New York Sales Tax Audit Readiness Checklist
Introduction
New York imposes sales tax on retail sales of tangible personal property and certain specifically enumerated taxable services under Tax Law Article 28. Businesses making taxable retail sales must register for a Certificate of Authority. Registered vendors must file sales tax returns according to their assigned filing frequency and remit tax due, even if no sales were made during the period.
If a business receives a sales tax audit notice, fails to file required returns, or discovers missing sales tax filings, understanding what happens next reduces confusion and helps prevent additional penalties or enforcement action.
What This Issue Means
Sales tax compliance issues include failure to register for a required Certificate of Authority, failure to file required returns, underreporting taxable sales or tax collected, failure to remit collected tax, failure to maintain required records for at least three years, making taxable sales without a valid certificate, and receipt of audit notices or assessments from the Department of
Taxation and Finance.
Each situation represents a gap between collected or unreported sales and state tax records.
The Department uses these gaps to identify compliance problems and determine whether additional taxes, interest, or penalties are owed.
Why the State Issued This or Requires This
The state requires sales tax filing and payment to fund government operations and public services. The Department of Taxation and Finance selects vendors for audit based on various factors, including filing patterns, return inconsistencies, industry benchmarks, and compliance history. Specific audit selection criteria are not published in detail.
Audits may be desk audits conducted through office review, field audits involving on-site examination, or limited-scope audits focusing on specific issues. The Department’s goal is to verify that all taxable sales have been reported and that collected tax has been remitted in full.
What Happens If This Is Ignored
Failure to file returns or respond to notices triggers the Department to issue a Notice of
Determination estimating your tax liability. If not protested within 90 days, the determination becomes final. The Department then files a tax warrant under Tax Law Section 1141 with the
Secretary of State and the county clerk, creating a lien on real and personal property.
After filing a warrant, the Department may enforce collection through income executions up to
10 percent of gross wages, bank levies, and seizure and sale of personal property. Interest accrues daily, and penalties apply under Tax Law Section 1145. The longer a sales tax issue remains unaddressed, the greater the financial and legal exposure becomes.
What This Does NOT Mean
Sales tax audits are civil administrative proceedings to determine tax liability. Criminal prosecution under Tax Law Section 1817 is a separate process requiring evidence of willful intent to evade tax. Audit findings suggesting fraud or willful evasion may result in referral for criminal investigation.
Civil and criminal proceedings may occur simultaneously or sequentially. An audit notice initiates the examination process and is not a final assessment until the Department completes its review and issues a determination.
Checklist: What to Do After Receiving This or Identifying
This Issue
Step 1: Identify the Type of Sales Tax Issue
Determine which situation applies to your business. You may have received a sales tax audit notice from the Department of Taxation and Finance. You may have failed to file sales tax returns for one or more periods.
You may have discovered that sales tax was not collected or remitted during a past period. A sales tax return may have been filed but requires correction or amendment. Write down the specific issue and any notice numbers, dates, or business registration numbers mentioned in correspondence.
Step 2: Gather All Required Documentation
Sales tax audits require proof of sales and tax collected during the audit period. Collect all sales tax returns filed for the audit period or documentation of which returns were not filed. Gather all sales records, including point-of-sale system reports, cash register tapes, and invoices. Compile
records of sales to out-of-state customers, records of exempt sales such as sales to tax-exempt organizations or wholesale sales with proper documentation, and business bank statements or accounting ledgers showing deposit amounts.
Include inventory records from the start and end of the audit period, records of purchases from suppliers to verify inventory and cost of goods sold, credit card processing statements showing total sales, and any correspondence with the Department of Taxation and Finance. Organize documents chronologically by month or quarter and note which periods or documents are missing if records are incomplete.
Step 3: Review the Audit Notice or Non-Filing Status
Read the audit notice carefully, as received, and note the audit period being examined. Identify the type of audit, which may be a desk audit, field audit, or limited-scope audit. Record the specific information or documentation requested. Note the deadline for responding as specified in the notice.
Write down the name and contact information of the assigned auditor or representative and any reference numbers for tracking purposes. Filing frequency is determined by annual sales tax liability: vendors collecting $300,000 or more annually file monthly; those collecting $3,000 to
$299,999 file quarterly; those collecting under $3,000 may file annually. Determine which periods are missing and whether the business was required to file during those periods if returns have not been filed.
Step 4: Calculate or Reconstruct Sales for Missing Periods
Reconstruct sales figures using available information if sales records are incomplete or returns were not filed. Use total bank deposits from the period, credit card processing records, supplier invoices and inventory records, cash register or point-of-sale system reports, and tax returns filed with other agencies, such as federal income tax returns.
This reconstruction helps establish total sales during the period in question. If you cannot provide adequate records, the Department may estimate your sales tax liability using methods authorized under Tax Law Section 1138, including industry standards, markup analysis, bank deposit analysis, or other reasonable estimation methods.
Step 5: Determine Taxable vs. Non-Taxable Sales
Review all sales during the audit period and categorize them as taxable sales subject to New
York sales tax, exempt sales (e.g., sales to registered tax-exempt organizations with proper documentation), out-of-state sales not subject to New York sales tax, or wholesale sales if the buyer is a registered reseller. Keep documentation for each category, especially exemption certificates for tax-exempt sales. Note missing exemption certificates in your records if they cannot be located.
Step 6: Calculate Tax Liability for the Period
New York’s statewide sales tax rate is 4 percent. Local jurisdictions impose additional sales tax, resulting in combined rates ranging from 7 percent to 8.875 percent depending on location. Use the Department’s Jurisdiction/Rate Lookup by Address tool to determine the correct rate for specific locations and time periods.
Apply the correct rate to taxable sales. Calculate total tax liability for the audit period and subtract any sales tax returns already filed and paid during the period. The result is the additional tax liability, if any. Keep a written record of this calculation with supporting documentation.
Step 7: Review for Penalties or Interest
Interest on unpaid sales tax accrues daily at rates set quarterly by the Tax Commission, equal to the federal short-term rate plus 5.5 percent, with a minimum of 7.5 percent. Penalties under Tax
Law Section 1145 include failure to file at 5 percent per month up to 25 percent, failure to pay at
0.5 percent per month up to 25 percent, and substantial understatement at 10 percent if the error exceeds the greater of 10 percent of the tax due or $2,000.
The minimum penalty for returns over 60 days late is the lesser of $100 or 100 percent of the tax due. You may calculate estimated penalties using these rates to understand your potential liability. Use the Department’s Penalty and Interest Calculator for estimates.
Step 8: Prepare a Written Response or Submission
Prepare a formal response if an audit notice with a deadline was received. Include all requested documentation, organized by date and category. Provide a cover letter that summarizes the documents and explains any gaps or issues. Explain why records are incomplete, if applicable, and describe what steps were taken to reconstruct data.
Provide a calculation of sales tax liability using the available documentation. Include the auditor’s name, notice number, and audit period in all correspondence. Keep a copy of everything submitted. Contact the Department of Taxation and Finance to determine the filing deadline and required procedures for submitting late returns if the business has not filed required returns.
Step 9: Submit Documentation by the Deadline
Audit notices specify the deadline for providing requested documentation. Deadlines vary based on the type of audit and information requested. Submit documents to the address or method specified in the notice. Send documentation by certified mail or, if possible, by hand delivery, and retain proof of delivery. Include a written list of all documents submitted. Contact the auditor before the deadline to request an extension if the deadline cannot be met.
Step 10: Follow Up on Outstanding Issues
Allow a reasonable time for the auditor to review materials after submission before following up.
Contact the assigned auditor using the information provided in the notice. Ask about the expected timeline for audit completion and confirm that all documents have been received. Note the date and name of the person you speak with. The Department does not publish standard processing timeframes for audit document review.
Step 11: Prepare for Possible Follow-Up Requests
Respond promptly to any follow-up requests using the same format, such as certified mail with return receipt. Do not assume the first submission was complete. Keep all correspondence organized in one file. Ask the auditor to clarify if you do not understand a request.
- Failing to respond by the stated deadline may result in an assessment based on the
- Providing incomplete or disorganized records slows the audit process and may lead to
- Responding late or not at all to follow-up requests signals non-cooperation and can
- Addressing only the audit period without correcting the filing schedule may lead to future
- Submitting documents without retaining copies makes it difficult to verify what was
- Assuming the process is finished before receiving a final determination letter can lead to
- State enforcement notices and responses
- Sales tax audits, assessments, and collections
- Payroll & trust fund tax enforcement issues
- Penalty and interest reduction options
- Payment plans and state tax relief eligibility
- Representation before state tax agencies
Step 12: Document All Communications
Maintain a detailed record of all interactions with the state, including dates of notices received, names and titles of auditors or state representatives, dates of telephone calls, meetings, or submissions, content of conversations and decisions discussed, and copies of all written correspondence. This record helps track audit progress and serves as a reference if questions arise later.
What Happens After This Is Completed
After completing the audit, the Department issues a Statement of Proposed Audit Changes for your review. You may request a conference if you disagree. The Department then issues a
Notice of Determination or Notice of Assessment of Sales and Use Taxes Due. You have 90 days from the date the notice is mailed to file a protest.
You may either request a conciliation conference with the Bureau of Conciliation and Mediation
Services by filing Form CMS-1-MN or petition the Division of Tax Appeals for a formal hearing.
The 90-day deadline is statutory and strictly enforced. Missing the deadline makes the assessment final and unappealable. If the determination shows a balance due, the Department will issue payment instructions.
Common Mistakes to Avoid
Department’s estimates rather than your actual records. unfavorable conclusions. result in penalties or collection action. compliance problems if returns were not filed as required. provided or to reference information in follow-up communications. missed deadlines.
Frequently Asked Questions
How long does a sales tax audit take?
The Department of Taxation and Finance does not publish standard timelines for audit completion. Audit duration varies based on business complexity, record availability, audit scope, and whether you provide the requested information promptly. Contact your assigned auditor for case-specific timeline information.
What is the difference between a desk audit and a field audit?
A desk audit involves the auditor reviewing records you submit to the Department. A field audit involves the auditor visiting your business location to review records on-site and conduct interviews. Both types follow similar procedures; field audits may require more documentation and may take longer.
If I cannot locate all my sales records, what should I do?
Contact the Department of Taxation and Finance and explain which records are missing and why. Provide any available documentation and clearly explain what is missing. You have the right to challenge the estimation method and provide alternative documentation if the
Department estimates your liability.
Can I amend a sales tax return before receiving an audit notice?
You may file an amended sales tax return within three years of the original due date to correct errors or claim refunds. File the amended return using the same form as the original, mark it as amended, and attach an explanation of the changes. No separate amendment form exists; use the standard return form.
What happens if I cannot pay the full amount assessed?
Submit Form DTF-4, Application for Installment Payment Agreement, with financial documentation to request an Installment Payment Agreement. For an offer in compromise, eligibility is based on doubts as to collectibility or effective tax administration under Tax Law
Section 171. Application procedures are detailed in Form DTF-4 and Publication 131.
Can I appeal an audit determination?
After receiving a Notice of Determination, you have 90 days to file a protest. You may request a conciliation conference or petition the Division of Tax Appeals for a formal hearing. The 90-day deadline is statutory and strictly enforced.
Are penalties always assessed for late filing or non-filing?
Penalties are assessed under Tax Law Section 1145 at specified rates. The Department may abate penalties for reasonable cause under Tax Law Section 1145 when you exercised ordinary business care but were unable to comply. Submit a written request explaining the circumstances with supporting documentation.
Closing
Sales tax compliance is straightforward when records are accurate and timely. Taking prompt action to gather records and submit documentation reduces uncertainty and demonstrates responsibility if an audit notice is received or if past sales tax filings are missed.
Understanding what the Department is asking for and responding completely within stated deadlines positions you well throughout the audit process. Keep detailed records of all communications, organize documents clearly, and follow the steps outlined in this checklist.
Facing State Tax Enforcement Action?
If you’ve received a notice related to sales tax or payroll tax enforcement and aren’t sure how to respond, our team can help you understand your options and next steps.
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