Sales tax audits are the determination by state or local tax authorities that a business is properly calculating, collecting, and remitting sales tax on taxable goods and services. The process can be daunting for a lot of businesses, so a little education on what to expect might be helpful. If you are audited, understanding the process and being prepared can really help reduce the stress for you and ensure that you are in compliance. Here, in this article, we will walk you through what a sales tax audit is like, from notice all the way to final resolution, and give you some best practices to help you better navigate this process.
Why Do Sales Tax Audits Happen?
Sales tax audits are the normal procedure conducted by the tax authorities to ensure that enterprises comply with the parameter of state and local tax laws. Various factors form what may make an enterprise get audited, amongst many others such as;
- Random Selection: Some businesses are randomly selected for compliance checks as part of normal auditing procedures.
- Tax filings anomalies: If the sales tax filings show anomalies, whether the sales are under-reported or the taxable sales show wider swings than would reasonably be expected.
- Industry Trends: Some industries are scrutinized more than others, especially when they involve heavy cash transactions or have historically resulted in higher non-compliance rates, such as food and beverage services, retail trade, and construction.
- Complaints or Whistleblowers: Past employees, clients, or competitors may have complained or acted as whistleblowers to suspected tax evasion, therefore an audit.
Technically, not a sign of malpractice, an audit is part of the tax agency’s mechanism to ensure that all entities are observing tax laws.
First Contact: What to Expect
You are notified of a sales tax audit. Typically, your tax authority will mail the notification, which would contain information you’ll need to know, including the purpose for the audit, the period that is to be audited (usually three to four years), a list of the documents and records you would need to allow for review by an auditor, and a date by which you should respond or prepare for the audit.
You must treat the notice very seriously and you must reply as early as possible otherwise, you risk penalties and complications.
Key Documents and Records You’ll Need to Provide
When you receive an audit notice, the auditor will request some specific documents. These usually include:
- General ledger and financial statements: The auditor will match the amounts you claimed for sales tax to your total revenues.
- Sales invoices. This record will show all the sales made, whether taxable or nontaxable.
- Exemption certificates: The auditor might require that transactions in goods or services be exempted from sales tax. Often, such evidence is contained in an exemption certificate the seller has obtained from the purchaser.
- Sales documents: When you have sold merchandise, accounts or services at an invoice rate, the auditor may require these documents for verification.
- Sales tax returns: They are the forms you have to file for reporting and remitting collected sales tax.
These documents when well arranged will make the auditing process become easy and minimize the chances of errors or inconsistencies.
The Audit Process: Step-by-Step Breakdown
After you have collected all the necessary documents for auditing, the audit itself is undertaken. This is a step-by-step explanation of what to anticipate during the audit:
Pre-Audit Meeting with the Auditor
The audit process usually begins with a meeting between you and the auditor. In this meeting, he should explain the scope and processes to be followed when they audit your company, but may also want to bring specific concerns they have regarding the type of business and industry.
This is also your chance to ask questions and clear any questions you may have about the process. It is therefore advisable to remain professional and cooperative throughout the whole process of auditing since that helps create a good working relationship with the auditor.
Document Review
The auditor will begin reviewing documents you submitted. They will
- Compare reported sales with sales records: The auditor will compare the sales as reported in your tax return with the sales as recorded in your financial documents in order to do this.
- Confirm tax-exempt sales: You ought to claim tax-exempt sales. During verification, the auditor will confirm whether you have correct exemption certificates from the transaction; missing or invalid certificates might therefore increase your tax liability.
- Review purchase records: The auditor may review your purchases to ensure that you’ve paid sales or use tax on taxable goods purchased for your business. If not, they may add an additional tax on those items.
- Sample testing: In some instances, the auditor may not examine each and every transaction. In this case, they may apply a sampling method in which he or she will examine a selected period or a group of transactions and then generalize this finding to the entire audit period.
Communication Throughout the Audit
The auditor can demand to know or for other documents during the audit process. Response to such a request should be prompt. In case of uncertainty, one can seek clarification on the issue with a tax professional before responding to it.
Preliminary Findings
During your records review, the auditor will often return after to confirm preliminary findings. During this period, the auditor will point out the errors, which include:
- Understatement sales tax
- Incorrect claim on exemptions
- Failure to pay use tax on purchases
You are now free to discuss the outcome with the auditor and introduce any supporting documentation that you need for him to clarify the misperceptions or mistakes.
Closing Conference
After the auditor has finished his report, he will have a closing conference. Here, he will present you with a formal report indicating the outcome of the audit. The formal report will indicate the following:
- Any additional tax owed
- Penalties and interest, if applicable
- Your options for paying the assessed amount or disputing the findings
This is also your chance to ask questions about what happens next and what rights you have should you not be happy with the outcome of the audit.
Audit Findings: Common Causes of Audit Results
Many audits produce errors or omissions. Some of the most frequent errors are as follows:
- Failure to charge sales tax on taxable items: Businessmen may inadvertently miss imposing sales tax on particular goods or services that are liable for this form of taxation.
- Incorrect tax rates: Sales taxes are locality-based, so different towns attract different sales tax rates. Using the wrong rate can lead to underpayment of taxes or even a wrong imposition of overpayment of.
- Lack of exemption certificates: You sold tax-exemptable items or services and you did not have the necessary backup, so the auditor will be able to tax.
- Use tax mistakes Use tax is often missed: Use tax comes to play when you buy taxable items in your business and you can’t tax them. It’ll be taxed by the auditor if you properly account for by the due date.
Many audit findings are unintentional mistakes and not intentional tax evasion. Still, you would be interested in having this information identified and taken corrective action so that your compliance practices become even better next time around.
After an Audit?
There are many outcomes of the audit once it is completed and the final report is released:
- No further tax due: In case your audit finds that you actually reported and paid the sales taxes, you can forget about this audit as nothing will be done to it.
- More tax due: In case the auditor establishes that you underreported or underpaid your sales taxes, they will calculate and charge you with additional taxes. In most cases, you will attract interest charges on the unpaid taxes, together with penalties according to the extent of the error.
- To appeal the audit results: You can dispute the outcome of the audit. As appealing the audit outcome is allowed in most states, you may present more evidence or argue a case for additional facts. In some cases, administrative hearings or court cases may be required.
- Payment agreement: States permit businesses to pay portions of a huge additional tax by providing a payment agreement for settling the tax liability over time
Once the audit is closed, it becomes essential to analyze your sales tax practices and make adjustments that can again prevent further risks. Most businesses learn from an audit and improve their record-keeping and tax compliance procedure.
How to Prepare for a Sales Tax Audit
Preparation for a sales tax audit actually should start months or even years before an actual audit notice arrives. Here are some of the best practices for you, which would ensure compliance with and prepare you for an audit.
- Keep proper records: Your sales tax records contain sales invoices, exemption certificates, and receipts for purchases. Keeping good records ensures easy auditing and prevents chances of mistakes.
- Check tax rates frequently: Sales tax rates change, so you should check your business’s location’s tax rates from time to time to ensure you are applying the right rate.
- Auditing your own records: Periodically doing an internal review of sales taxes can help you catch and correct mistakes before an official audit.
- Collaborate with a tax expert: If you are unsure whether or not your firm is even in compliance with the sales tax, then think about consulting a tax expert to cut through all the noise and mumbo jumbo of tax codes for you so your business is in good standing.
Get Professional Help for Your Texas Sales Tax Audit with Ansari Tax
A Texas sales tax audit can be rather confusing, especially with multiple complex state regulations. Whether your business is undergoing an audit or you want to keep things on the right side of the tax law, Ansari Tax can handle the entire process of the audit with ease and full confidence. They have experience in Texas sales tax laws; thus, they can prepare and assist you in any form of audits, review documents, or even representation before the tax authorities. With Ansari Tax at your side, you will have the all-important guidance to minimize risks and ensure a smooth audit experience.
Conclusion
Then, if you are prepared and know what to expect, a sales tax audit does not have to be a stressful experience. Keeping good records of your activity, keeping track of the changes made within tax laws, and being cooperative with the auditor should ensure that the process goes as smoothly as possible. The results of the audit may leave you owing no more taxes or adjusting your fillings in areas needing improvement, but either way, it gives you the chance to learn from experience to improve your tax practices and avoid potential future issues related to compliance.
