When it comes to a business audit, Arizona Department of Revenue (ADOR) policies and state law govern the performance. The department views an audit as a cooperative and educational process that promotes voluntary compliance with tax obligations by ensuring that taxpayers pay the correct amount of tax. Our trained auditors fairly determine whether the correct amount of tax has been reported and are responsible for performing audits in a professional and courteous manner with minimum disruption to a business.
What to Expect During a TPT Field Audit
Businesses selected for an audit by ADOR are not singled out, nor does an audit mean a business has been reporting incorrectly. Overall, the department has the right to examine any taxpayer’s records, including electronic records, to determine if all taxes were properly paid, or in some cases, if a refund is owed pursuant to A.R.S. § 42-1108.
Additionally, an audit normally covers the most recent four-year period. However, if tax returns have not been filed, the statute of limitations may be longer, and the audit period could be more than four years. While this is meant as a guideline to help taxpayers through the audit process, any omission on this site or any inconsistency with the statutes or rules, the language of the Arizona Revised Statutes, the Model City Tax Code and the Arizona Administrative Code will prevail.
Please note that our auditors are highly qualified and well trained. When dealing with the department, taxpayers have the right to professional, prompt, fair and courteous treatment by all ADOR personnel. The auditor(s) will perform the audit within the parameters and procedures outlined in the Arizona Department of Revenue Transaction Privilege Tax Audit Section of the General Audit Manual.
While completing the audit, the auditor(s) will need a place to work in order to complete the audit in an efficient and timely manner. This will cause the least amount of disruption to a taxpayer's business. Generally, a desk/table close to a power supply is sufficient. However, if a taxpayer does not have room at a place of business to accommodate the auditor(s), an alternate audit location may be discussed.
A taxpayer may use Form 285 to authorize ADOR to release confidential information to the taxpayer’s appointee and may include officers of the company. The following officers are considered principal corporate officers: C.E.O., president, secretary, treasurer and vice-president. The department may have to disclose confidential information to fully discuss tax issues with, or respond to tax questions by the appointee. A taxpayer may also use Arizona Form 285 to grant additional powers to the appointee.
Note: Arizona Form 285 may only be executed by a principal corporate officer (corporations), partner (partnership) or an owner (sole proprietorship).
Notification of Intent to Audit
Upon receiving the audit assignment, an auditor will contact the taxpayer to initiate the audit process. Once contact is made, the auditor will schedule a mutually agreed upon time to have an opening interview. Once the time, date and location are set, the auditor will send the taxpayer the Intent to Audit Letter and opening interview confirmation letter to officially begin the audit.
At the start of the audit, an auditor(s) will meet the taxpayer’s representative or employee working on the audit. It is helpful if this person is responsible for the accounting records and tax returns. The taxpayer may also have an external accountant or attorney present. During this meeting, the auditor(s) will ask some general questions about the business and accounting records. They will also ask about the location of the taxpayer’s records and the process of how the tax returns are prepared. Depending on the nature of the business, the auditor(s) may ask for a tour of the facilities. A tour of the facility and operations gives the taxpayer the opportunity to explain the business to the auditors(s).
Examination of Records
The auditor(s) will then review the accounting and tax reporting systems to decide how to proceed with the audit. An auditor will perform a detailed examination of the tax returns and the taxpayer's books and records to determine if the correct amounts were reported on the tax returns. If necessary, the auditor may obtain information from third-party sources.
An audit of business activities will cover several major areas, including:
- Income – verification of proper amounts, classifications and documentation.
- Exemptions and Deductions – verification of proper amounts, classifications and documentation.
- Purchases – verification of retail sales or use tax paid on capital assets, supplies or articles manufactured for taxpayer use.
Electronic Records (Preferred)
Electronic is the preferred method of financial data extraction. This improves the accuracy of the audit and reduces the time it takes to complete, minimizing taxpayer inconvenience. Whenever possible, taxpayers should provide records to their auditor in Microsoft Excel (.xlsx) or PDF format.
Sampling is frequently used to realize efficiencies for both ADOR and the taxpayer. This helps minimize costs associated with the audit, such as retrieving and examining documents. The auditor will discuss the options to select the most appropriate method.
If the auditor experiences difficulty in obtaining the necessary records during the course of an audit, the auditor should give the taxpayer reasonable time to produce the required records. If, after a reasonable time, the documentation has not been obtained, the auditor should refer the account to a supervisor. The supervisor may then attempt to obtain information from the taxpayer through either telephone or personal contact.
If a taxpayer fails or refuses to furnish any information requested in writing by the auditor, a written request may be sent to the taxpayer by certified mail under the authority of A.R.S. § 42-1125(C.) and section 555 of the Model City Tax Code.
If the request is not successful, a subpoena may be completed and served to the taxpayer. Prior to the issuance of a subpoena, approval must be granted from ADOR. In cases where the taxpayer appears to have a legitimate reason for delaying the audit for an extended period, the auditor must have the taxpayer sign a waiver covering the period of audit.
Administration of Exemptions
An auditor will review identifying information the taxpayer has received from a customer and the reason for claiming a tax exemption at the time of purchase. The taxpayer shall maintain proper records of exempt transactions. If the taxpayer has not obtained an exemption certificate or all relevant data elements as provided in A.R.S. § 42-5009, the auditor will provide the taxpayer with 45 days subsequent to the request for substantiation to either:
- Obtain a fully completed exemption certificate for the customer statutorily available on the date of the transaction in the jurisdiction where the transaction is sourced, applicable to the item being purchased and reasonable for the purchaser’s type of business; or
- Obtain other information establishing the transaction was not subject to the tax.
If the taxpayer obtains the information described above, the auditor shall relieve the taxpayer of any liability for the transaction tax; unless, through the audit process, ADOR discovers the taxpayer had knowledge of false information relating to the exemption claimed. If the taxpayer does not obtain a properly completed exemption certificate, that taxpayer shall have the burden of proof to establish the required information.
Audit Transaction Detail Schedule Review
After examining a taxpayer’s records, an auditor will meet with the taxpayer to go over the audit transaction detail schedule. During this meeting, the auditor will provide copies of work papers detailing the transactions that occurred during the audit period. This schedule will also show all proposed changes to taxability of the transactions.
The taxpayer should review this schedule closely. If there are additional questions, or the taxpayer believes an error has been made, that taxpayer can discuss this with the auditor(s). Taxpayer needing time to gather additional documentation can establish a mutually agreeable date to furnish the information. Providing all necessary information to the auditor in a timely manner helps resolve most, if not all, questions before the issued audit.
Audit Closing Conference
After reviewing and finalizing the work papers, the auditor will schedule an Audit Closing Conference. This is where the auditor will provide the draft audit results. The auditor will explain the reasons behind any proposed audit adjustments to the taxpayer. After explanation of the results, the auditor will provide a due date for any further adjustments. If the taxpayer believes an error has been made, that taxpayer should contact the auditor prior to this due date to discuss necessary changes.
Protest Rights and Audit Finding Confirmation
Taxpayers who disagree with an audit's findings has 45 days from the receipt date of the proposed assessment to file a timely appeal. An appeal form is provided with the proposed assessment, and a timely protest must be filed in writing. It must state the reasons the assessment, the tax, interest and/or penalties are incorrect.
Managed Audit Procedure
TPT Rulings and Procedures
In addition to the information provided by the Arizona Department of Revenue on transaction privilege tax (TPT), the following links outline TPT procedures, decisions, rulings and publications for additional taxpayer resources and education.