7 Ways a Business is Selected for Audit

As we entered 2021, many industry experts believed that state sales tax audits were likely to increase sharply due to the loss of state revenue during the pandemic. Likewise, in a recent TaxConnex survey we saw that two out of five respondents agree with the experts, saying that they expect sales tax audits to become more common over the next two years. 38% of respondents said they believe audit levels will stay the same, and in a separate question, 66% have already seen an increase in the number of audits in the past two years.

So far, other evidence of tax jurisdictions’ ramping up audits remains anecdotal, but with the addition of economic nexus in Florida to start later this year, and Missouri set to potentially follow suit, the realization that money received from economic nexus liabilities is definitely top of mind for states. And states are looking to collect.  

But what does this mean for your business? How does a business get selected for an audit? Is it luck of the draw? Like most things in sales tax, there’s not an easy answer. But there are many triggers that can result in an audit. In this blog, we’ll examine 7 of the most common.  

1. An audit of your customer – A customer undergoing its own sales tax audit may produce one of your invoices, resulting in the auditor questioning why you are not charging sales tax and potentially leading to an inquiry or nexus questionnaire being sent to your company.  
2. An audit of one of your suppliers – If one of your suppliers is investigated in an audit, there’s a potential for questions to arise on an exemption certificate for example. If they believe something should be taxable that you were not taxed for, it could result in a red flag for your business as well.  
3. An audit of one of your competitors – Auditors know that competitors tend to have similar business models and that some industries are more susceptible than others to tax deficiencies based on the complexity of the taxation scheme. Audits of similar companies in your industry may lead a state tax authority to run comparison data on you and your competitors, such as your percentage of taxable sales. Even being off just a little bit could lead to you being audited.  
4. A disgruntled employee – Hopefully, you have no employees that would do this to you, but a disgruntled employee that knows you are not in compliance and not charging sales tax correctly in a state or jurisdiction may report you to a tip-line. This is a fast ticket to an audit.  
5. Name recognition and general inquiries – It may just be luck of the draw, your good news or growth, but brand name recognition could incite an audit. A random drive-by past one of your locations, noticing your company’s name in the news, an auditor seeing your business at a tradeshow, all could lead to a potential audit.  
6. You have recently been audited – Jurisdictions do speak to each other. And usually, simply being audited by one does not mean all of them will be coming after you, but an audit by one state or jurisdiction could lead to another jurisdiction sending a notice shortly after.  
7. Chance – Sometimes it’s just your unlucky day. Not much you can do or say, sometimes it just happens. 

No matter the reason you are selected for audit, it is usually not a welcome surprise. Sales tax audits can represent a significant distraction for any business. Pulling paperwork, managing the audit, answering the auditor’s questions, and negotiating an outcome can be time-consuming at best and risky at worst. Having a sales tax expert, like TaxConnex, act as an intermediary between you and the auditor can be extremely beneficial to your business. An even better option is having that sales tax expert evaluate your processes and maintain your compliance before you get audited! Contact TaxConnex to learn more about our services and how we can take sales tax off your plate.  

Looking for more information on how to prepare your business for a potential sales tax audit process? Join our webinar on May 19 at 3pm EST.