A sales tax audit happens when a company doesn’t send sales tax to the Internal Review Service (IRS). It could happen for a lot of different reasons. For instance, a customer who is being audited might show one of your bills. It would make the auditor call your business to ask for the exemption certificate. As another example, your seller may show up with a certificate of protection for a deal that the inspector says is taxed.
Who Is Responsible for Paying the Sales Tax?
The accounting services sector of the United States has been generating huge revenues and it is expected to reach $139.5 billion at the end of 2024. In terms of sales tax, collection responsibility of sales tax lies on the seller. Some new businesses try to make customers pay for sales tax by putting it in their Terms and Conditions. That being said, you are the seller and need to pay the right amount of sales tax to the state. People who buy from you should pay sales tax, but if you haven’t paid yet, you need to pay the sales tax that is due.
How Does the Auditor Find Unpaid Sales Tax?
A sales tax auditor checks to see if too little sales or use tax was sent to the state. The inspector will look at your income tax returns, bank records, notes, bills, exemptions, and transfer certificates. A big red flag for inspectors is if your income tax returns and sales and use tax returns don’t match up when it comes to gross sales.
Common Sales Tax Audit Triggers
Many states are picking businesses for sales tax audit. There are a few common reasons why yours might be one of them. These are some regular events that might make people notice your business:
Not Registering and Paying Sales Tax
Failure to file and remit sales tax in a jurisdiction where there is an established nexus is among the most common reasons a business might have an audit. The states are figuring out how to find these companies and punish them.
Clients or Suppliers That Have Undergone an Audit
Your business may be chosen for an audit just because one of your clients or vendors has already been audited. States often look into the business networks of companies they have inspected to find possible compliance problems.
High Sales Tax Reports at the Start
If your business sales tax reports very high sales tax amounts right after registering in a state, that state will think you crossed a nexus level a lot earlier than when you filed. Most of the time, this will lead to an audit so the state can look at your records. They can punish you if you should have filed sooner.
Past Audit
If your company has been audited before and problems were found, you’ll probably be audited again. States keep records and often check up on companies again that have had problems with following the rules in the past.
Big Changes in a Business
Big changes can get people’s attention, like reorganizations, mergers, or big sales jumps. States may do audits to make sure that these changes haven’t caused people not to follow sales tax rules.
Reporting and Paying Taxes Late
Paying taxes late or giving wrong information can be a trigger point. States see repeated late entries as a possible sign of not following the rules. They may start an audit to find out more.
How Can You Lower the Chance of Being Audited for Sales Tax?
A sales tax auditor checks to see if a company has received and sent the correct amount of tax to the state sale tax authority. Auditors look at financial records and compare the total amount of money made from sales with the amount of sales tax collected. The process also includes a comparison of the sales tax due and the sales tax the company paid. Here are some mistakes that people often make that can cost them money in sales tax audit fines:
- Find out if the use tax applies.
- Make sure the tax rates and calculations are right.
- Keep your exemption and transfer certificates safe.
- Look over past reports and ratings.
- Check all of your records for mistakes before you send in the report.
- Learn about the specific sales and use tax rules that apply to the place where your business is located.
- Check that the taxes paid on a recently bought business were done correctly before and after the buy.
- Get sales tax services to help you follow indirect tax rules.
- Make sure that the marketplaces that helped your business sell things online have received and sent the correct amount of taxes.
Use automated processes to figure out taxes. It also applies rates in real time and makes sure compliance for each tax state can help lower the risk of a sales tax check.
Importance of Keeping Full Records
To escape sales tax audit and make sure you’re following the law, you need to keep detailed records. All kinds of sales receipts, bills, exemption certificates, and all other documents related to the collection and transmission of sales tax must be preserved. All such records can help during an audit, which is proof of what you have done with your business. State laws differ in how long to retain records, but generally, keep them for at least three to seven years.
Keep detailed records, not only for audits but also for the financial health of your business as a whole. Keeping detailed records makes it easier to find problems, make better decisions, and report correct finances. Keeping records in a structured way, like with accounting software or digital files, can speed up the process. It makes sure that all the important papers are easy to find. Updating and going over your records on a regular basis can also help you find mistakes quickly and stay in line with tax rules.
Also, Read – Key Considerations before Choosing the Right Sales Tracking Software
Conclusion
Before the audit, you should do everything you can to figure out what your risk is. For instance, you might realize that you don’t have the right exemption papers on file. If you find this problem ahead of time, you might have time to get the lost certificates from your buyers. If you find a big difference in sales taxes that must be paid during a certain period during the audit law, try to avoid selecting that period.
