The second you receive a notice for audit, you start panicking. For big business houses, sales tax audits are normal. But for small businesses, especially those who get the first-time audit notice, it is surely nerve-wracking.
But if you are running a business, your company will surely undergo an audit at some point in time. Therefore, instead of fearing the process, let’s understand how you can prepare for it. You can successfully dodge the ball with better preparations comprising sales tax filing principles.
What Actually Causes the Sales Tax Audit?
The primary reason behind sales tax audits is often a sales audit of a customer. Auditors finding invoices with incorrect tax charges get suspicious. This suspicion then results in you receiving an audit notice.
Thus incorrect sales or use tax filing or not missing out taxes in vendor invoices can increase your chances of facing an audit. There is a 58% growth in tax payment under a regime where no third-party audit is involved.
That is why states and municipalities rely on their singular deciding factors to point out factors triggering an audit. The factors they consider while deciding on an audit include;
- The size, volume and complexity of returns
- Amending a return or filing a refund claim
- Sudden decision to dissolve a business or close its certain operational areas or filling its bankruptcy
Audits are a part of business operations that you must not fear. Instead, you can prepare well for it in advance. Below are the steps you can take to smoothen the audit process.
How Can You Prepare Yourself for a Sales Tax Audit?
Timely preparation is the key to avoiding the negative consequences of a sales tax audit. For this, you can follow the below methods;
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Make Your Relevant Documents Ready
You need to maintain proper documentation of all your taxes charged, return reports, etc. to any jurisdiction. Maintaining this audit trail will help you face a sales tax audit at any point. The documents you need to maintain for an audit properly are;
- Federal income tax return reports
- Requests for sales tax returns
- Fixed asset schedules
- Sales and purchase journals
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Train Your Employees for It
Now that your relevant documents are ready, train one employee of your organisation to face the auditor. Train the employee on the relevant questions, and communication with the auditor. In case of an on-site audit, alert all your employees to behave appropriately in front of the auditor.
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Understand Your Products Concerning Tax Filing
You need to be aware of the taxability of your products and services. Sometimes, you may think your products are exempt from sales taxes, but they are not.
Things like changes in taxability rules, your selling point, and customer usage of your products can levy a tax on you. To understand this, consult a financial expert before filing your taxes.
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Check with Vendors
An effective way to resolve audit assessments is to check whether your vendors are paying their sales taxes correctly. Check if they assessed and reported the sales and use tax exactly. Check if any of your vendors received an audit notice.
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Try To Make It Accurate
While providing documents for an audit, make sure they are accurate. Your accurate documentation upon asking for them will convey to the auditor of your sincerity. However, you can intentionally hold on providing some of your documents. Too much proactivity can raise suspicion, resulting in detailed scrutiny of your details.
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Up-To-Date Your Exemption Certificate
If you have exempt some of your sales, maintain an exemption certificate for that. Make sure there is no error and the certificate has not expired before the audit.
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Understand Marketplace Facilitator Agreements
If you have links with marketplace facilitators like Amazon or Etsy, understand your agreement with them. Notice whether the facilitator will handle your sales tax requirements.
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Keep On Checking For It
Notifying you of the audit notice in a timely manner will help you better prepare. To ensure you receive the notice without error, make sure your company’s name and contact details are correct.
General Sales Tax Principles to Know About
Understanding the basics or principles of the general sales tax can help you in different ways. It helps preventing you from getting any penalties. Plus, you can ensure compliance and plan for your finance properly. So, follow the basic measures of tax filing to avoid an audit. These are;
- Do Not Be Late
- Do Not Forget The Use Tax
- Stay Calm And Professional During The Process
Conclusion
Following these guidelines and timely preparations, you will find it much relaxing to face a sales tax audit. Stay calm and showcase your utmost professionalism in timely providing relevant documents to the auditor. Take help from a financial expert whenever you feel the need to avoid the unnecessary penalties and defamations caused by a failed audit.
Also, Read – How Is an Excise Tax Different from a Sales Tax?
FAQs
1. How can you reduce the risk of sales tax audit?
You can avoid an audit by determining use tax relevancy, maintaining exemption and release certificates, and accurately reporting sales. Proper analysis of previous audit causes will also help avoid it the next time.
2. What happens if you fain in sales tax audit?
Upon failing in a sales tax audit, you will have to pay penalties with interest. You will also have to pay all your past due taxes and may even face potential criminal charges if the audit finds you defrauding the state.
3. Which businesses are most likely to be audited?
Businesses with previous audits, especially those that failed, remain at a higher chance of subsequent audits. Businesses with high sales volume and many exempt sales reports can also get an audit notice.
4. What noncompliance issues do auditors mainly catch during an audit?
Errors in sales tax rates, rules, and late filings usually alarm the auditor. Missing exemption certificates and registration in states for tax obligations can also raise their suspicion.
