission considered available publications on the use of audit sampling techniques and concluded that (1) audit sampling is widely accepted and used; (2) absolute maximum and minimum sample sizes cannot be established due to the individual circumstances present in each case; and (3) reliance must be placed upon the sound judgment of the auditor to select the appropriate audit sample. In the case before us, the Department conducted the audit using the test periods because it considered the technique to be an accepted audit procedure which works well on large audits. Further, the sample renders comparable results to a day-to-day audit using the taxpayer's records. The test period method saves an auditor months of work, especially for a business which, as in this case, has recurring customers who buy things from the taxpayer on a regular basis. Under these circumstances, it would be foolish to audit on a detailed basis because of the consistency of the transactions. The Department considers it a misuse of the public's money to conduct a more lengthy audit under the circumstances presented here. We are not alone in holding that a test period is reasonable. In Torridge Corporation v. Commissioner of Revenue, 506 P.2d 354 (N.M. 1973), the Commissioner used a test months method to determine a tax deficiency. Id. at 357. The court stated that even though the taxpayers had records upon which to base an audit, restricting the Commissioner to the use of the records alone would effectively foreclose any investigation. Id. The court held that, as a matter of law, the audit techniques employed by the Commissioner were not arbitrary. Id. See also Paine v. State Bd. of Equalization, 137 Cal. App.3d. 438 (Ct.App. 1982); Farrar Brown Company v. Johnson, 207 A.2d 406 (Me. 1965); Chartair, Inc. v. State Tax Commission, 411 N.Y.S.2d 41 (N.Y. App. Div. 1978); McDonald's of Springfield, Ohio, Inc. v. Kosydar, 330 N.E.2d 699 (Ohio 1975). In the case at hand, Shetakis issued an average of 250 invoices per day. Over a three-year period, this totals 195,000 invoices. Shetakis' non-food sales were approximately one percent of its business. Therefore, the Department would be forced to look at 195,000 invoices over the three-year period to find the one percent non-food sales and determine whether particular line items on those invoices were properly exempted from sales tax. This would place an undue burden on the Department and would virtually cripple the Department's ability to conduct an audit in a timely and efficient manner. We are not unmindful of Shetakis' argument that if a taxpayer keeps accurate and complete records, as is required by NRS 372.735(1), it is entitled to have those records used in an audit. In this case, the Department did use Shetakis' records in sampling its business for certain periods of time. In a very practical sense, it is unrealistic for this court to impose the burden on the Department of auditing 195,000 invoices looking for specific line items over a three-year period. It is simply unfeasible and unreasonable to conduct an audit in this manner. We therefore conclude that the Department may use representative and reasonable test periods in determining if a taxpayer has paid the proper amount of taxes.