As Iowa faces nearly a $1 billion budget deficit, the state is searching for every tax dollar it can find. Reports from federal and state tax experts earlier this year confirmed that when times get tough, it’s more likely that governments will look to raise revenue by increasing audits rather than looking for ways to reduce spending. “In times when more revenue is needed and the tax gap widens, absolutely the Internal Revenue Service is going to step up audits” proclaimed one tax analyst with H&R Block’s Tax Institute. “You’re not going to find a document that says this, but it’s very clear that in a budget deficit, increased tax collection is another source of revenue” a tax expert and university professor stated.
Recently, several of my colleagues in the Legislature have been contacted by their constituents with questions about audits conducted by the Iowa Department of Revenue. The Department of Revenue has initiated an audit program focusing on unpaid consumer use tax. Specifically, the Department of Revenue is analyzing United States Customs records to identify purchases individuals have made outside of Iowa.
Iowa’s use tax provision complements the state sales tax. When a transaction is subject to sales tax but occurs outside of Iowa for use in Iowa and Iowa tax is not collected, it is subject to use tax. Taxpayers are responsible for registering with the Department of Revenue when they purchase taxable goods or services outside of Iowa and send the use tax to Iowa. The problem is not many Iowans know this.
One western Iowan, received a notice last week stating she owed tax, penalty and interest on purchases she made in the United Kingdom in the year 2000. Understandingly, she was shocked to learn she owed back taxes on her transactions made 10 years ago and frustrated that the penalty and interest was being assessed, especially because it had taken so long for the Department of Revenue to notify her. Similar reports of similar audits have surfaced throughout the state this year.
Nearly all Iowans understand they must pay their taxes and willingly do so. But many are expressing frustration about the lack of effort that goes into educating taxpayers about their obligations. The majority of Iowans are unaware they are required to pay use tax to the state when a retailer fails to collect it. Moreover, Iowans don’t understand why it takes the Department of Revenue 10 years to issue notification of taxes owed. It is not unreasonable to require the state government to issue notice of unpaid tax liabilities in a timelier manner.
Because such little outreach occurs, most taxpayers rely on certified public accountants to handle their tax matters. Even so, it is rare for an accountant to ask an individual if they purchased anything across state lines and paid sales or use tax. For this reason, it is important for taxpayers to educate themselves on the requirements outlined in the federal and state tax code. Individuals can learn more about federal tax law at www.irs.gov and state tax law at www.iowa.gov/tax. Additionally, if an individual is being audited it’s important everyone knows their rights. The following website is also helpful: www.iowa.gov/tax/educate/78619.html
(From Representative Dwayne Alons Capitol Comments June 29, 2010)
Nancy Wombacher on 10.06.2010
I have just received an audit notice for use tax. We are a Dental Laboratory and were unaware of use tax. We pay all of our taxes and in a timely manner. We hire accountants from a very good accounting company to make sure we are paying them correctly. Even this company missed the use tax.
The Dental Laboratory Industry has had a very tough year and many labs have closed due to the lab work being done in China. Also the economy has been hit therefore, sales have been down. In this down environment a call from the Iowa Department of Revenue informing you about an audit for use tax is an anxiety for any business owner, let alone an extremely small business owner. I employ 4 people and this audit will take hours of my time, $$$ of my accountants time and $$$ of the labs money. All for a tax that has been dormant for years. I did a survey and out of 50 Iowans that I spoke with including other business owners not one paid or knew of use tax.
Kudos to the state for taking hard earned money from the WORKERS and use it for ??????