New Jersey Department of Revenue publishes “Manual of Audit Procedures”

On March 7th, the New Jersey Department of Revenue released its “Manual of Audit Procedures” to the public, which is intended to provide a comprehensive overview of the procedures and guidelines available to it for completing all types of audits, as well as general guidance for both audit staff and taxpayers.  The manual, which was requested numerous times over the years by tax professionals, has generally received praise from practitioners.  Very few states make their audit manual publicly available.

Topics addressed include field audit preparation and procedures, sampling, work papers, nexus, and various subjects related to specific tax types (e.g., sales and use tax and corporation business tax). The Division explains that it will update this manual periodically to reflect foregoing changes, and that the tax rates in this first edition are based on laws in effect as of December 31, 2016.

The Manual has the below disclaimer:

This manual does not reflect changes in laws, regulations, notices, decisions, or administrative procedures that may have been enacted, issued or adopted since the manual was last updated. This manual and the information contained herein may not be cited as authority to support any audit position. Taxpayers and Division auditors are to be guided by the controlling statutes, regulations and case law in presenting their respective positions in the context of an audit or investigation. This manual does not constitute a public policy statement of the Division. Moreover, this manual does not constitute written guidance by the Division to the public at large or to any specific taxpayer. The auditing methods and techniques suggested in this manual are intended primarily as administrative guidance, and may not be appropriate, applicable or necessary for every audit. Auditors should use discretion, in consultation with their supervisors when needed, when deciding which techniques should be used in a particular audit, and should consult with their supervisors whenever atypical factual patterns or legal issues arise.

The disclaimer basically states that the manual is not authoritative and cannot be used as binding law or regulation on Division of Taxation audit activities.

Of particular interest is the discontinuation of audit section in the manual.  Our office has been successful in discontinuing audits by demonstrating little potential for assessment and good accounting practices of a taxpayer.

16.8 Audit Discontinued
After starting an audit, it may become clear that there is little potential for an assessment or refund. Since audit time is a limited resource, it is incumbent upon all personnel to use it in the most effective manner possible. In cases when the potential for adjustment is small, the Division and the public are better served if audit time is spent on an audit with more potential for material tax differences. With the above premise in mind, if after an auditor’s or supervisor’s initial review or visit, an audit has a potential for an adjustment (assessment or overpayment) of less than $1,000, the audit should be discontinued.

Of particular note is the “Walk Away” section in the manual.  Our office recently received a walkaway letter from a taxpayer after we demonstrated that all returns were filed correctly.  This discontinued the audit before it even started.

8.11 Walk-Away Audit
If, after the pre-audit interview with the taxpayer, the auditor determines that the taxpayer has filed all returns correctly, the auditor may discontinue the audit. The supervisor, upon his/her approval, will send a walk-away letter to the taxpayer.

We expect auditors to follow the new published manual.  Also, we will continue to aggressively defend taxpayers in all audit activities and will use the provisions of the manual to do so.

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