§ 26-18-305
LexisNexis Practice Insights
Disputing Audit Sampling in State Tax Audits
26-18-305. Examinations and investigations.
(a) (1) (A) In the administration of any state tax law, the Director of the Department of Finance and Administration, for the purpose of determining the accuracy of a return or fixing any liability under any state tax law, may make an examination or investigation of the place of business, the tangible personal property, equipment, and facilities, and the books, records, papers, vouchers, accounts, and documents of any taxpayer or other person.
(B) Every taxpayer or other person and his or her agents and employees shall exhibit to the director these places and items and facilitate any examination or investigation.
(2) (A) The director may employ proper and reasonable audit methods as he or she deems necessary, including the use of sampling.
(B) If sampling is to be employed as an audit method, the taxpayer's consent to the sampling technique must be obtained at the commencement of the audit.
(b) No taxpayer shall be subjected to unnecessary examination or investigations, and only one (1) inspection of a taxpayer's books of account shall be made for each taxable year unless the taxpayer requests otherwise or unless the director, after investigation, notifies the taxpayer in writing that an additional inspection is necessary.
(c) (1) When conducting an investigation or an audit of any taxpayer, the director may, in his or her discretion, examine the records and files of any person, except when privileged by law, any other business, institution, financial institution, the records of any state agency, agency of the United States Government, or agency of any other state when permitted by agreement or reciprocity.
(2) (A) The director may compel production of these records by summons.
(B) The summons may be served directly by the director.
(d) In the administration of any state tax law, the director may:
(1) Administer oaths, conduct hearings, and compel by summons the attendance of witnesses, testimony, and the production of any books, records, papers, or other data of any person or taxpayer; or
(2) (A) Examine under oath any person regarding the business of any taxpayer concerning any matter incident to the administration of any state tax law.
(B) (i) The fees of witnesses required by the director to attend any hearing shall be the same as those allowed to the witnesses appearing before circuit courts of this state.
(ii) The fees shall be paid in the manner provided for the payment of other expenses incident to the administration of any state tax law.
(e) (1) The investigation may extend to any person that the director determines has access to information which may be relevant to the examination or investigation.
(2) When any summons requiring the production of records as described in subsection (c) of this section is served on a third-party recordkeeper, written notice of the summons shall be mailed to the taxpayer that his or her records are being summoned, at least fourteen (14) days prior to the date fixed in the summons as the day for the examination of the records.
(3) Notice to the taxpayer required by this section is sufficient if it is mailed by certified mail to the last address on record with the director.
(f) When the director has the power to issue a summons for his or her own investigative or auditing purposes, then the director shall honor any reasonable request by any taxpayer to issue a summons on the taxpayer's behalf.
(g) (1) The director or the taxpayer may apply to the circuit court of the county of the taxpayer's residence, place of business, or county where the summons can be served as with any other case at law for any order compelling the production of the summoned records.
(2) Failure to comply with the order of the court for the production of records may be punished by the court as for contempt.
(h) (1) The cost of producing records of a third party required by a summons shall be borne by the taxpayer if he or she requests the summons to be issued.
(2) (A) If the director initiates the summons for third-party records, the director shall bear the reasonable cost of producing the records.
(B) The director may later assess the cost against any delinquent or deficient taxpayer as determined by the records.
(i) (1) The director may examine the books, records, and other documents of transportation companies, agencies, firms, or persons that conduct business by truck, rail, water, airplane, or otherwise in order to determine any sales or use tax due on out-of-state purchases and to determine which dealers are importing or shipping articles of tangible personal property and are liable for any state tax.
(2) If the transportation company, agency, firm, or person refuses to allow an examination of its books, records, and other documents, the director may petition the appropriate circuit court to require the transportation company, agency, firm, or person to show cause as to why its books, records, and other documents should not be examined and why a bond should not be required in an amount not to exceed two thousand dollars ($2,000) for a period of not more than one (1) year to guarantee compliance with the provisions of this section.
(3) Refusal to permit the director to examine books, records, and other documents pursuant to this section is a Class C misdemeanor.