The sales tax audit can be one of the scariest – and costliest -- things an online business ever goes through. If you do get hit with an audit, it’s critical to handle the process correctly.
Last time we looked at mistakes companies make leading up to an audit (Check out part 1 here). This blog will conclude our top 10 list with a look at 5 missteps to avoid when handling and resolving the audit.
- Not keeping your cool. Those under audit often react emotionally. Always treat the auditor with respect and dignity. It’s also a good idea to assign one person from your company to manage the relationship with the auditor. Be careful about leaving the auditor alone in an environment where they have access to records or other employees.
- Not being clear about your business. It’s always helpful to explain your business to the auditor. Be clear about your sales cycle, inventory, past compliance and other matters. Also, however, be careful about facility tours as these often turn up exposure areas.
- Not thinking you can work with an auditor. Choosing to disclose certain errors to the auditor can allow you to build rapport and show that you’re willing to help the process (which could result in less scrutiny on the rest of your compliance questions). And depending on the situation, you may have room for negotiation before the final assessment.
- Not negotiating. There’s usually some ambiguity associated with an auditor’s assessment that provides you an opportunity to negotiate the findings. Try to work with the auditor to understand their thought process and interpretation of the law as it relates to a particular transaction.
You want to maintain a good relationship in the event you are audited again. And don’t unnecessarily go over the auditor’s head to their supervisor, as this could create animosity.
- Not taking advantage of a VDA. If you determine you have significant sales tax exposure, a Voluntary Disclosure Agreement (VDA) is an option to mitigate this risk. VDAs are only an option prior to audit notification. So missing the opportunity to enter into a VDA can be costly to your business.
A VDA is a legal means for taxpayers to self-report back taxes owed for income, sales, property and other types of tax. In exchange for voluntarily reporting the tax due, states generally grant a waiver of penalty and limit the look-back period, potentially reducing the tax due.
VDAs often work best if your company has previous non-compliance and exposure dating back more than four years, you’ve collected sales tax but have yet to register and remit to the prospective state or if you want to sell your business or otherwise seek outside capital and have previously not complied.
Audits aren’t the end of the world for your business. Not committing these goofs can help you get through the process.
At TaxConnex, our goal is to take sales tax off your plate. Laws are constantly changing, and now it’s even more important to have a resource to help you understand your sales tax obligations. If you have a question, please reach out.