Surviving a few sales tax audits, I can say that initially, the scariest part was the unknown. Why are they auditing me, did I do something wrong or what have I missed? Unless you have intentionally avoided paying taxes or falsified information to keep from paying state sales taxes, the worst that can happen is the interruption of cash flow when they find items that you should have paid taxes on and did not. However, with that can also come penalties and interest; therefore you don’t want to exacerbate the issues by not supporting the process to the best of your ability. Most tax audits are looking for two things: taxable sales that were not properly taxed and taxable purchases that were not taxed (watch out for those internet purchases). The auditor’s job is to make sure that tax laws are being followed and by doing so they intend to:
- Collect revenue for the state.
- Make sure businesses within the state are collecting sales tax and in the right amounts.
- Generate future revenue for the state as businesses becomes compliant.
- Find out-of-state businesses that may potentially have nexus in-state.
- Reviewing transactions that are occurring in the marketplace in order to make new tax laws.
I would encourage you to see your first audit as a learning experience and remain compliant going forward. You don’t want to have a second audit to find the same errors. That certainly wouldn’t justify or guarantee minimal penalties going forward.
What are the rules of thumb during an audit? First, you must understand that the auditor is not a consultant that will help you find ways to minimize the taxes you pay. They work for the Department of Revenue, and they are trained to collect revenue for the state. They look to identify the mistakes (in their opinion) that you make.
Have respect for what the auditor is tasked to do and treat him/her accordingly. Provide the required information in an organized manner that will allow them to complete their work as quickly as possible. Afford them a quiet and reasonable place to perform the audit.
If you keep your ducks in a row, you are always preparing for a tax audit by periodically reviewing sales tax procedures and policies. If you haven’t don’t panic, below are a few tips:
- If you need more time to prepare, ask for it.
- Make sure they understand how your business operates. For instance the types of services you provide, how your invoicing works, how your exemptions certificates are filed if applicable, and answer other basic question they may have for you.
- It is crucial that you understand what they are asking for, and don’t give more than information than they are asking for as anything you give them is fair game.
- Have all the information ready and organized when the auditor arrives.
- Let them know you are available if they have questions. If you leave, let them know you are leaving and when you will be back. Don’t abandon them and don’t stand over them either.
- In the event the auditor strikes up a conversation with other employees, advise the employees to direct the auditor’s questions to you.
- Don’t sign any documents without fully understanding what you are signing.
Lastly, if you need to rebuttal a decision, make sure your information is cogent. For more information on your states audit process, check with your state's Department of Revenue. Here is a link that may be helpful: http://www.aicpa.org/Research/ExternalLinks/Pages/TaxesStatesDepartmentsofRevenue.aspx
What tips do you have for surviving an audit? Share them in the comment box below.
Brooke Simcik, CDFA, is the Business Manager for VAI Architects Incorporated in Dallas, TX
She serves as the 2017-2018 SDA National Vice President.