Best Practices in Managing Sales Tax Audits

Over the years, my partners and I have worked with hundreds of companies in assisting them in some way with a sales tax audit.  During that time, we have recognized a number of strategies that lead toward positive audit results.  Here are a couple:

1. Assess Your Records - Once you’ve been notified of a sales tax audit, you’ll want to assess your own records and determine where you have gaps.  You should make every attempt to identify your exposure prior to the audit.  For example, you may discover a problem with your accounting system or a significant gap in taxability measures during a specific period of time during the audit statute.  If so, you will want to avoid sampling that period(s) if possible.  If the period is identified and reviewed in detail by the auditor, you may be able to isolate that period from any sample as an outlier.
2. Setting the Audit Sample - A typical sales tax audit will be conducted using a sampling methodology.  Sampling methods vary from jurisdiction to jurisdiction and from audit to audit.  It is important that you understand your historic business cycles and evaluate any proposed sampling method prior to acceptance.  For example, if your business is cyclical, you will want to avoid a “block” sample (block samples apply the liability from one period, or account, across the entire audit period evenly).  A statistical sample is usually ideal, but you should make sure you understand the statistical program used by the jurisdiction in its entirety before accepting this method.  The goal should be to align your exposure with the periods in which the exposure has occurred or has the possibility of occurring.

For a complete listing of the Top 10 Tips for Managing Sales Tax Audits download our white paper.