Steps to Prepare for a Sales Tax Audit
Your organization has received the dreaded notification that the government will soon be performing a sales tax audit, and you need to prepare. If you have the feeling like you don’t know where to start, let us help. We’ve listed a few tips below to help you prepare yourself, and your business, for a sales tax audit.
Begin preparing immediately. Once you’ve received word, take the time to review all of the requirements set before you and begin a checklist of items to gather, and people to get in touch with. For example:
- Review supporting documents related to any invoices that are going to be assessed. Check to see if tax was paid through a separate related invoice, if the item was returned, or if use tax was appropriately paid in the case of a vendor not charging sales tax.
- Talk to your employees about why items under review were purchased to evaluate qualifications for specific exemptions. Often, the specified use of an item that was purchased will explain whether or not it is exempt from sales tax.
- Check with your vendors to see if any of your suppliers were audited for the same period and were assessed tax on the same purchases; if so, you typically will not owe sales tax. Most states honor double taxation provisions so that sales or use tax is only paid once.
Deliver what they ask for. If an auditor is requesting specific documentation, be sure to provide it swiftly and without issue. If your business fails to provide documents, or is missing information, it reflects poorly on you and can raise suspicion. In some cases, if these documents aren’t prepared and shown promptly, you could lose the right to a deduction.
But don’t overdeliver. Don’t give auditors records they did not request. Be careful not to allow auditors to interview employees or representatives that may make comments that lack attention, consideration or forethought that could give auditors reason to dig deeper.
Set yourself up for success. Your first impression matters! A friendly, professional demeanor is crucial to a successful audit and a good relationship with the auditor. On that note, the environment in which you place the auditor is also important. Sometimes we do the best we can in a situation, but make sure they are comfortable, and in a work-friendly environment so they can focus on their tasks without hassle or distraction.
Read and review. Don’t be shy to point out a calculation error, auditors are human too. Also, review exemption certificates, and correct any noticeable errors. If errors are uncovered, request time to correct the error; auditors will typically grant time to correct these types of mistakes. Never accept the auditor’s initial evaluation without requesting time to remedy any mistakes.
Finally, don’t go at it alone. Organizations are under intense pressure to meet aggressive deadlines. Requesting outside help from a tax attorney or public accountant to represent your interests in an audit is imperative in certain situations, e.g., it is your first time being audited, harsh time constraints, lack of resources/capabilities to fulfill audit requests, or lack of knowledge related to tax rules and regulations.
We find that many businesses cannot afford to divert enough high-level staff to prepare for an audit or provide the necessary support to auditors on site. Businesses also struggle to see the value with performing a pre-audit. We strongly recommend assessing the audit risks before the audit begins to help evaluate whether or not to accept proposed audit adjustments.
EFPR Group has extensive experience in helping organizations in preparing for audits and can also act as an intermediary between your business and the auditor.