Whether you’re an established firm or a startup a sales tax audit will be done at some point in the company’s lifeline. The question is when and not if the auditor will come knocking at your door. Being audited can be scary even for the most prolific organizations. Therefore, it is crucial to have these tips to help you successfully manage the process regardless of the Sales Tax Audit Firm that will come to you.
- Understand your business
Whether yours is a small-sized or medium-sized business, it’s imperative to know the sales tax rules vis-a-vis your products and services. Without this information, you might think a particular product does not attract a tax only to realize it does. Or what you think is an exemption, may be taxable depending on the jurisdiction applied.
On the other hand, you may provide a taxable service along with a tax-exemption product but the regulations demand otherwise when the two are offered independently.
The crucial information here is, understand what you’re selling and the tax obligation requirement that applies to your state.
- Get the required documents in place
You can take control of auditing by getting all the requested documents in order. It is also important to anticipate other supplementary documents that may initially not have been requested. In case books of account are stored off-site warehouse, arrangements should be made to have all the records accessible.
The auditor is likely to ask for the following in their notification sales tax audit letter: journal entries, bank statements, sales, and purchase invoices, detailed general ledger, sales, and purchase journals, depreciation schedules, financial statements, resale and exemption certificates, state tax returns, and shipping documentation.
3. Check for potential Issues with the records
Once these documents are made accessible, you need to study them to ensure they’re incomplete. Any gap needs to be patched with the required information. Tracking and accessing these documents can take some time, so it’s imperative to begin the process immediately after you’re notified of the impending audit.
In case there are issues, you can engage the auditor after their arrival to determine the audit procedure. Some of the issues you’re likely to find in the books of account are:
- Missing records
- Changing in account systems
- Change in tax maintenance systems
- Other electronic records such as purchasing cards
You want to avoid any inconveniences on your part should the auditor need these documents in their random sampling procedure. For instance, the auditor may need to trace a taxable transaction and may need to see the accompanying paid tax documents
In case, there’s an issue of missing documentation records, you may need to engage with the auditor and come up with a suitable alternative. The auditor’s electronic records trail may fail, thus, raising the need to track the taxpayers’ procedure on payment and collection of the respective taxes on these types of documents.
Be informed that electronic transactions attract additional scrutiny because there are no paper documents to support them. It is imperative to have excellent internal controls in matters of electronic records. For the taxpayer’s acceptance by the taxing authority, the following functions should be examined;
- Security access codes
- Access authorization
- Regular log reviews
- System access logs
- Data access logs
- Preservation of data integrity
- Review basic records before the audit begins
It is imperative to scrutinize all the records, identify potential loopholes and major exposure areas. Additionally, make necessary arrangements to obtain any incomplete or missing resale. Remember to attach documentation for tax-free sales such as direct pay or exemption certificates.
Ensure that the exemption certificate is legally accepted in your state. In case there are errors, reach out to the party involved, and get the appropriate record before auditing begins. Failure to do so may attract unwarranted penalties and interests for uncollected tax.
- Review and respond to audit reviews timely
No business entity ever wants to be sampled for auditing, but when your organization is picked, you want to have the best outcome of the procedure. If you run an online tax account, always update your business details such as name, email, and phone address.
This allows you to receive audit notices and reviews promptly. Additionally, insist on having a hard copy to accompany the online accounts. Read, review, and respond to the auditor’s report accordingly.
- Set an agreeable time to begin the audit
Immediately you receive audit notification, access your situation, and decide if there’s ample preparation time. You can request an extension to allow you time to finish preparations. The best practice is to put your request in writing, even when requesting a time extension.