How to successfully prepare for sales Tax Audit
At some point, you likely will have a sales tax audit. This means an auditor will come to look at your books in search of any tax underpayments. Suppose a reputable accountant like Dean Roupas handles your taxes. In that case, you will not have to worry about any tax underpayments as Dean Roupas and associates ensure that your company’s taxes are in order. However, when most business owners receive a notice for a tax audit, they panic and do not know how to prepare for the audit. Dean Roupas will calm your nerves by helping you prepare for the audit.
Here are some tips to consider after receiving an audit notice.
- Get in contact with the auditors and set up an initial audit meeting. Ensure that every communication is properly documented and that all communication is written down and signed. In comparison to calls, emails are a great way to keep a trail of communication.
- The second step is for you to gather all of the paperwork you’ll need. Search over previous audits, if any, and look for any tax rate Make arrangements for reimbursements and check for overpayments/refunds throughout this time.
The first step in gathering paperwork is to determine the audit period and the applicable statute of limitations. Then double-check that all requested records and any extra records that the auditor could need are available for the audit period. Once you’ve determined where they are kept, you will have to obtain these records, whether physically or electronically.
Most documents are digitally stored on a firm network, but they may or may not be accessible to you. Suppose the records are physically stored off-site in a warehouse or controlled by someone else. In that case, you’ll need to figure out how long it’ll take to recover any off-site records or digital files managed by someone else or another department (e.g., Accounts Payable, Sales, Accounting, and Fixed Assets). Because the data may not be immediately accessible, you should begin this process as soon as possible to acquire and review the information before submitting it to the auditor.
The auditor will likely send you a lengthy list of the records they will need for the audit. This will make it easier for you to put together the documents. However, some of the commonly requested records include Journal entries, detailed general ledger, sales and purchases invoices, sales and purchases journals, financial statements, resale and exemption certificates, depreciation schedules, bank statements, state and federal income or franchise tax returns, sales and use tax returns and work papers, and shipping documentation.
Some of the elements listed above may not be applicable for your business, depending on your legal entity structure and reporting. This is so because some of these records may not necessarily correlate at a state sales tax level (e.g., State and federal income tax, Bank Statements). Determine what you can offer and be prepared to explain any goods that aren’t rational to offer.
- Following the compilation of the records, you must assess their condition and completeness, verifying that you have all documents for the audit period and all data types are present. If you discover gaps in the records, you’ll need to search down the missing data. You should begin this process as soon as feasible after being notified of the audit. This is because of the time involved and the possibility of system or provider changes throughout the audit period,
Keep in mind that the auditor’s technique for expenses and sales is normally a sampling strategy, so you may not need to supply all of the records until the auditor has discussed and confirmed them. Knowing that you have the records on hand and that they are easily accessible can help you prepare for the sample selection.
- Upon gathering all your documents and records, you can go on to identify any existing potential issues that might be in the records.
You may discover problems while gathering the records. These should be resolved prior to the auditor’s arrival or, if the audit is being completed remotely, prior to the audit start date and may need to be discussed with the auditor during the audit procedure determination. Some of the common records issues include a change in the accounting systems, change in tax reporting systems, change in tax calculation systems, change in tax maintenance or procedures (worsening or improved tax controls), missing or incomplete records, amended returns, paper vs electronic records (EDI, ERS, Purchasing cards, Resale/Exemption certificates), and mergers and acquisitions.
You ought to be aware of these concerns as they may affect any sampling techniques undertaken by the auditor. The auditor will need to track a transaction and the tax paid or collected on the transaction if the transaction is taxable.
You’ll want to come up with alternate choices to share with the auditor if there are difficulties with records, such as damaged or missing records. The auditor will need to analyze the taxpayer’s methods for paying or collecting the necessary taxes on these transactions. You will want to know your company’s technique to appropriately advise the auditor.
- You then go on to review the records. Conducting an internal examination to identify any large exposure areas is recommended. To support all tax-free sales, you should attempt to obtain any missing, incomplete, or invalid resale, exemption, or direct pay certificates. Examine the exemption certificates to check that the correct form was provided and that all relevant fields were filled in (date, signature, purchaser name and registration number, description, and purchase use with exempt reason). If you don’t already have valid certificates, now is the time to go back to your customers and collect them. To exempt the sale, this should have been done at the time of the transaction.
It may also be an ideal time to get in contact with independent consultants like Dean Roupas about recent tax law changes or to assess any substantial exposure areas, credits or potential overpayments. The auditor is there to look for tax underpayments, but you should be looking for tax overpayments and using the audit as an opportunity to obtain a refund if you identify cases where you might have accrued and paid sales tax on your purchases or accidentally over-accrued (non-taxable item). Before the audit, you should verify tax returns and reconcile them to the General Ledger to ensure that no tax was received but not remitted.
- Lastly, when the auditor arrives on-site, make sure they have a peaceful and private area to work in. Make it extremely clear who in the office has the authority to engage with the auditors and respond to their queries. All correspondence should be documented in this case. Auditors are frequently third parties. Therefore you must comprehend your relationship and boundaries with them. You can frequently check for updates and if the final assessment looks precarious for you, be sure to get hold of Dean Roupas or your tax advisor.
A sales tax audit will not stress you out if you work with a reputable accountant like Dean Roupas and associates. You are guaranteed that they will maintain and record all your sales tax reports. They will always be prepared for an audit by ensuring that your books are error-free. Should there be any errors, they will rectify the errors and ensure that similar errors will not occur again.