Prepare for a Successful Sales Tax Audit Part 1 OSYB Number Crunch! Bookkeeping Tips from Outsouce Your Books

One of the fTen Tips For A Successful Sales Tax Auditt pieces of paperwork an auditor will want to see are your exemption certificates, which substantiate exempt sales you claimed. Replacing end-to end manual processes with a suite of automated indirect tax solutions minimizes the potential for human error and omission and ultimately reduces operating costs. Tax technology can also reduce the risk of an audit, saving your business time and the need to pay costly penalties. If you are audited, indirect tax software enables you to respond to audits faster and more accurately. States enact hundreds of new tax laws each year, so your indirect tax team needs to stay up to date on the changes and apply the latest rules and rates the moment they become effective. Plus, every time your company launches a new product or introduces a newly taxable item or service, it increases your odds of being audited.

To calculate interest on past-due taxes, visit Interest Owed and Earned. InterestPast-due taxes are charged interest beginning 61 days after the due date. If tax is paid over 30 days after the due date, a 10 percent penalty is assessed. When you need a small business loan quickly, these five providers… Owning and operating a small business in 2020 was fraught with hardships because of the COVID-19 pandemic and the resulting economic strife.

The Hidden Cost of Interstate Sales Tax

In addition, some taxpayers may not have complete documentation for earlier periods in the audit period and would therefore request that the auditor choose a more recent period to review. TIP #7 – Taxpayers should make sure that purchases are booked to the proper corresponding general ledger account. Create a process that will record business purchases, the sales tax implications if any, and to report use tax.

• State auditors say they’re the No. 1 audit risk and the bulk of assessments come from use tax not being paid.
• Expenses ending in zero (i.e., rounded up or down), losses in previous years, or one extremely high expense compared to revenue are other common red flags, Savage said.
• Mehrdad Talaifar –Mehrdad is a recognized expert in sales, use, and value added tax compliance automation with over 30 years of Indirect Tax experience.
• Sales Tax Institute will be by your side as you build your foundation of sales tax training.
• Some businesses are targeted every year because of their size, sales volume, or the complexity of their returns.

While you can control some factors that may trigger an audit, like the location of your business, other factors, including high net sales or the ratio of exempt sales to total sales, are just part of doing business. A reverse sales and use tax audit can be a useful tool for a taxpayer to obtain refunds on overpayments of sales and use tax. It can also help ensure that the taxpayer does not overpay sales and use tax on issues identified in the future, thereby improving cash flow. Consistency is even helpful when you’ve been managing sales tax incorrectly. It’s far easier to correct transactions when you’ve identified a common mistake, rather than combing through thousands of records and assessing errors one by one.

Which indirect tax reports fulfill sales tax audit requests?

The auditor will assume you are trying to hide something and dig deeper to find discrepancies and errors. It is a good idea to make the records easy for the auditor to follow and review. When penalties are asserted, auditors hold some influence over whether the assertion is upheld before the case is closed. A taxpayer who treats the auditor with respect and cooperates throughout the audit process stands a much better chance of having penalties abated. TIP #10 – Taxpayers may be unsure whether they should choose to sign the waiver form requested by the auditor.

Start with exemption certificates when conducting your own audit because that’s the area an auditor will likely start with. Missing or outdated exemption certificates on transactions will blow any chance of a quick and painless audit. Another common reason why inconsistent practices creep into your business is when you make changes to your back office accounting system and technology. Do a quick audit on your transaction records shortly after you upgrade to a new system and/or purchase a new ecommerce platform, etc. Conducting a pre-audit or reverse audit before you get a notice from the state lets you find — and correct — errors.

Revenue and Spending

The agency estimates it audited “0.60% of individual returns and 0.97% of all corporation returns” between tax years 2010 to 2018. “Always report all small business earnings using Schedule C,” says Kaplan. Since the IRS determines which accounts to audit based on discrepancies, “make sure all government-issued forms, such as1099-INT,1099-DIV, etc., match what you report on the tax return,” Terrigino says. But earlier this year, during the first annual meeting with my team, someone raised the question of how we could transform that relationship into greater sales and better profitability for the business. Luckily by chance,(or simply confirming that cell phones listen to us 24/7), a few days later I got an email whose subject was “10 tips to improve the sales strategy”.

• Taxpayers who do not have a policy in place to review capital assets on a consistent basis can be caught unaware that they did not pay sales tax on these assets and are now liable for use tax.
• Before agreeing to a sample, make sure you understand the process and which one will best fit with your records for sales and operating expenses.
• You could have your own team do it but outsourcing this task to a consultant has its advantages in that you’re bringing in a fresh set of eyes.
• When a taxpayer cannot provide the appropriate documentation requested by the auditor or the documentation is incomplete, the auditor will assume the transactions are taxable.
• Mismanaging use tax is one of the costliest compliance mistakes companies make.
• Texas imposes a 6.25 percent state sales and use tax on all retail sales, leases and rentals of most goods, as well as taxable services.
• Relying on knowledge and manual processing often creates errors, which are further compounded by staff turnover.

After a brutal year in which his wife’s mother died, his brother died, and he had a heart attack, Jaffe forgot to deposit the five-figure check to roll over an IRA his wife had cashed out. The resulting audit taught him the important lesson that failing to report tens of thousands of dollars in income is one of the most glaring red flags for the IRS. Assign one person from your company to manage the relationship with the auditor. Tax authorities don’t need a particular trigger to launch an audit. State agencies also schedule random audits, or your business may be statistically selected for an audit. Reported to tax authorities – A whistleblower, outside party, or disgruntled employee reported you.