Reverse Sales and Use Tax Audits - Watch Out!

There are a lot of sales and use tax firms that pitch their process of performing some type of reverse sales tax audit, or overpayment review, where the client has limited to no risk with the potential for a big payday. 

These firms will generally do their work on a contingency basis and thus no risk (or no out of pocket fees) to the client.  However, not so fast.

How eager do you think most taxing jurisdictions are to turn over a refund?  Not very nowadays.  What I’ve seen in many situations when a company applies for a sales tax refund is an automatic audit.  This is not necessarily a bad thing if the company has all their ducks in a row and any potential assessment has been factored in to the overall refund opportunity.  The last thing a company wants is a scenario where they believe they are going to get a refund and then under audit determine there is unremitted tax elsewhere and they end up owing money in the long-run.

Each individual client situation will be unique so you can never take a one size fits all approach to something like this.  But what I’ve seen work very well is to perform the reverse audit or overpayment review as part of an existing audit.  The auditor is not always looking for situations where you’ve paid too much tax so they may “miss” something like this during their audit.  However, a good sales tax professional will look for overpayment situations as a means to offset any potential audit assessment.  In this vane, I’ve seen numerous situations where an audit with a healthy assessment resulted in a net refund or a net reduction of the assessment.  And when you are able to reduce the audit assessment through this means, you’re also able to reduce the penalty and interest portion of the assessment.

If you are looking for help managing a sales tax audit, you may be interested in our white paper with the Top 10 Tips for Managing Sales Tax Audits.  Or simply call us to talk through your unique situation.