Triggering a Sales Tax Audit

We’re often asked what triggers a sales tax audit.

Unfortunately, there’s no magic formula for avoiding a sales tax audit. Here are a few things we’ve seen over the years that sometimes precede a sales tax audit:

Your Invoices to Clients

Audits tend to lead to more audits.  If one of your clients is audited, and the state finds that you didn’t charge the client sales tax on a transaction (or worse, a series of transactions), you may end up getting audited. Prior to the audit, you could receive a nexus questionnaire from the state in an attempt to determine if you have sales tax nexus or not.

Amended Returns or Refunds

If you are amending a return or seeking a refund from a prior period, be aware this may raise a red flag with the states. I’ve seen companies hire an outside firm to perform a “no risk” over payment review only to trigger a full audit before the state cuts a refund check. If you truly believe you have overpaid, be sure to audit yourself first and resolve any short comings before requesting the refund.

Industry Practice

Auditors know that businesses in the same industry tend to have similar business practices and models.  They also know that some industries are more susceptible than others to tax deficiencies based on the complexity of the taxation scheme.  If an auditor begins to see a pattern of sales tax violations among your competitors, you might be next. 

A Disgruntled Employee

Many employers are worried that a particularly bad firing might result in an employee blowing the whistle to state and federal agencies, including state tax agencies.  It certainly does happen.  The good news is that auditors don’t like to spend their time chasing violations that don’t exist.  A disgruntled employee is going to need to show some credible evidence of sales tax violations in order to cause an audit.

Random Bad Luck

It’s impossible to completely guarantee that you won’t be audited.  Every state agency has some mechanism for choosing its audit victims at random.  If your name comes up, you’ll get audited, even if you took all the steps you possibly could to avoid it.

The best defense is to expect an audit and have all your documentation in place so you can breeze through the audit. 

Expecting a sales tax audit? Download our white paper below for tips to survive a sales tax audit.