South Dakota DOR — Audit Process Guide

# Record-Keeping Requirements

Businesses licensed by the South Dakota Department of Revenue can be audited by the Department at any time.
Licensed taxpayers are audited on a regular basis. If your business is selected for an audit, you should not feel that your account is under suspicion for any wrongdoing. Licensed businesses are chosen for audit by automated systems, or manual selection. Some factors that are considered for selection are: the business type, previous audits, and tax filing history. Special effort is made to achieve wide geographic coverage as well as to include businesses where noncompliance has been previously found or is suspected. Some audits are randomly chosen to confirm compliance.

# Audits

The purpose of this tax fact is to explain how South Dakota laws apply to
Audits. It is not intended to answer all questions that may arise. The information contained in this fact sheet is current as of the date of publication.
December 2025 https://dor.sd.gov/ 1-800-829-9188

# Audit Selections

Any business subject to sales, use, or contractor's excise tax in this state must keep all business records for at least three years.
Examples of business records include:
Gross Receipts

Sales and billing invoices
General ledger
Cash register tapes

 Journal tapes
 Detail tapes
 Z tapes
 Guest checks

Bank deposit slips and statements
Sales and/or cash receipts journal
Contracts
Pricing and portion/service size informationmenu prices

# Record-Keeping Requirements (cont.)

Deductions
All deductions to gross receipts allowed by law and claimed in filing returns must be supported by the following types of documents:
Resale certificates
•

Proof of exemption (exemption certificate or proof of government funds)
Bills of lading or other proof of delivery
Credit memorandums

Bad debts as claimed on federal income tax returns
•
Use Tax
Tangible personal property or services on which sales tax has not been paid are subject to use tax. Services and use taxable items which are stored, used, or otherwise consumed should be identified by:

Purchase invoices
Cash disbursement journal or check register

Fixed assets schedule
•

Inventory withdrawal records
Depreciation schedules

The above records should be preserved for a period of three years and must include the normal books of account ordinarily maintained by the average prudent businessperson. All tax returns, as well as the schedules or working papers issued in connection with the preparation of tax returns, should also be preserved. In addition to the above records, the business should keep copies of supporting information, worksheets, schedules, etc. showing how the sales and use tax amounts were determined.
Anyone who fails to keep records and books required, or refuses to exhibit these records to the Department of Revenue for the purpose of examination, could be found guilty of a Class 1 misdemeanor.

# Electronic Records

are those records that are generated and maintained in an electronic format. State regulation requires all businesses that utilize electronic records to make them available to the auditor upon request in the format commonly used by the business.
Electronic records used to establish tax compliance shall contain sufficient transaction-level detail information so that the details underlying the electronic records can be identified and made available to the department.
Businesses utilizing electronic records, upon request, are required to describe the business process that created the records, including the relationship between the records and the tax documents prepared by the business.
All businesses utilizing electronic records are required to maintain and store the records in a manner that facilitates their use by the department during an examination.

# The Audit Process

There are four basic steps to the audit process:

The taxpayer is contacted by a state revenue auditor to set up an audit appointment. A Notice of Intent to Audit will follow, confirming the commencement date of the audit.

# The Audit Process (cont.)

In most cases, an opening conference is held on the commencement date of the audit. The taxpayer and auditor will discuss the company's procedures, Examples of documents include: operations, accounting system, and records maintained. All records, books, and documents are to be ready for presentation to the auditor on the commencement date of the audit. Any documents evidencing reduction, exemption or deduction of the tax are to be presented to the auditor within

60 days of the commencement date of audit.
If the seller has not obtained an exemption certificate or all relevant date
Resale certificates
•
Exemption certificates
•
Proof of delivery

elements for exemption certificates, the seller may, within one hundred twenty days subsequent to a request for substantiation, either prove that the transaction was not subject to tax by other means or obtain a fully completed exemption certificate from the purchaser. Any exemption certificate presented after one hundred twenty days need not be considered by the department PURSUANT TO SDCL 10-59-7, DOCUMENTS PRESENTED AFTER THE 60 DAYS NEED NOT BE CONSIDERED BY THE AUDITOR.

However, additional pertinent papers or documents shall be considered if the following apply:

The additional pertinent papers or documents are material;
There were good reasons for failure to present other pertinent papers or documents as referenced in § 10-45 -45 or 10-46-43, within the prescribed time period; and
The additional pertinent papers or documents are submitted within a reasonable time period prior to any hearing scheduled pursuant to § 10-59-9.

The 60-day time limit is strictly enforced.
The taxpayer may apply for an extension prior to the expiration of the 60-day limit, and upon showing good cause, an additional 30 days may be granted through an Agreement to Produce Records.

The length of an audit varies considerably, depending on the complexity of the business and the problems encountered. After a preliminary examination of your business, the auditor will decide whether to conduct a "detailed" or "sample" audit. In a detailed audit, the auditor examines all of your business records for the entire audit period. In most cases, a sample audit is appropriate, and the auditor will examine a representative sample of your business records.

Based on any errors found, an error factor will be computed and applied to the audit period.

When the auditor's work is completed, a conference is held so the auditor can explain the results. The taxpayer has a period of time to review the audit and provide additional information to support his position. At a closing conference, a proposed Certificate of Assessment is presented, reflecting any tax, penalty or interest owed by the taxpayer. After the audit is reviewed by the audit manager, the Certificate of Assessment is sent by certified mail to the taxpayer.

If an audit results in credit due the taxpayer, it will generally be applied to future tax obligations.

# Statute of Limitations

The department is precluded from collecting taxes owed more than three years prior to the audit. This limitation period does not apply in the following instances (SDCL 10-59-16):
Any period during which the taxpayer was unlicensed;
•
Any period during which the taxpayer filed a fraudulent return or failed to file a return;
•
The three years preceding the date of mailing of a notice of intent to audit.
•

# Appealing an Audit

If the licensed taxpayer believes the assessment is based on a mistake of fact or an error of law, the taxpayer may request an administrative hearing before the Secretary of Revenue. The written request for a hearing must be received by the Department no later than 60 days after the date on the Certificate of Assessment. The written request must contain a statement indicating the portion of the assessment being contested and the mistake of fact or error of law the taxpayer believes resulted in the assessment. This request should be sent to the Secretary of Revenue. Hearings may not be requested for assessment of penalty and interest.
Taxpayers will be contacted by a legal representative of the Department of Revenue once the written request is received.
At this time, the taxpayer and the Department will schedule a hearing date, and a Notice of Hearing will be sent to the taxpayer, which will include instructions on the presentation of evidence and the issues under consideration at the hearing. Corporations, LLCs, and other business entities must have legal representation for an administrative hearing.
After the hearing, the taxpayer will receive copies of the findings of fact and conclusions of law, and the proposed order (decision).
The Secretary of Revenue's order may be appealed to the circuit court by submitting a notice of appeal within 30 days after the order was submitted. A circuit court's order may be appealed to the South Dakota Supreme Court.

# Audit Assessment Payments

Audit assessments are due on the date the certificate of assessment is issued. If payment is not received within 60 days of the certificate date, additional interest begins to accrue. If the taxpayer does not make arrangements for payment or request a hearing in writing within 60 days of the date of the Certificate of Assessment, collection procedures will be initiated by the Department of Revenue. This may result in liens being filed, a jeopardy assessment and distress warrant being issued, forfeiture of bond, or revocation of license.

# Penalties and Interest

A penalty of 10% of the tax, or $10, whichever is greater, will be assessed on any return that is not filed within the time prescribed.
If there is any tax deficiency, interest will be assessed at the rate of 1% per month or part thereof, unless the failure to pay the tax was with the intent to intentionally avoid or delay the payment of tax, in which case interest will be assessed at the rate of 1-1/2% per month or part thereof. (Interest of 1.25% is assessed for each month tax is unpaid prior to July 2015).
Contact Us
If you have any questions, please contact the South Dakota Department of Revenue.
Call toll-free: 1-800-829-9188
Business Tax Division Email: bustax@state.sd.us
Website: https://dor.sd.gov/
Mailing address and office location: South Dakota Department of Revenue
445 East Capitol Ave
Pierre, SD 57501