Beware of Inhospitable Tax Queries in 2012

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Based on analysis of data reported by businesses, the Minnesota Department of Revenue recently announced that 2012 audit attention will focus on compliance levels of catering businesses and hotels/motels among other businesses.

This doesn’t mean that other hospitality-focused businesses are immune. It’s likely—based on audit results of car dealerships and others in 2011—that state tax authorities are looking into business tax compliance on sales and use tax.

Review has historically gone back three years, or as far as 2009 returns this year.

For example, tax authorities may review reported beginning and ending inventories on food and alcohol and compare that to paid sales and use tax. It can be difficult to defend discrepancies without meticulous records.

In addition, hotels and motels must take care to pay Minnesota use tax on items such as beds and bedding purchased out of state. The hospitality business is considered the final sale — not the out-of-state vendor.

Other common areas for scrutiny include reported tips, depreciation vs. expensing of assets and credit card purchases.

For credit card purchases, the 1099-K will be an important form to include in business tax reporting and planning. Tax authorities will compare these forms to the merchant’s reported gross sales. But the 1099-K form may not account for canceled transactions or credits. Transaction software and procedures should be in place to track credit card transactions separately. Monthly reconciling will ensure accurate records.

Because of this additional scrutiny, hospitality businesses that receive any correspondence from either the Department of Revenue or Internal Revenue Service should keep the following in mind:

  • Don’t ignore the letter. And it will always be a letter first. Calls or emails could be scams.
  • Share the tax agency’s request with your CPA. Some letters are generic in nature and may not apply directly to your tax situation.
  • Even if it seems reasonable to handle the request on your own, an incorrect answer may result in a more expansive review of your tax situation.
  • Keep careful records of credit card transactions, tips, sales and use tax payments and asset purchases. A monthly audit of transactions could be cost-effective in the long run to ensure proper reconciling and avoid future tax agency claims of underpayment.

Stepped-up compliance efforts on both a federal and state level are paying off. Department of Revenue Commissioner Myron Frans reported that during the 2011 fiscal year alone, Minnesota’s audit compliance efforts resulted in collection of $39.3 million, exceeding the revenue target by $12.5 million.

If you have any questions regarding methods to ensure tax compliance in 2011 or proper record keeping and tax planning this year, talk to your CPA. For referrals to CPAs who focus on hospitality and small business in your area, visit the Minnesota Society of Certified Public Accountants or call 800.331.4288.

—Scott

Scott Taylor, CPA, is a senior tax manager who focuses on hospitality and small businesses at Eide Bailly LL. You can reach him by phone: 612.253.6578 or email: sataylor@eidebailly.com.

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