COLORADO STATE SALES and USE TAX AUDITS

What Should You Expect?

Colorado differs from most other states in that local jurisdictions can be State-collected (Statutory) or home-rule (self-administered). The Colorado Department of Revenue (DOR) is responsible for collecting and administering Colorado State sales and use tax, local sales taxes for all statutory cities, counties and special districts that impose a sales tax and various other taxes.

Home-rule cities’ sales, use and other taxes are self-administered and collected. They conduct their own audits or use contract auditors. Their laws regarding taxability can and often do vary from the State’s laws. The Colorado Department of Revenue has no jurisdiction over sales and use taxes imposed by home-rule cities, but information is shared. The audit risk is very real and should also be addressed.

The information in this tax tip addresses Colorado State and state-collected jurisdiction audits. For information on what to expect in a home-rule city audit and additional issues impacting audits, see our tax tip: Denver Sales and Use Tax Audits.

It’s best to be proactive and to identify and resolve issues before an auditor contacts you. Voluntary Disclosure Agreements are no longer available once you’ve been contacted.

What should you expect if you’re audited?

The audit will cover all tax types administered by the Colorado Department of Revenue:

• Sales Tax
• Consumer Use Tax (This impacts nearly all businesses!)
• Wage Withholding
• Corporate Income Tax
• Partnership or S Corporation Income Tax
• Estate and Trust or “Fiduciary” Income Tax
• Cigarette and Tobacco Tax
• International Fuel Tax Agreement (IFTA) Excise Tax
• Fuel Tax
• Liquor Excise Tax
• Severance Tax

You’ll receive notification of your company’s selection for audit. You or the auditor may initiate a call to discuss the audit in more detail and set an appointment to begin the audit.

These initial calls and the opening meeting should be used to help clarify mutual expectations during the audit process and to provide an understanding of the work to be done during the audit. The auditor will seek to understand your business and determine the scope of the audit. The auditor will provide you with a Statement of Philosophy.pdf and a Statement of Taxpayer Rights.

The initial meeting is a key time of negotiation to select proper sample periods and to set a cooperative tone for the audit. You may be asked to sign an initial and perhaps additional extension. It’s a consent to keep the Statute of Limitation open through completion of the audit. Failure to sign can lead to the auditor prematurely closing of the audit. You’d then need to formally protest the assessment to handle issues ordinarily resolved with the auditor. Professional representation is advised.

During an audit, the auditor customarily checks your sales records and purchase invoices to be sure that you:

• Computed the correct amount of tax
• Properly reported tax on your transactions
• Have documents in your records that support any untaxed sales
• Vendors properly added Sales Tax to your purchase transactions
• You correctly self-assessed and remitted Use Tax on untaxed or under-taxed purchases

You’ll be asked to provide documentation before or at the start of the audit. Some common requests include:

General:

Copies of returns and all workpapers and supporting schedules relating to the preparation of such returns for all taxes included in the scope of the audit, including but not limited to the company’s general journal, cash journal, general ledger, subsidiary ledgers, check register/ voucher register, and chart of accounts.

Sales Tax (State, County, Statutory Cities, RTD, Cultural District and other special districts):

Sales Journal, sales tax returns and backup reports, exempt sales supporting documentation and information, general ledger details for sales accounts listed by customer name (Excel format preferred), customer details list and access to all sales invoices for the audit period.

Use Tax (State, RTD, Scientific and Cultural Facilities District (CD), Football Stadium District (FD) and other applicable special districts):

Schedule of Fixed Assets and supporting documentation, depreciation schedule, bank statements, credit card statements, general ledger details for expense accounts listed by account number and vendor name, vendor details list and access to all purchase invoices / receipts for the audit period.

The auditor will conduct the audit and prepare and issue work papers showing the schedule of taxes due and the associated interest and penalties. You then have opportunity to provide documentation to challenge the assessments.

The auditor will review such and may issue a revised proposed assessment. You may still disagree and work to resolve it with the auditor and their supervisor. If you still disagree, a Final Determination may be issued, but you can protest it if you file a timely protest in writing. Penalties may be waived for first-time audits when taxpayers request abatement in writing and show good cause.

How can you prepare?

Know when and where to get help. Review your records and compliance procedures internally or with the assistance of your accountant or other experienced 3rd party. Note: Many accountants do not specialize in or even handle sales and use tax. This is often a problematic and costly area on audits that catches taxpayers by surprise. Look for overpayment/ refund opportunities to offset potential assessments, but refund requests can trigger audits! Professional sales and use tax specific advice is recommended.

The CO DOR offers Tax Workshop and Training classes and videos and participates in other training events such as this Sales Tax Colorado, LLC moderated event on Managing the Complexities of Sales and Use Tax and Keeping Your Company Audit-Ready.(Get 20% off by registering through our link.)

The Colorado Department of Revenue also offers a Managed Audit Program (MAP) for mid-sized businesses to conduct a self-audit with guidance from a Revenue auditor. A review of the MAP guide provides useful information in preparing for an audit. Professional representation is advised.

What if you find a problem?

The good news is that remedies are often available when you’ve discovered obligations before auditors contact you. Anonymous Voluntary Disclosure is one option. Even if you are already under audit, we can often help. See our Audit Case Studies.

To learn more about how we can help with these or the following issues, please Contact us today:

• Assistance with proactive minimization of prior period sales/use tax liabilities
• Help with nexus questions and issues
• Other sales and use tax related questions

What are your priority issues and when do you want them resolved?

Please click here for more Sales Tax Tips. For additional insight on common sales tax concerns, please see the Did You Know? section of our website.

* This tip is intended to provide general information only and is not to be considered as a substitute for professional advice.