What is Sales Tax Audit?
Whether a company has collected and paid the correct amount of sales tax due to the state for taxable transactions is determined through a sales tax audit. Auditors look over financial records and contrast total sales income with sales that led to sales tax collection. The procedure also entails comparing the sales tax due with the sales tax that the company paid.
A sales tax audit is frequently conducted when a state tax authority suspects a company of underreporting its reported sales or when the state’s sales tax return and the Internal Revenue Service’s (IRS) report differ. The strain on indirect tax departments to keep up with new sales tax legislation and regulations while lowering audit risks is growing. Sales tax audits can be disruptive and result in exorbitant fines and penalties that could hurt a business’s bottom line.
How should a sales tax audit be prepared for?
Tax auditors review federal income tax returns to reconcile gross sales noted in accounting records with gross sales reported on federal returns. The auditor also examines the depreciation schedule to determine whether any fixed assets were sold or purchased during the audit period.
Consider engaging a specialist, such as a CPA, a sales tax audit services, or a tax advisor who specializes in state and local taxes (SALT), if your company has been chosen for an audit. An expert can negotiate the audit’s conditions and control how much access the auditor gets to your company.
The following stage is to compile the necessary records for an audit while limiting the amount of information you provide to the auditor. A seamless process can be ensured by supplying organized documentation that is simple to read (invoices, exemptions, resale certificates, summary reports, tax returns, etc.). Be prepared to provide other financial records, such as sales diaries and general ledgers.
Additional methods for accelerating
Additional methods for accelerating audits include:
- Immediately inform the auditor of any discovered inaccuracies.
- Respect the auditor and designate one employee from your firm to handle communications with them
- Throughout the procedure, ask the auditor for updates.
- Talk with the auditor before the verdict is made.
What happens during a sales tax audit?
Over days, weeks, or months, the auditor examines your records to find errors or fraud and encourage adherence to tax regulations. The auditor’s objective is to boost state revenue and impose sanctions when a company owes taxes.
A sales tax auditor’s duties include:
- Look for differences between sales tax returns and data from primary sources.
- Check the data for inaccuracies, omissions, and mistakes Ensure that you charged and paid the correct amount of tax on purchases
- Make sure to charge the proper taxes for shipping.
- Examine sales tax exemption documents for resales.
What are the main reasons for sales tax audits?
State tax authorities may initiate a sales tax audit for several reasons. The majority of states examine and identify companies that may be at risk of underreporting or underpaying sales and use taxes using systematic processes and data. Since approximately one-third of state tax revenue comes from sales and use taxes, authorities take audits very seriously.
Your company can take measures to lessen the likelihood of getting audited if you are aware of what the authorities are looking for. While some circumstances that could lead to an audit are within your control, such as the location of your company, other criteria, such as large net sales or the proportion of exempt sales to total sales, are simply a condition of doing business.
The following are the top 11 causes of sales tax audits:
- High-Risk Sector
- Intricate Industry
- Check For Compliance With New Business
- Audited Client Or Vendor
- Made A Tax Authority Report
- Strange Financials
- Earlier Audits
- Significant Business Change
- Business Entity Type
- Application Of Resale Certificates
- Late Files And Reporting
How may the chance of a sales tax audit be decreased?
The following actions will help you avoid frequent problems that could result in fines for a sales tax audit:
- Determining the relevance of usage tax
- Maintaining certificates for exemption and resale
- Truthful sales reporting
- Determining and charging accurate prices
- Examining earlier audits and evaluations
- Recognizing the local sales and use tax laws and regulations that apply to your company’s operations
- Before reporting and sending sales tax accruals, checking all records for errors
- Confirming the correct pre- and post-acquisition taxes from a freshly acquired company
- Confirming that marketplace intermediaries have correctly collected and sent the appropriate amount of taxes from your company’s online sales.
Businesses can avoid typical errors by using automated systems that determine and calculate taxes, apply rates in real-time, and assure compliance for each tax jurisdiction. Indirect tax teams can manage tax reporting, locate data quickly, and gain confidence in the organization’s tax reporting and compliance procedures with the use of a centralized tax data warehouse for corporate taxes.