OTC Audits Levels Up While IRS Audit Levels Down

Unlike the IRS, the Oklahoma Tax Commission (the “OTC”) is beefing up enforcement efforts

By Jesse Chapel 

Over the last several years, the IRS has endured substantial budget cuts. These cuts have drastically reduced staff and audit rates, which are at their lowest levels in over 10 years. In 2016 alone, the IRS audit rate reportedly declined by 16 percent. This obviously affects federal revenues. This does not seem to have concerned congressional leaders, which is probably due to the fact that Congress is not burdened by a constitutional requirement of a balanced budget. When revenues decline, Congress can sustain federal spending and even increase it.

Our Legislature does not have this luxury due to the balanced budget requirement. As most know, Oklahoma has recently faced severe budget challenges. The Legislature has generally been reluctant to raise taxes, so it has scrambled to find ways to protect investments in government programs. One initiative has been authorizing the OTC to hire up to 50 additional auditors.

Given this mandate to raise additional revenue, the OTC has significantly increased its enforcement efforts. These new initiatives have caught many unguarded taxpayers by surprise. One area the OTC has focused on is the sale of fixed assets. When a taxpayer sells all or part of a business, the transaction oftentimes includes the sale of fixed assets, which are generally subject to sales/use tax (unless an exemption applies). Unlike some other states, Oklahoma does not have what is commonly called a bulk sale exemption. Also, these kinds of sellers, unlike retail vendors, are not accustomed to tacking on sales tax, so it can be surprise to them when the OTC comes a calling. In the end, the seller may end up having to pay the tax that should have been charged to the seller.

The OTC is also targeting employers to make sure they are meeting withholding requirements, which includes non-residents who work in Oklahoma. There is also a renewed focus to get non-filers in compliance. There are just some of the examples of the OTC’s new efforts.

It is always important for businesses to work with their advisors on staying in compliance with tax laws. Audits are time consuming and burdensome. Not having records ready for production, not only increases the cost of the audit, but exposes the business to substantial tax liability. Falling behind on compliance efforts, in some cases, can put the business in jeopardy. The recent initiatives by the OTC are a good reminder to us all to stay on top of things.

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