The auditing process can be a scary thing for most business owners. That’s why hearing that your company is about to have a sales tax audit isn’t at the top of your bucket list. Fortunately, you’re not as powerless as you might think if this ever happens. There are things you can do to make a sales tax audit much easier and take a bit of control over the auditing process.
The starting point for any sales tax audit comes when the Department of Revenue informs you that your business has been chosen to undergo an audit. After this happens, it’s time to start preparing for the audit immediately. There’s no need to resign yourself to a terrible and costly experience. Instead, think of this notification as a chance to get ahead of the auditors and make the best out of an unpleasant situation.
It begins with gathering up all the records that are pertinent to the period under audit.
The Records You’ll Need for the Sales Tax Audit
To get ready for the audit, be sure to track down all the appropriate records you have from the period that’s under audit. If these records are stored somewhere offsite, make sure to take the time necessary to retrieve them into account.
What kinds of records will the auditor wish to examine during the sales tax audit? Typically, you’ll receive a list of these records when you’re notified of the audit. (Note: if possible, it’s a good idea to submit paper records instead of electronic files. This will give you greater control over what the auditor will see.)
Here are some of the most commonly requested records:
Your company’s General Ledger (GL)
Purchase and sales journals
Exemption and resale certificates
Government tax records
Company bank statements
Sales Tax Records
Documentation of all shipping expenditures
After you’ve collected these records, you’ll still need to assess their level of completeness. If you discover multiple gaps in the records, you have no choice but to track down any missing information. This might take a while, so make sure you get started on it immediately after discovering the omissions.
The auditor will require a random sample of your sales and expenses, so be sure and retain all of your documents. This is the best way to handle whatever type of sample the auditor asks for.
Locate any Possible Flaws in Your Records
It’s not uncommon for business owners to find issues while reviewing these records. These should be dealt with before the auditor comes.
Here are some of the issues you might need to resolve:
If you’ve switched to a new accounting system
Changes in the quality of your tax maintenance procedures
Missing or unavailable records
It’s important to anticipate these issues because they may have a significant impact on the auditor’s sampling procedures. If a transaction is taxable, then the auditor will need to be able to track the amount of taxes that were collected and paid on it.
In cases where requested records have been lost or destroyed, you’ll have to find an alternate way to discuss them with the auditor and allay any concerns the auditor might have about the information contained in the unavailable records.
The audit trail of any electronic records you’ve kept may have disappeared, so it will help if you’re prepared to explain the procedures you use to collect/pay taxes on electronic transactions.
When reviewing your electronic records, the auditor will want to check whether your company has implemented effective internal controls over electronic data. Here are some of the functions the auditor is likely to scrutinize before sanctioning the electronic tax data you submit:
System and data access records
A regular check of files
Maintenance of data security and integrity
Complete transparency is essential when it comes to preserving electronic tax records. The auditor is more likely to validate your internal controls if you’ve prepared a guide to your internal controls, for instance.
Reexamine Your Records Prior to the Sales Tax Audit
After you’ve gathered all the relevant records, it’s very important to look for any significant areas of exposure they might contain. You should also do everything you can to retrieve missing records, especially those that will support any non-taxed sales you made during the audit period.
In some cases, you may need to seek expert counsel before the sales tax audit begins. A tax expert can help you understand recent tax code changes that might affect your case, for instance. You might also need expert help when reviewing any areas of exposure you might have. Lastly, you must review your tax returns and make sure that you paid your state’s Department of Revenue any all taxes you collected.
About Ivan Popov
Ivan has been counting for the past eight years for small and medium sized businesses helping owners with tax planning, financial covenants, financing and tax optimization.
Email: [email protected]
License ID: MA-32053