Whether you have a small or big business, you should expect to be audited by the state at some point. Even if you think you've been tax compliant or well-organized, a sales tax audit is one of the most frightening challenges a business owner can face. While you may not want to go through a sales audit, many fears about them are from a lack of knowledge.
There's no reason to panic when picked for a sales tax audit, and instead, it doesn't mean your business has done something wrong. It might just be your turn, or the state has selected your industry, making you a target. Although sometimes your business does something to get targeted by the state for a sales tax audit, many times the reasons are some are out of the control of the business.
However, it's essential to have a deliberate and organized plan allowing you to effectively work through a sales tax audit and understand the main elements of the process. So, what questions do you expect in a sales tax audit?
You Received a State Notice Now What?
A sales tax audit begins when you receive a state notice letter that alerts you that you have been selected for a sales tax audit. A notification letter is the first contact with an auditor and is typically accompanied by a “must” fill out a questionnaire requesting information about your business. It is generally advisable to use the state’s grace period to get your records organized. From there, you should ask the following questions when reviewing your records:
1. Do your sales tax returns match your federal returns?
One of the first targets auditors focus on when handling your sales tax is reconciliation between the sales tax returns and your federal returns. Auditors will assess the difference and identify the cause of the variance.
At times, what you imagine is exempted may be taxable depending on the jurisdiction. If you offer nontaxable services, have exempt sales, or have non-sales included on your fedeal return, be prepared to explain those differences. For a healthy sales tax audit, it is very important to ensure that there are no understated taxable sales that may be flagged by a sales tax auditor.
2. Do you have documentation to prove your exempt sales?
Exempt sales include specific nontaxable goods or services you sell, or sales to a particular type of customer, like a place of religion, school, or government. It is prudent to note that not every sale is exempted from an auditor's perspective. In some instances, exemptions are based on the buyer and the intended use of the purchased goods.
To prove all this, you should obtain a completed exemption certificate from the customer. Read through the exemption certificate carefully to identify any mistakes or expiration date of the certificate. Make sure the forms are state-approved before the sales tax audit. In case there are errors, reach out to the client for correction.
3. Where Are Your Audit Documents?
Any document that relates to sales is important to a sales tax audit. Such documents include a chart of accounts, trial balance, list of locations, invoices, Review of all exemption certificates, Fixed asset purchases (use tax), Non-asset purchases (use tax), Review of all returns (federal, state, and local).
If there were an audit in the past, the target of the new sales tax audit would be the same. Check for tax rate faults to avoid paying for that expense.
4. What Is Your Process for Business Purchases?
When purchasing, many businesses fail to recognize taxes on the purchases and auditors are keen on identifying the whole process of purchases. If the liability was on your business for failing to submit the taxes through self-assessment, the responsibility will fall on you.
You may have previously purchased goods for use without paying taxes. If so, you have the responsibility to self-assess the use of tax on the procurement. You may attract problems with the law if the auditor finds a loophole. Report using a tax on a purchase before the audit.
5. Are You Reporting and Paying for Your Sales Through a Facilitator?
It has always been legal to use the facilitation process of paying for sales, but sometimes it gets questionable from a business ethics point of view. This is because sometimes there may be questionable business practices. It might be a risk depending on irregular payments that creates additional risk.
It is therefore very crucial to understand and review any agreements you may have with a facilitator. Ensure you collect, report, and pay for your trade through a Market Facilitator as the state requires.
When you're aware of what an audit involves, you'll have no cause for worry when an auditor knocks on your door. If you receive an audit request, ensure you make the changes required to address any errors that may attract stiffer penalties. In addition, a professional can offer effective Washington sales tax help if the business receives an audit notice. We are here to help you through the entire process. Feel free to contact us today.