In our Sales Tax 101 post, we covered the what, why and how of sales tax. In Sales Tax 201, we covered the steps companies take to collect and pay sales tax. In Sales Tax 301, we covered who is exempt from paying sales tax. In Sales Tax 401, we covered different types of nexus. In this post, we discuss what to do if you get audited.
The idea of an audit sounds scary and overwhelming, but the reality is, you will survive an audit and live to fight another day. We’ve broken the audit process into three four-step processes. The first process is what you should be doing now, before an audit. The second process is what you should be doing during an audit. The third process covers post-audit.
Know the Rules: Know what you sell, where you sell it, and what determines nexus. Understanding the states’ laws where you do business is critical to avoiding surprises and fines. Start by figuring out the type of products or services you sell and noting any nexus thresholds for the states where you conduct business. Remember to review all potential nexus triggers we covered in Sales Tax 401.
Document Your Transactions & Payments: Keep records of the transactions you’ve completed including buyer information, ship from location, ship to location, exemption certificates, all revenues, costs, and dates. Also make sure you have up-to-date marketplace facilitator agreements and that they are complying with the latest tax laws for each of your transactions. Additionally, be mindful of purchases you make for your business, as you could be obligated to pay tax on them, depending on what items are used for, known as Use Tax.
Pay Taxes on Time: When nexus is triggered in a state, register and begin paying taxes. Don’t delay the process and be sure to pay any tax obligations on time based on the schedule the state sets during the registration.
Use Voluntary Disclosures if Needed: It is completely possible for you to innocently overlook collecting and remitting tax on a transaction – many companies do. If this happens, using the Voluntary Disclosure Agreement can help you avoid fees and criminal charges.
During Audit Steps
Review & Respond to All Notices: Never delay reading and responding to a notification for your business, especially not a notification of an audit. If you have an online account with the DOR, be sure to read all notifications and also duplicate electronic letters with physical copies. Check your mail regularly to avoid missing a notice.
Set a Start Date: Remember that most auditors are reasonable. They have a job to do and respect that you are trying to run a successful business, which means you are busy and likely wearing many hats. Prior to the first meeting, typically an initial audit conference to review the plan, figure out what an appropriate start date would be that allows you to gather all the necessary information for the audit as well as prep a location if the audit is going to take place on site.
Set Contacts & Boundaries: If the auditor is on site, create a quiet place for them to conduct their work. While they will be near other employees, be sure to set ground rules with them and your team about who should interact with the auditor and answer questions. It is important for all communication between your business and the auditor to be documented, so communicate in writing when possible or follow-up with a written review of what was discussed if needed.
Review Assessment: If you agree with the auditor’s findings, then pay the due amount and get back to work. If you are unsure of the assessment, or there is a confusing rule that you believe may be misinterpreted by the auditor, review the information in more detail, getting help from outside experts, like a CPA, where needed.
For more information on how to handle the audit process, read How to Survive an Audit.
Appeal If Necessary: If you do not agree with the assessment, then appealing by following the state’s guidelines is your option for refuting the decision.
Adjust Collection & Remittance for Future Transactions: If there was something incorrect in your collection and remittance amounts that you learned in the audit, adjust where needed to avoid future problems.
Review Your Process & Improve Where Needed: Before you forget the details of the audit process, take a moment to reflect where things were done well and where you were frustrated. Are there any process changes, like how you keep track of documents or deadlines and the way you process transactions, that need to be made? Discuss these changes with your team today to make tomorrow easier.
Celebrate – You Survived! An audit will never be something fun to go through, but you did it! Take a deep breath and get back out there to build your empire.