CPA colleagues across the country just finished tax busy season. And hopefully they are taking a well-deserved break. But I wonder – when they come back up for air, will their clients be pinging them again because they’ve received notice of a sales tax audit?
My practice is based in California, so most of my audit controversy work is in the Golden State. And it seems to me that audit activity has been picking up. I have several audits going on right now in a variety of industries, for clients with a variety of issues. And yet, the areas in question for the State are often similar. So I thought it would be a good time to revisit some areas that companies should be aware of when maintaining their documentation, just in case it really IS audit season and you get tapped on the shoulder, ever so gently, by the state taxing authority:
Be Able to Tie Your Revenue to the Tax Return
While this seems like an obvious tip, it’s really important. When the state comes out to audit, they are trying to verify numbers reported to the State on your sales tax return. In order to do this, they will review bank deposits, federal and state income tax returns, and invoices issued by the company. In some industries which typically have a lot of cash transactions (restaurants, bars, convenience stores) they may look to cash register receipts. If you have a nice reconciliation to tie out the sales tax return to supporting source documents (and of course, provide the underlying source documents as well), it’ll help during the audit. Besides – you should have that anyway as you’re doing your returns – right? Bottom line – keep clean books and records.
Don’t go it alone
Sure, it’s additional cash outlay to hire a consultant like me or your current CPA to assist with the audit. You may think you can do it yourself. But business owners (and even large company personnel) may be too invested in the numbers and become emotionally involved in the audit. For us, it’s something we do every day. We know the laws; we know how to deal with the administration of an audit; and we know where to look for possible refund areas or other credits areas (to offset possible assessments). Also, having a third party in between provides a bit of buffer between you and the State. It allows us to step in between and work with you to provide the right information (not too much, not too little) to the state. Trust me – the money spent up front will be well spent. Oftentimes I’m brought in when it’s far down the road and the client has already spent a lot of time and energy internally dealing with it.
Remember – it’s not personal
Auditors have a job to do. You have a business to run. They’d like to get in, do their job and finish the audit. Sure, some auditors come across as being more aggressive and on search to “find something”. But most are professional and simply want to make sure that the taxpayer is properly collecting and remitting and reporting the sales tax owed to the state. In the case where the auditor is difficult to deal with, the supervisor may be available to assist. You always have the right to ask for the supervisor if the audit is not running smoothly. Also, if the audit shows that you ultimately have a liability, you may be able to work out a payment plan or other resolution. Again, it helps if you have an advocate on your side rather than dealing directly with the state.
How can we help?
Miles Consulting regularly assists clients in dealing with auditors and working through the audit process. Call us if you get a notice. We also share our knowledge freely – well, some of it! Check out my upcoming free webinars on this topic through the CPA Academy platform. I’ll be presenting “How to Avoid or Navigate a Sales Tax Audit” this year on May 13th and July 18th. Click here for more info and to register.
