Evade State X Tax Payable
An online retailer, eVade, operates distributions centers across all 50 states in the United States. Due to the fact that eVade does not own storefronts in said states, the company has not been collecting or remitting sales tax. Recent court rulings in States X has proclaimed that a distribution center within the state results in tax collection and remitting sales tax. Seeing that eVade has not paid taxes for five years, they can owe a large amount of taxes to State X. As of December 31, 3011, eVade owes $50 million plus $6 million in interest and $4 million in penalties for the uncollected and remitted sales tax for the past five years. However, the company considers this risk of detection not probable. On March 15, 2012, the governor of State X, Mr. Needmoney, has set up a tax amnesty program to aid unregistered taxpayers. This will allow eVade to register as a taxpayer and, as a result, be forgiven of 50 percent of all taxes and the full amounts of interest and penalties. eVade has decided to enroll in this program to be relieved of their taxes. eVade completed the paperwork on June 15, 2012, to participate in this program. The company pays $25 million to settle their obligation through December 31, 2011
eVade has to make certain decisions in regards to the financial statements. Over this time period, three issues need to be addressed:
As of December 31, 2011, what amount, if any, of sales taxes due, should be recognized in eVade’s financial statements?
What effect, if any, does eVade’s decision to participate in the tax amnesty program have on the amount recognized as of March 31, 2012?
What amounts should be recognized in the financial statements for the $25 million payment on June 15, 2012?
As the situation involving State X proceeds eVade needs to decide how much, if any, they should recognize when it comes to key events. The Financial Accounting Standards Boards (FASB) Accounting Standards Codification (ASC) will provide guidance as to what eVade should recognize on their financial statements.
While examining what amount should be recognized as of December 31, 2011, it is imperative to address whether this situation is an error in the financial statements or simply a contingency. An error in financial statements can possibly mean restating previous financial statements while including this transaction in the December 31, 2011, financial statements. According to FASB ASC 250 – 10 – 45 – 25 a correction related to prior interim periods of the current fiscal year is defined as follows:
“For purposes of this Subtopic, an adjustment related to prior interim periods of the current fiscal year is an adjustment or settlement of litigation or similar claims, of income taxes (except for the effects of retroactive tax legislation), of renegotiation proceedings, or of