In sales, every day is like a new opportunity where you contact leads, make your deals, and give closure to your sales target. But have you ever considered sales tax important? Have you paid your sales tax on time? Have you paid the correct amount or shared appropriate details and documents regarding your business sales with the IRS? You have to consider it seriously and should take sales tax help from an expert before you get the dreaded notice from the IRS for a sales tax audit. Sales tax audits cause inconvenience and are very costly at their worst.
In such a case, you would definitely need sales tax audit help from any former tax auditor (who is rare to find) or from a tax attorney who could give you the best suggestions on how to avoid penalties or get your sales tax details to check before making any tax payments.
Managing sales and use tax audit by yourself can be highly challenging. It is completely in your hands to avoid sales tax audit (as already mentioned by taking professional help is the only way out). But once you get an audit notice from the IRS, there is no going back. You should prepare yourself and find out the ways to deal with the authorities. Here, a tax attorney can be your partner and guide you on the same as he/she will handle all legalities of your case. However, there are certain options available through which you can influence the audit result. Here are some expert tips for successfully managing a sales tax audit.
EXPECT AN AUDIT: There could be several reasons for your business to be audited. Some of the reasons include:
- Based on your industry
- Because one of your customers being audited
- An invoice being reviewed
- Trail of breadcrumbs leading back to you
- Any of your disgruntled employees reported
- sometimes audits absolutely happen by chance
MAINTAIN COMPLIANCE DOCUMENTATION: Maintaining sales documents is necessary. All your documents should be well-organized and easy to interpret so that auditor finds no error in the same and easily interpret them. Missing documentation can complicate an audit and may even result in penalties that you may not actually owe. The most common documents that are typically required by an auditor include:
- Exemption certificates
- Summary reports
EVALUATE YOUR RECORDS: It is unavoidingly necessary to assess your own sales records if you have been notified of an audit by the IRS. You should make every effort to identify your disclosure before the audit. By doing this, you may reveal issues during specific times that you would wish to avoid during sampling.
MANAGE THE RELATIONSHIP: Make sure your behavior with the auditor is good. Treat the auditor with respect and dignity. You can also assign a representative from your company who could deal with the auditor and manage the relationship with the auditor. Your company representative will essentially be the point of contact with the auditor to avoid any confusion and miscommunication. Employees will not be playing any role in answer any questions from the auditor. Instead, they should direct the auditor to the assigned point of contact.
REVEAL INSIGNIFICANT ITEMS PROACTIVELY: By selecting to disclose inaccuracies to the auditor, it lets you build some connection and demonstrate that you are willing to help in the audit procedure. This could result in less inspection when going through the rest of your circumstances.
NEGOTIATE THE FINDINGS: Your point of contact should work closely with the auditor to understand his/her thought process and pronouncements. Depending on the situation, there may be space for compromise before the final evaluation. As mentioned earlier, maintain a good relationship with the auditor in case of future audits.
Experts believe that one should avoid tax audits in the first place to survive. Here are some points that you should learn. These are the points of the Sales Tax Compliance Checklist that include:
- Know your nexus
- Maintain sales tax and business licenses
- Charge proper tax type
- Collect and maintain exemption certificates
- Know the risk of sales and use tax returns
- Know the tax rates
- Recognize the difference between origin vs. destination-based sales tax rules
- Understand product taxability rules
- Understand audit triggers
Audit Triggers can include:
- A significant percentage of exempt sales
- Large changes (either increase or decrease) in sales tax
- Late returns filings
- Incorrect math
- Nexus but no registration
- Not filing and remitting Use Tax
- Current vendor audit
- Current customer audit
- Resale Certificates
- Drop-in taxable sales
- Requesting a refund
- Industry type
- Luck of the draw
- Not found in the state system
If you have received a notice of sales tax audit, the auditor will typically ask for a list of nontaxable or exempt sales transactions, associated exemption certificates, invoices, and backup documentation. A use tax audit is also similar as auditors will request purchase statements, use tax accrued and paid, and any direct pay permits.
Other documentation that will be required:
- Chart of accounts
- Fixed asset purchases (use tax)
- List of locations
- Nexus questionnaire
- Non-asset purchases (use tax)
- Review of all exemption certificates
- Review of all returns (federal, state, and local)
- Trial balance
For more information on the documents and details that an auditor can ask when you have been chosen for an audit, you would need the help of a tax attorney or tax law firm. They are the most experienced and knowledgeable people who could get you out of any kind of IRS troubles.