Larry Hess CPA
I received a letter telling me I owe gross receipts tax for prior years. What's this all about?
It is likely that if you did not file gross receipts tax reports or only reported sales that were subject to gross receipts tax (GRT).
The N.M. Taxation & Revenue Dept. (TRD) detects these discrepancies by comparing gross receipts (aka sales) you reported to the IRS on federal Schedule C for sole proprietors (and some LLCs) to gross receipts reported to the TRD for gross receipts tax and also payments reported to the IRS on Forms 1099. 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 all sales that exempt from GRT.
It's a common misunderstanding that if sales are not subject to GRT they don't need to be reported to the state. Sales reported to the IRS on Schedule C and 1099s include sales that are not subject to GRT as well as sales that are taxable. The Taxation & Revenue Dept. routinely obtains Schedule C sales and 1099 amounts from the IRS which are then electronically compared with gross receipts reported to the state. Not reporting all sales will cause a mismatch and that will lead to an audit. What's the solution? Simply report all sales and then deduct those that are not taxable.
Along with the audit letter there will be an offer for you to participate in a Managed Audit and avoid penalties and interest