Mississippi Court Affirms MDOR Tax Assessments in Ha v. Graham: The Importance of Recordkeeping and the Presumption of Correctness

When the Mississippi Department of Revenue (“MDOR”) conducts an audit, one can be surprised by how much discretion MDOR has in reconstructing sales and assessing liability. A recent decision from the Mississippi Court of Appeals, Ha v. Graham, 2025 WL 2397562 (Miss. Ct. App. Aug. 19, 2025), highlights the risks of failing to maintain adequate records[1 and the heavy burden taxpayers face in challenging MDOR’s assessments.

In this case, the Court affirmed MDOR’s use of an observational audit to reconstruct cash sales after the taxpayers failed to provide reliable documentation. The decision illustrates how the statutory presumption of correctness operates in favor of the state, and it provides important guidance for businesses on compliance, recordkeeping, and litigation strategy.

Factual Background

Gulf Fresh Seafood, a sole proprietorship operated by Truong Nguyen with his spouse, Xieu Ha, came under scrutiny after repeatedly failing to file Mississippi income tax returns for several years. MDOR launched both a sales tax audit (covering July 2016 through December 2019) and an individual income tax audit (covering January 2011 through December 2018).[2]

When asked to produce records, the taxpayers provided only partial documentation:

• Incomplete bank statements,
• Some “z-tapes”[3] from the cash register showing monthly sales totals,
• A few unfiled state returns, and
• Purchase invoices for 2017.

These materials painted an inconsistent and incomplete picture. MDOR found discrepancies between bank deposits and purchase invoices and noted that the reported markup on sales (60%) was “unreasonably low” compared to industry norms. Most significantly, the taxpayers admitted they did not reconcile cash transactions or otherwise provide how received cash was spent, deposited, or otherwise used.

Given these deficiencies, MDOR conducted an observational audit[4] of the business, monitoring approximately 200 transactions over five separate on-site visits between November 2019 and February 2020. The audit revealed that roughly 42% of transactions were in cash, while the taxpayers’ z-tapes suggested only about 20% were cash. MDOR concluded that significant cash sales had gone unreported, leading to an assessment of $654,951 in unreported sales.

Administrative and Judicial Proceedings

MDOR Assessments

Based on its findings, MDOR assessed:

• $54,679 in sales taxes against Gulf Fresh Seafood, and
• $92,200 in individual income taxes against Ha and Nguyen jointly.

Board of Tax Appeals

The taxpayers appealed to the MDOR Board of Review, which affirmed the assessments. The Board of Tax Appeals (“BTA”) later upheld the sales tax liability but reduced the individual assessment to $23,898. The BTA reasoned that MDOR could not retroactively apply error rates from the sales audit to prior years outside the audit window.[5]

Chancery Court

Ha and Nguyen next sought de novo (i.e. starting over from the beginning without reference to previous determinations) review in chancery court under Miss. Code Ann. § 27-77-7. After considering competing motions for summary judgment, the chancellor affirmed both assessments. The court found that the taxpayers failed to keep adequate records as required by law and that MDOR was entitled to rely on “any information available” to determine liability.

Although the court expressed reservations about the reliability of observational audits, it held that statutory presumptions left the taxpayers without sufficient evidence to overcome MDOR’s assessments.

It should be noted here that MDOR did dispute the BTA’s reduction of the individual assessment. However, that challenge was dismissed by the chancellor and MDOR did not challenge that holding on appeal.

Court of Appeals

Ultimately, the Mississippi Court of Appeals affirmed the Chancery Court’s decision, reiterating that MDOR’s assessments are prima facie correct, and taxpayers bear the burden of rebuttal. The z-tapes offered by Ha and Nguyen, standing alone, were not enough. Without corroborating invoices, reconciled cash records, or full documentation, the Court found no basis to disturb MDOR’s findings, stating as follows:

However, the Taxpayers produced no evidence before the chancellor to rebut MDOR’s assessment, only asserting that MDOR should have relied on the gross sales as recorded in the z-tapes. Ultimately, we agree with the chancellor that the Taxpayers failed to rebut the presumption of correctness given to the assessment. The z-tape data (as available in the audit worksheets) were insufficient to base the assessment on in light of the inadequacy of the financial records as a whole. The observational audit resulted in a significant discrepancy between the observed cash sales and the register z-tape cash sales. The Taxpayers were unable to account for how they reconciled cash and could not produce complete records, including purchase invoices. Regardless of whether observational sales audits are an ideal method for estimating gross sales, MDOR was entitled to rely on “any information” and not necessarily the “best” information.

Legal Analysis

Recordkeeping Requirements

Mississippi law imposes strict recordkeeping obligations with respect to sales tax reporting. Under Miss. Code Ann. § 27-65-43 provides that taxpayers are required to:

[…] keep and preserve for a period of three (3) years adequate records of the gross income, gross receipts or gross proceeds of sales of the business, including all invoices of merchandise purchased, all bank statements and cancelled checks, and all other books or accounts as may be necessary to determine the amount of tax for which he is liable.

Failure to maintain such records allows MDOR, pursuant to the preceding statute, to estimate sales tax liability from “any information available,” and those estimates are presumed correct by statute.[6]

The Presumption of Correctness

The Court relied heavily on the principle that MDOR’s assessments are prima facie correct.[7] This means that once MDOR issues an assessment, the burden shifts to the taxpayer to provide credible, corroborated evidence showing the amount is wrong. Mere testimony or partial records will not suffice.[8]

Observational Audits as Evidence

Ha and Nguyen argued that observational audits are inherently unreliable.[9] MDOR had observed only 200 transactions over five visits, a small fraction of total sales. However, the court emphasized that the law does not require MDOR to use the “best information available”—only “any information available” when taxpayer records are inadequate.

The discrepancy between observed cash sales (42%) and reported z-tape ratios (20%) provided sufficient justification for MDOR’s conclusion that cash sales were underreported.

Penalties and Interest

The court also upheld statutory penalties:

• A 10% negligence penalty under Miss. Code Ann. § 27-65-39 for failure to comply “without intent to defraud.”
• Penalties and interest on the income tax assessments under Miss. Code Ann. §§ 27-7-53 to -75 for failure to timely file and pay.

The Court rejected the taxpayers’ arguments for abatement, noting that the BTA and chancery court had already addressed the issue.

Practical Takeaways

1. Recordkeeping Is Paramount (especially when statutorily required)

This case reinforces the critical importance of maintaining complete business records. Invoices, reconciliations, and cash tracking are not optional. Without them, taxpayers are effectively defenseless in the face of an audit and ultimately empty-handed when trying to prove their case at trial.

2. The Burden Shifts Quickly

Once MDOR issues an assessment, the taxpayer carries the heavy burden of rebutting the presumption of correctness. To succeed, taxpayers must present detailed, corroborated evidence—not merely assertions or partial documentation.

3. Observational Audits Exist

Notwithstanding some criticism, observational audits remain a valid tool when records are inadequate. Businesses operating heavily in cash should be especially vigilant, as discrepancies in cash reporting often trigger such audits.

4. Penalties Add Up

Negligence penalties, interest, and additional statutory charges can substantially increase liability. Avoiding these requires both timely filing and accurate reporting.

Conclusion

The Mississippi Court of Appeals’ decision in the instant case illustrates the formidable advantage MDOR holds when taxpayers fail to comply with statutory recordkeeping requirements. Despite skepticism about observational audits, the Court reaffirmed that MDOR may rely on “any information available” and that its assessments are presumed correct unless convincingly rebutted.

For Mississippi businesses—especially those with significant cash transactions—the case serves as a cautionary tale. Diligent recordkeeping and timely compliance are the best defenses against costly assessments, penalties, and expensive litigation.

[1] See previous articles: https://esapllc.com/baum-2021/, https://esapllc.com/substantiate-those-deductions-but-not-with-falsified-documents-chopra-2025/, https://esapllc.com/langston-2020/, https://esapllc.com/izen-jet-2022/, https://esapllc.com/smith-v-commr-2025/, https://www.esapllc.com/reasonable-comp-ward2021/

[2] The court’s Opinion only concerned the sales tax dispute.

[3] From Footnote 2 of the court’s Opinion, “The United States Tax Court has explained the “Z” tape is a tape produced by a cash register which reflects the amount of all sales transactions entered into the machine.” (citing Edgmon v. Comm’r, 66 T.C.M. (CCH) 1093 (T.C. 1993)).

[4] Observational audits in this context were essentially the MDOR auditor visiting the business locations on-site, observing the sales in real-time, and then comparing the observed results to what was reported. In the instant case, such was used to determine the cash to credit sales ratios.

[5] The author’s understanding of this is that the BTA did not want to apply the rate of unreported cash receipts identified in the sales tax audits for income tax years at issue that fell outside of the sales tax years at issue.

[6] Beware: “Any information available” does not necessarily mean “from the best information available” either. See Rawan Hayaf LLP v. Frierson, 323 So. 3d 555, 564 (Miss. Ct. App. 2021).

[7] See Miss. Code Ann. § 27-65-43 (second paragraph).

[8] Marx v. Bounds, 528 So. 2d 822, 827 (Miss. 1988), holding that “uncorroborated testimony, coupled with a failure to maintain adequate records, does not overcome the Commission’s prima facie correct assessment.”

[9] Based on the notes in the Opinion regarding the chancery court case, this argument may have found traction were there not other significant gaps in documentation to provide.