Generally, when the state of Arkansas initiates an audit, before the audit even starts - tax auditors will often push the taxpayer to sign a waiver of statute of limitations. Such a waiver allows the auditor to in effect stop the statute of limitations clock. The auditor will then select a future date for the audit period, which will allow the auditor plenty of time to complete their listing of exceptions.
If a taxpayer signs the waiver, the interest clock starts to tick – and interest (if owed) starts to accumulate. Arkansas’ interest is imposed using the Julian calendar at an interest rate of 10% per annum. (The first month of the first year is already at 30%.) Signing a waiver to extend the period for which an assessment can be issued only increases the potential interest the taxpayer may need to pay upon completion of the audit.
As previously discussed in my “Arkansas Statute of Limitations - and How It's Unique” post - the statute of limitations in Arkansas is 3 years unless the taxpayer tax is understated by 25% or more in the first three years, then the state of Arkansas can extend the audit to six years. The tax auditor, however, can only assess tax in the months in years 4, 5 and 6 that are understated by 25% or more. The tax auditor will assess every month in the first three years if understated at all.
The only reason to sign a waiver in Arkansas is when it is in the taxpayer’s best interest. For example, if the records are not on site or available for review, signing a waiver may provide a taxpayer additional time to locate and/or deliver records to the facility. Otherwise, my advice is to simply say “no, thank you”.
After the auditor has finished their listing of potential exceptions, now would be the time to request a waiver of statute of limitations and ONLY extend the period of time 30 to 60 days. This time can be used by the taxpayer to review the listing and remove any items due to data input or math errors, exemptions claimed, non-taxable transactions or services and other potential errors listed.
The key is to be in control of the audit process and not allow the auditor to drive the audit. Only sign waivers when it is in the taxpayer’s best interest, not because the auditor has requested it.
So remember “no, thank-you” - simple but important words for Arkansas taxpayers.
Is your business facing an Arkansas audit? If so, please feel free to contact me with any questions or concerns.
Other recent “Arkansas (AR)” posts by B.J. Pritchett, CMI:
- Procurement (Credit) Cards in a Tax Audit- Good or Bad?
- Consumer Use Tax vs Direct Pay in Arkansas: Key Differences
- Arkansas Waivers of Statute of Limitations: No, Thank You - Unless…
- Arkansas Local Taxes - Understanding the Local Tax Cap
- Arkansas Statute of Limitations - and How It's Unique