Sales Tax Horror Stories: Audits

“Scary” has five letters. Know what word in sales tax also has five letters?

“Audit.”

Few issues in the area of tax are more terrifying than this kind of exam from a tax authority.

Our third annual survey of financial professionals showed that although most companies (67%) reported that state sales tax audits have remained at the same level over the past two years, almost one in four respondents (23%) said they expect such audits to increase in coming months.

Sales tax audit processes can certainly become nightmares – but they can be handled, too, with the right steps, allowing you and your business to move forward.

How to react

Don’t take this personally. You can do your best to forestall audits by continuously assessing your economic and physical nexus and the taxability of your products and services. Still, many events can trigger an audit, such as one of your customers being audited and the auditor seeing one of your invoices without sales tax, industry audits where taxing authorities target specific industries, or perhaps just random bad luck.

Read the notice. The audit notification should state the intended start date of the audit, the period under audit (usually at least 36 months) and, likely, a list of the records that the auditor wants to see. Start to consider which pieces of information are most critical to provide to the auditor and which pieces of information are easily accessible on your side.

Organize your information. Documentation typically required can include invoices, exemption certificates, summary reports, tax returns and more. If possible, have an expert review your data/compliance process before the auditor arrives. Missing documentation complicates an audit and may cause penalties that you may not actually owe.

Providing a flow of information – especially proactively disclosing honest past errors – shows you’re willing to help the process. But you may choose to delay providing certain documentation and wait for the auditor to ask for it a second or third time before you provide it.

Line up your people. First, consider engaging a specialist such as a CPA or sales tax expert to prepare you and manage the audit in case the taxman comes knocking. Inform your staff of the audit and assign a designated liaison between the auditor and the business. The liaison should be the only person on your staff who communicates with the auditor, consistently controlling all communication.

Be professional. Take notes in audit meetings and always treat your auditor respectfully and with courtesy. You can probably work with the auditor to understand their thought process and decisions.

But remember that auditors are not necessarily your advocates. His or her job will be to find discrepancies on your part and determine if additional tax or penalties are due. Guard what you say and what information you offer.

Negotiate the findings. There may be room for negotiation before the final assessment. Maintain a good relationship with the auditor and you’ll have more success when you negotiate “gray-area” issues.

To put your fears to rest, download our eBook, Top 10 Tips for Managing Sales Tax Audits.

TaxConnex can help you prepare for sales tax audits and assist you in establishing and maintaining effective processes to mitigate sales tax risk. Contact us to learn more.