The fear of a sales tax audit from one of the country’s thousands of tax jurisdictions is legitimate. Audits can disrupt your business and potentially cost you thousands of dollars.
How should you prepare for a sales and use tax audit?
A lot of worry
The latest results of our annual survey of top finance executives regarding their thoughts and experiences in managing sales tax showed once again that audits are top of mind.
Even though most respondents (85%) had already gone through a sales and use tax audit, there’s a growing lack of confidence in audit preparedness in more than one in every five (22.53%) respondents (fueled in no small part by staff shortages). Among other results of our survey:
- Almost half said they’re unprepared or only somewhat prepared for an audit.
- Almost 17% of respondents want to outsource managing sales tax audits.
- Almost 14% said poor audit results would alter how they manage sales and use tax obligations.
A sales and use tax audit could land in your lap for various reasons: a string of similar audits of competitors in your industry; a result of one of your customers being audited; one of your invoices being reviewed; and even a report by a disgruntled employee. Sometimes audits also happen purely by chance.
The point is, expect an audit sooner or later.
Best defenses
If audited, turn to some best practices:
Maintain compliance documentation: Missing documentation complicates an audit and may result in additional tax assessed as well as various penalties and interest. Doublecheck that your documentation is well-organized and that an auditor can easily interpret it. Documentation typically required by an auditor can include invoices, exemption certificates, summary reports, returns and more.
Consider the Sample Period: After being notified of an audit, make every attempt to identify your exposure prior to the exam. In doing this, you may discover an issue within a specific time period. For example, maybe you recently converted to a new invoicing system, and there was a short period of time where you weren’t charging tax correctly. Knowing this, you can attempt to control the sample period so as to not use a period where you know you were out of compliance.
Disclose insignificant items before the auditor asks: Choosing to disclose errors to the auditor allows you to build rapport and show that you’re willing to help the audit process. It could also result in less scrutiny of the rest of your sales and use tax obligations.
Manage the relationship: Treat the auditor with respect and dignity. Assign one person from your company to manage the relationship with the auditor; that staffer will essentially be the auditor’s point of contact, which can reduce confusion and miscommunication. Employees shouldn’t answer any questions from the auditor but rather direct the auditor to the assigned contact staffer.
Negotiate the findings: Work with the auditor to understand their thought process and decisions. There may be room for negotiation before the final assessment – and, again, a good relationship can help here and with future audits.
Audits aren’t the end of your business, especially if you know how to handle them – and do your best to avoid them in the first place.
(See our eBook about how to prepare your company for a potential audit and
our eBook Top 10 Tips for Managing Sales Tax Audits.)
Sales and use tax laws change constantly. 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.