This year, most states have experienced steep declines in sales tax revenues due to the pandemic. This shortfall will likely result in more sales tax audits as states scramble to make up for lost revenue. If your business is registered for sales tax, don’t get caught off-guard. Knowing how to prepare for a sales tax audit can help reduce your anxiety and result in a better audit experience. Simply follow these six tips to ensure you have a successful sales tax audit.
Sales Tax Audit Prep
As a business owner, there are a few things you can do now to set yourself up in a better position should you ever be selected for a sales tax audit.
1. Understand State Taxability Rules
Before South Dakota v. Wayfair, Inc., states could only impose taxes on businesses that had a physical presence or remote employees within their borders. Today, expanded nexus laws allow states to assess sales tax based on economic activity within their state regardless of where the business is physically located. To ensure your business is compliant, make sure you understand the taxability rules for any state where you have established a nexus, including sales tax registration, collection, and remittance requirements.
2. Review Certificates & Agreements
If you deal with exempt sales, be sure you have a process in place for completing and storing exemption certificates. Incomplete or incorrect certificates could result in you being billed for uncollected tax, penalties, and interest. Be sure you also review any marketplace facilitator agreements to ensure you are collecting, reporting, and paying sales tax as required. If you find any errors, make the necessary corrections before you are selected for a sales tax audit.
3. Organize Your Documentation
An auditor may request to review various business documents during a sales tax audit, including:
- Sales and use tax returns
- Sales invoices
- General ledgers
- Purchase invoices
- Property tax statements
- Receipts
- Resale and exemption certificates
- Bank statements
- Credit card statements
- Federal tax returns
- Depreciation schedules
- Shipping documentation
Keeping good books is a must. If you discover gaps or omissions in your record-keeping, now is the time to identify these problems. You’ll want to reconstruct missing documentation or have a plausible explanation as to why it’s not available.
During the Sales Tax Audit
Once your business is selected for a sales tax audit, you’ll want to follow these steps.
1. Respond to Notices
If you’re selected for a sales tax audit, you should receive a letter from the state’s taxing authority. The letter will outline which business entity is being audited, as well as the audit period. Be sure to respond in writing within the timeframe listed in the letter. Some states may also include a questionnaire that must be completed. You typically have a grace period before the audit begins. Do not waive your right to this additional time for preparation. If you need more time to get everything in order, you can move back the audit start date by requesting an extension.
2. Designate Point of Contact
After you receive your initial sales tax audit notice, you’ll want to identify someone who will represent your company during the audit. This could be yourself, a trusted employee, or an outside third-party. The point of contact (POC), or audit liaison, should be the main person who engages with the auditor and provides the information requested. Be sure to inform all staff members that any audit questions should go through this person. Staff members should never answer on their own or offer additional information unless directed to do so by the audit liaison.
3. Seek Professional Help
Remember, the auditor is not there for your benefit. They are looking for ways to generate revenue for the state. Hiring a tax professional, like those at Tax Defense Network, to represent your business during a sales tax audit has several advantages. We can help identify areas of exposure and minimize potential problems. We can also limit the auditor’s interactions with your staff and disruptions to your business. Our experienced tax professionals know which issues are better resolved during the audit, and which should be handled post-audit. And in the event that you disagree with audit findings, we can assist with handling your sales tax audit appeal.
Dealing with a sales tax audit can be stressful and overwhelming, especially when you are unfamiliar with sales tax nexus requirements or have inefficient bookkeeping methods in place. To ensure you get the best outcome, don’t face your audit alone. Call Tax Defense Network and schedule your free consultation today.