Preparing for a Sales and Use Tax Audit

Have you received a state notice of audit for sales and use tax? If so, are you prepared for the business’s sales, purchase and expense accounts to be examined by auditors trained to collect every penny of state revenue they can find? Are you aware that state tax law is the one area of law where you are considered guilty until proven innocent? This means that once the state has assessed tax, penalty and interest on a transaction it is owed to the state unless you can prove otherwise. Many state even impose what is termed a “pay to play” strategy which requires the business to pay the full assessment before the state will even consider reviewing an audit protest.

Take it from a sales and use tax expert who has supervised numerous tax audits, your best defense in any tax audit is to go on the offensive as soon as possible and start to prepare your business for the many demands an audit will have, from reviewing the transactions that make up the company’s sales, purchase and expense accounts to making sure all required tax returns have been filed. Not being proactive and thinking you will address audit issues as they arise is a big mistake. State auditors are trained to find every penny of unpaid or uncollected tax during the audit period, which is typically three to four years depending on the state conducting the audit. Auditors do not care about any good intentions you may have to address the problem later.

In preparation for the audit, ask yourself the following questions: Do you know what can be negotiated before an audit even begins? Do you know what company accounts will be examined in detail? Has use tax been accrued on all taxable purchases the business made where the vendor did not charge tax? Are you familiar with how auditors use sampling methods to test the business’s transactions for compliance purposes? Do you know how a business’s tax assessment is calculated in a sample audit?

As you can see from the basic questions listed above, a sales and use tax audit can be a very complicated matter. However, being prepared and knowing what to expect can be crucial in surviving the audit. The information provided above is just the tip of the iceberg when it comes to a sales and use tax audit. For now, begin by asking yourself: what does the state require when it comes to reporting the taxes? Has the business been collecting exemption certificates on tax exempt sales? Has any required use tax due on the business’s purchases been accrued, reported and submitted to the state conducting the audit?