Things to Do After Receiving a Sales Tax Audit Notice!

by | Apr 5, 2022 | Audits, Mary's Wisdom | 0 comments

Nothing can kill a sugar or caffeine buzz quicker than a sales tax audit notice, right?  Not so fast!  The worst thing you can do is panic or allow a sales and use tax audit notice to color your day.   You’ve got this!!…You do!  Take a deep breath and DO NOT PANIC! 

An audit notice means that someone is going to review your books to make sure sales tax was collected and paid, along with the payment of use tax, in accordance with applicable rules.   When you receive a notice, what is the best use of your time?  Here are my top four suggestions:

Things You Should Do First

  • Gather and review all exemption, resale, and direct payment exemption certificates.  If you have not charged sales tax because a client issued one of the named certificates, review those certificates and make sure they are valid.  If there is an item of information that has not been provided, secure it.  If a client promised a certificate and has not yet issued it, get it right now.    Make sure that you have the documents to support the tax treatment of all sales.  Start with the documents that support the largest value transactions and work your way down.
  • Gather sales tax returns and all supporting documentation.   Before the auditor starts field work, do your best to have a trail of all the data you used to compile all sales and use tax returns in the audit period.  The taxing authority knows every number you reported on your sales return.  What they don’t know is how you got those numbers.  Get all the support for why and how you compiled the sales and use tax returns ready for review.  For extra points, reconcile your sales tax return numbers to your federal income tax return numbers and be ready to explain any reconciling items.  No auditor misses that particular trick!
  • Gather the data requested by the state taxing authority. The state taxing authority will list the documents to be reviewed during the audit.  Start gathering that data.  The auditor will  identify information of interest and let you know when more information is needed.  Wait for those audit requests.  Don’t spend a lot of time gathering information that the auditor does not request.   And do not share data that has not been requested.

Auditors will give you time to gather data but they have deadlines too.  If you take too long to respond or present information, you won’t benefit from it.  An estimated deficiency (that has no basis in reality) can be levied against you.  You will then be required to present all the data that was originally requested to refute the estimate.  In addition, you probably won’t get the benefit of any doubt or waiver of penalty because you were not cooperative.

Hire a Sales Tax Consultant or Handle it In-House?

Decide if you are going to (1) address the audit in-house, (2) address the audit in-house and hire a representative if the audit deficiency is too high, or (3) hire a third party representative to represent you from start to finish.  How you address the audit is a business decision.  There are pros and cons to each approach.

I hate to say it but there are times when the audit process is like going to an airport.  It’s a lot of “hurry up!…and wait” . Don’t expect the audit to be done quickly.  The time it takes to complete an audit varies wildly.   But do take comfort in the fact that no one is out to “get you.”  Participate in your audit, present documents, ask questions, have an open mind (or have someone do it on your behalf).   If there are no major errors, you should be fine.

Safeguard Your Business: 3 Must Know Pre-Sales Tax Audit Steps

This tax tip is about 3 things you should do before you or your client receives a Notification of Routine Sales and Use Tax audit letter. If you follow these guidelines, your life or at least the audit will be a lot simpler. These measures should be in place before the sales tax audit starts.

Taxable Purchases and Employees

There are differing sales and use tax ramifications when dealing with taxable items given to employees versus items that are sold to employees. The difference is who pays the sales or use tax.

Sales Tax Exemptions- Tax Exempt Customers

Every jurisdiction has sales and use tax exemptions available to certain taxpayers. Exempt organizations include governmental agencies and other exempt entities can include educational, religious, and charitable organizations.
When making sales to exempt organizations, it is important that to obtain the appropriate documentation required to substantiate the tax-free nature of the sale.

Sales & Use Tax Audits- Accounts of Interest

When you are going through at sales and use tax audit, the audit will not only review source documents, but they will also review your accounting records, i.e., the GL. Auditors focus on certain accounts of interest. These are accounts where they know there may be sales and use tax compliance issues.

Addressing Sales and Use Tax Credits

This tip is about what you can do when you discover that you have overpaid sales or use tax on the purchase that you make for your business. As we discussed in an earlier video, there are various sales and use tax exemptions available to purchasers for miscellaneous reasons.

Sales and Use Tax Compliance- Scanning Documents

This sales tax tip is about document retention. Specifically, making sure you have a plan in place when it comes to scanning your documents. We talk about it a lot because it is so important to have a good document retention policy in place, especially in a sales and use tax audit context.

Sales Tax and Bad Debt Write-Offs

In our discussion, we are focusing on bad debts and how they affect the sales and use tax that you report to the taxing authority. We also discuss the importance of documenting which bad debts were written off and how important it is in an audit context.

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Top 4 Red Flags About Bad Clients!

Over the course of my career I have regretted becoming engaged by select clients.  I thought it would  be good to share some of my experience dealing with difficult clients and the red flags that can help other small businesses identify them.   

Accounting Software Upgrades & Reluctant Staff

The effectiveness of an accounting software upgrade is underminded if your accounting staff refuses to use it. You must manage your expectations and help your staff wrap their heads around the new technology in order to make the most of your oftentimes expensive upgrade.

Sales Tax Nexus- Am I Required to Collect Sales Tax?

A few years ago, the Wayfair case was everywhere. It changed the landscape regarding sales tax nexus and registration requirements for remote sellers all across the country. Let’s talk about what the case may mean for you and your business. For some people, it means very little. For other people, the world exploded.

Sales and Use Tax Audits- Don’t Forget the Credit Cards

When you first receive notification that your business is going to audited for sales and use tax compliance, there are a number of areas of concern they may occur to you.  One thing that business owners routinely overlook is company credit cards and how they can...
sales tax and invoices

The Marriage of Sales Tax Compliance & Clear, Concise Invoices

Sales and use tax compliance is a complex thing. Knowing whether you must register in a jurisdiction (i.e., do you have nexus), whether what you sell is taxable, what tax rate you should charge, the applicable sales tax exemptions, etc. can be a lot to digest when you are starting your business. One thing that all business owners can do to make their lives easier is have clear and concise invoices.

Sales Tax Audits- Can the Auditor Do That?

Once you involved in an audit, you must understand that the taxing authority has broad powers as it relates to what documents they can request. If a state tax auditor requests data, you should produce it. If you don’t, there are consequences that are very unpleasant. Find out how much power the auditor has and how to navigate the process.

The Sales Tax Audit is Over! Now What?

Congratulations! You have survived your sales tax audit. While you can breathe a sigh of relief, don’t think that the tax authority is through with you because the audit is over.

Depending on the sales tax audit results, (i.e how much money your company owed in sales and use tax), you may be audited again.

Why Use a Sales Tax Consultant? Not All CPAs Address Sales Tax!

Sales and use tax is a specialized niche area. While your book keeper or CPA may be helpful in myriads of other ways, sales and use tax compliance is not their speciality. You may need to consider another resource, like a sales tax consultant.

Top 5 Sales Tax Audit Gotchas!

Here we discuss about five things you can do to make your audit go smoother. Four of the five tips are things to do when you set up your accounting practices and systems.

Top 5 Sales Tax Audit Documentation Mistakes!

The key to all audits is documentation. You must prove what you do, that you collected the correct amount of sales tax, all sales tax collected was remitted, etc.

Texas Taxes for the Construction Industry

Texas Taxes for the Construction Industry

Join us for Texas Taxes for the Construction Industry, where we'll dive into all things tax-related, specifically tailored to contractors.
Copy of Texas Taxes for the Construction Industry

Copy of Texas Taxes for the Construction Industry

Join us for Texas Taxes for the Construction Industry, where we'll dive into all things tax-related, specifically tailored to contractors.

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