I received a letter that I'm being audited for gross receipts tax. What's this all about?
Audits can happen when the N.M. Taxation & Revenue Dept. (TRD) compares gross receipts (aka sales) on federal Schedule C of sole proprietors (and some LLCs) to gross receipts reported to the TRD for gross receipts tax (GRT) on form CRS-1. They also compare payments reported to the IRS on Forms 1099 to the CRS-1s. When the amount reported to the TRD is less than Schedule C gross receipts or 1099 payments, they send the business a letter advising them that the TRD has opened an audit and proposes the amount of gross receipts tax that may be assessed.
What are the most common circumstances that cause this mismatch?
The business is not registered with the TRD.
This can simply be because the business did not do its homework. If it had, it would have discovered the requirements for business's doing business in New Mexico to report their gross receipts and pay gross receipts tax.
A more understandable reason is that the business in located outside of New Mexico and has customers in New Mexico.
Or the business is operated by individuals who moved to New Mexico and are not familiar with the GRT.
The business fails to report sales that are not subject to GRT.
It's a common misunderstanding that, if sales are not subject to GRT, they don't need to be reported. Such sales are either exempt or deductible. Think about it. Sales on Schedule C and 1099s include sales that are not subject to GRT as well as sales that are taxable. Not reporting all sales will cause the mismatch. What's the solution? Simply report all sales and then deduct those that are not taxable.
N.M. Taxation & Revenue Dept. Publication FYI 215. expands on these matters.
Along with the audit letter will be an offer for you to participate in a Managed Audit and avoid penalties and interest.