I don't know what kind of audit I would be in for, I am also not planning to rip anyone off.
Imagine this scenario,
A person goes online and purchase an airline ticket from Atlanta, Georgia to Chicago, IL. He checks the little box that says "Business trip- do not collect NRST" and is issued his boarding pass with no NRST collected.
Right now, this expense is tracked, documented and recorded eventually on the business tax returns as an deduction. The paper work is stored and the accounting department handles all this work that I would call "Tax compliance" activities.
Under FairTax:
1. Who will be responsible for checking whether this is a valid business expense?
2. How will they catch it?
3. What will businesses need to do to protect themselves from being called a NRST tax cheat?
4. Will businesses still need a "Tax compliance department" to protect themselves from going to jail?
5. If so, doesn't this negate some of the Fair Tax arguments that a) we get rid of the horrible, all-powerful tax auditing agency (IRS has morphed into something else) and b) that compliance costs under NRST will be cut to zero?
"Under FairTax:
1. Who will be responsible for checking whether this is a valid business expense?
2. How will they catch it?
3. What will businesses need to do to protect themselves from being called a NRST tax cheat?
4. Will businesses still need a 'Tax compliance department' to protect themselves from going to jail?
5. If so, doesn't this negate some of the Fair Tax arguments that a) we get rid of the horrible, all-powerful tax auditing agency (IRS has morphed into something else) and b) that compliance costs under NRST will be cut to zero?"
Legitimate concerns, no doubt. Here is how I understand it will work.
All retailers will charge the sales tax if it is an item that is potentially for personal consumption. The purchaser will file a request for reimbursement on a monthly basis. That accomplishes a couple of things.
(1) It relieves the retailer from having to figure out who is legitimately entitled to buy tax-free.
(2) It builds a file that the sales tax authority would be able to use to spotlight abuse.
That isn't to say that Americans won't abuse the system to some extent. There is no system that is abuse proof. However, when one considers the enormous reduction in points of collection/enforcement and the enormous decrease in the complexity of the system being administered, it just makes sense.
Will a sales tax create a different set of compliance challenges than an income tax has? Absolutely. That does not mean, however, that those challenges cannot be met with AT LEAST the degree of success that we have demonstrated with an income tax. I strongly believe that we will get higher rates of compliance with the FairTax than we do with the current system with much lower compliance costs. For me, that is more than good enough.
I just thought of something as I was typing this out. If I were in charge of NRST compliance, I would develop an audit program for these refund files. The ones that revealed suspicious patterns would be the ones that I would send field auditors out to inspect. You could probably develop a list of questions from that file that could be answered very quickly and easily.
That would be different than the audit for those collecting and remitting the sales tax, of course, but that, too would be relatively trivial compared to an income tax audit.