Tax agencies have long used taxpayer social media accounts to troll for information during an audit. In this TMI age, the IRS and state tax agencies use taxpayer social media accounts to compare taxpayers’ reported income against their visible lifestyle on social media; confirm business service offerings and pricing; check event announcements for possible unreported revenue; and use social connections to reveal potential unreported business relationships.
But even if the taxpayer isn’t the one posting images online, customers might be.
An Orange County, California, nightclub was found to have underreported its taxable sales by approximately $1.85 million after an audit revealed unreliable information regarding its purchases.1 During an audit from the California Department of Tax and Fee Administration (CDTFA), which administers California’s sales and use taxes, the CDTFA determined that the nightclub’s liquor markup percentage (which was around 40%) was far below normal, indicating understated sales.
Purchase records from the nightclub’s vendors showed beer purchases, but documentation for liquor purchases was largely absent. The CDTFA examined Yelp reviews of the business, where photos and videos showed a fully stocked bar with various name-brand liquors. Based on these images, the CDTFA estimated that the taxpayer’s liquor purchases equaled its beer purchases (a 50:50 ratio).
Using this ratio and a 463.40% markup from a prior undisputed audit (which is a normal markup percentage for a bar/nightclub), the CDTFA calculated unreported taxable sales of $1,854,547, resulting in unpaid tax of $145,000.
