With economic nexus laws enacted in all but a couple of states, the rise in sales and use tax audits by state agencies is inevitable. And the more states your business sells into, the more likely your business will be audited by one or more of them. Being selected for a state sales tax audit can be anxiety-inducing, but it doesn’t need to be a disaster. Taking deliberate action and having an organized plan will minimize your sales tax exposure and set you up for a successful audit.
At Sales Tax Helper, we handle state sales and use tax audits for a living, so we know all the tricks in the book and we’re here to help you navigate yours. In this blog, we will discuss 5 key things you should do before, during, and after your audit.
Prepare and Plan for your State Sales Tax Audit
Failing to prepare is preparing to fail. This adage holds true when it comes to your business's sales and use tax audit. No one wants to spend more of their business's valuable time and resources on an audit than absolutely necessary, but the work you put in before your audit will pay off big for your business. You should consider the following in preparation for an upcoming audit:
- Time: Give yourself as much time as possible to get organized and prepared for a sales and use tax audit. Most states have a mandatory grace period before an audit can start. That means the state sales tax auditor cannot start the audit during the grace period unless you waive your right to it. It’s not uncommon for an auditor to try to get you to waive this period by asking you to provide your earliest availability, usually in the form of a questionnaire. Do not unknowingly waive your grace period! This is your time to get your records organized and thoroughly prepare.
- Select an audit manager: It’s crucial to select one person to manage the audit from start to finish and serve as the single point-of-contact for the auditor. We will discuss this in more detail later, but it’s important to determine who this will be early on, as they should be fully engaged in the audit preparation process. It’s imperative that your audit manager have experience with sales tax audits.
- Locate / Organize Records: The lookback period for a sales tax audit in most states is 3 years, and you should plan on providing the auditor with documentation for the full period (but no more). Make it a priority to locate and organize these records. The earlier you get this going the better, because it can take time to reconcile any errors or receive copies of any missing documents and receipts.
- Conduct a Pre-audit: Once everything is accounted for and organized, dive into your records with the goal of locating and correcting any errors found along the way. We recommend conducting an audit of your records by reviewing the following:
- Comparing sales tax returns against federal tax returns.
- Check that all exempt sales are properly justified. If it’s too much to review all sales for 3 years, do a spot check of at least one or two months.
- Verify that your sales tax payable account versus your sales tax payments are accurately reconciled.
- Review any fixed assets purchases for proper tax payment.
- Audit key expense accounts to ensure tax was paid on your purchases.
- Decide on an audit location: We strongly discourage allowing an auditor to conduct an audit at your business location. When we handle audits for our clients, we arrange for the location of the audit to be either electronic (where the auditor works out of his/her own office) or at our office, but never yours. This is to prevent the auditor from poking their noses in places they have no business or inappropriately soliciting information form unexpecting employees. This also allows you to focus on running your daily operation rather than tending to a needy auditor.
Know and Defend Your Businesses Rights
Auditors are notorious for requesting records or documents that are outside the scope of the audit. They have no right to these documents, and they should not be made available. Likewise, auditors have been known to pressure or mislead the auditee into signing documents that they have no obligation to sign and are harmful to their best interest. For example, auditors will commonly present a sampling agreement to a business before the audit as an opportunity to limit exposure. We STRONGLY DISCOURAGE businesses from signing these agreements as they are completely one-sided and do not benefit your business at all. A sampling agreement frequently binds you to its terms, and the auditor usually samples those months even if you don’t sign. It’s essential that your audit manager know what to provide, what to sign, and when to say no to an auditor.
It’s also important to know that auditors are usually trained to be aggressive with their audit findings. The mantra ‘if in doubt, write it up’ is one they often live by. These doubtful findings are later presented as fact, and the business is left proving their innocence rather than being innocent until proven guilty.
Due to the guilty until proven innocent tactics employed by the states, we recommend businesses refrain from agreeing to their sales tax assessment, or a payment plan, until a sales tax professional has reviewed the audit findings for issues that should be challenged. Many businesses wind up drastically overpaying the state because the business owner or in-house accounting personnel were not well versed in the sales tax laws that, if challenged, could have reduced their sales tax assessment.
Assign A Single Point-of-Contact to Interface with The Auditor
The importance of this can’t be overstated. Your chosen audit manager, whether internal or external, should also be the assigned point-of-contact for the auditor and they should be the only person from your company to communicate with them throughout the audit. They should coordinate all responses on behalf of the company and discuss matters with the auditor, as it is important to speak with one voice. There are several reasons to limit the number of people communicating with the state sales tax auditor to just one.
Having a single point-of-contact prevents mixed messaging and incorrect information from being communicated to the auditor. It also helps prevent the auditor from probing employees for information that could be taken out of context or misconstrued by the auditor to hurt your business.
Check Your Deadline, Then Check It Again
There are many deadlines throughout the audit process, some more critical than others, but auditors and state agencies are known for strictly sticking to them. If you miss a deadline by even a day, it's likely that you will lose out on the opportunity to protest or appeal your audit results, which could cost your business dearly.
Deadlines vary from state to state, but generally, a business has thirty or sixty days after the date the notice was mailed or received to appeal an audit. It takes time to compile the requisite statement of facts and the legal reasoning behind your appeal, so this isn’t much time, especially if you have not yet engaged a sales tax professional to represent your business. If you miss the deadline, the assessment becomes final and the results cannot be appealed.
Similarly, if a business fails to make a payment on time, additional penalties and interest will be assessed.
Talk to A Sales Tax Professional About Your Post-Audit Appeal Options
We touched on this earlier and it's worth going into more detail over. State sales tax auditors are often instructed to write up as a finding any questionable issues or grey areas found during an audit. Then, the business is left to prove the state auditor wrong through the protest / appeal process. Additionally, despite the auditor telling you that, as part of the audit they are looking for any areas where your business is entitled to a sales tax refund, they very seldom (if ever) do. As such, we recommend businesses refrain from agreeing to their sales tax assessment until a sales tax professional has reviewed the audit report and findings for issues that should be challenged and unidentified refund opportunities.
Many businesses wind up drastically overpaying on sales tax audit assessment because the business owner or in-house accounting personnel were not sales tax professionals and did not know the sales tax laws that, if challenged, could have reduced their sales tax assessment.Whether you need a sales tax attorney or consultant, Sales Tax Helper matches the service to meet your needs. Not only does Sales Tax Helper take the pressure off you, but we also provide much-needed peace of mind that your sales tax audit is being handled by the best in the industry and your business’ best interests are being represented. Just as you are a pro in your field, our field is sales tax audits, and we know how to handle them better than anyone. If you haven’t already, schedule time with us now and learn how to best solve your sales tax concerns.