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Sales Tax audit sampling: How does it work?

What is sales tax audit sampling?

Sales tax audit sampling involves the gathering of records that have been drawn from a large population of transaction records.

If you have been selected for an audit for state tax by your state, you most likely need to know that the numbers they come up with, are based on an estimate and may not be a hundred percent true.


How does sales tax audit sampling work?

Most sales tax auditing relies on sales tax audit sampling. Which involves taking samples of documents or samples of observations and drawing conclusions on a population, based on these samples. There are various audit sampling methods used in auditing to examine for discrepancies of any form. This is done when it is not feasible for an auditor to scrutinize every single record of a taxpayer. Sales tax audit sampling is done to ensure speed in the auditing process.

The errors observed from a sample are used to predict an estimate of errors in a population. This net error derived from a sample is usually gotten by netting the positive and negative errors against each other.

Not all audits are done by sampling. For some sales and use tax audits, transactions above certain amounts (thresholds) are audited thoroughly with a detailed examination of the transaction. While transactions below a specified and sizeable amount are mainly done by sampling.


Types of audit sampling methods

Different types of audit sampling techniques are used in a state sales tax audit. An audit sampling technique is said to be constructive and effective when the estimated amount of errors it gives are accurate. When the audit sampling methods are constructive and well organized, taxpayers gain from them.

State sales tax auditors will usually use a form of audit sampling method or another. A plethora of audit sampling techniques exist but a few are widely known and used by auditors to aid their work. They include:

1.Random Audit Sampling: This technique of sampling involves the use of random number tables or generators. Random Audit Sampling gives every member of the population an equal chance of getting selected.

2.Monetary unit sampling: With the Monetary unit sampling method, everything from sample selection and sample size, is hinged on monetary amounts.

3.Systematic selection sampling method: This sampling method is more organized and well structured. It is done by fixing an exact interval where selection should be done. After the first item is selected, subsequent items would follow a sequence.

For instance, if the interval that was set is 5 and the first into selected was item 10, then the sequence to be followed would be 15, 20, 25, 30, 35… This is a methodical audit sampling technique.

4.Haphazard sampling method: This method is not structured or methodical. Using the haphazard sampling method, the auditors do their best to eliminate bias and simply choose a sample of records from the population. The samples although randomly selected should be items that represent the population.

5.Block selection sampling method: This audit sampling method is not used much in recent times because it involves selecting a block of samples from a population which makes it impossible to make valid references beyond the selected block. For instance, an auditor using the block sampling method may decide to take all items from a particular month of the year as samples.

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Internet subscribers, users, and online readers are advised not to act upon this information without seeking the service of a professional accountant. Any U.S. federal tax advice contained in this website is not intended to be used for the purpose of avoiding penalties, of any kind, under U.S. federal tax laws.