Last month our blog on reverse audits highlighted the primary steps of a reverse audit, and why your company might benefit from one. This month we will touch on some of the procedural best practices and pitfalls as well as some specific points to consider when embarking on a reverse audit
Filing Claims for Refund
Many hours of good work put into a reverse audit can be wasted if the proper refund claims are not in place. Claims need to be filed timely. In California for example, the statute of limitations is three years from the due date of the return for the reporting period for which the asserted overpayment was made. However, if we again look at California as an example, we will need to determine the nature of the tax overpayment. If we are we talking about sales tax paid to a vendor in error, the period open for review is based on the vendor’s statute of limitations. If the vendor has an ongoing audit with waivers in place, you could have an extended claim period. If the tax in question is California use tax, whether use tax self-assessed or use tax paid to vendor, the claim period is based on the purchaser’s statute of limitations. There are numerous factors that come into play when asking the question was the claim filed timely.
Some jurisdictions allow taxpayers to file a protective claim for refund, while others don’t. For example, California allows taxpayers to file a $1 protective claim. Wisconsin on the other hand does not allow for protective claims and imposes a 25% penalty where a buyer or seller negligently files an incorrect and excessive claim for a refund of sales or use tax.
The question of sufficiency is also important. California requires that a claim be in writing and state the specific grounds upon which the claim is founded. The purpose of this statutory requirement is to ensure that the state receives sufficient notice of the claim and its basis. Taxpayers can file the claim timely and list out twenty different contentions, but if the issue causing the overpayment is not in the claim, the claim will likely be denied.
The question of who has standing to file a claim is important for a few reasons. For example, in California, if we are dealing with sales tax paid in error, the retailer is the only person who has standing to file a claim (unless the over payment in question relates to a tax paid purchases resold deduction not taken in which case the purchaser can claim the credit). If the tax in question is California use tax, either use tax self-assessed or use tax paid to a vendor, only the purchaser has standing to file a claim. Other states allow either the retailer or purchaser to file the claim. It is important to determine who should be filing the claim so that the right party is doing so timely and has included the right contentions.
Claim for Refund Deliverables
How a claim is presented will often determine how much of the requested claim is allowed and how quickly the claim is approved. It is often best to have everything the auditor needs to approve the claim in the schedule. This would include all the relevant vendor and accounting information, a description of what caused the overpayment, tax citations, and a hyperlink to a copy of the vendor invoice or other supporting documentation. Clear and accurate schedules go a long way to establishing the credibility of the claim.
What to present, and when, is a consideration. Rather than throwing everything at the auditor at once, another approach to consider is to let the auditor know that he or she will be receiving a series of schedules. If the first batch of requested refunds are approved without complication, two things will happen. First, there will be movement in a positive direction on the claim. Second, you can take the time spent reviewing the first refunds to establish a relationship with the auditor and a level of trust in what will be presented on future schedules.
Regularly scheduled meetings to review the auditor’s progress and address questions is helpful. Everyone is busy including the auditors. Having a standing call keeps the auditor and consultant on task and focused on moving the claim along.
How Can we Help?
As we mentioned last month, our team can work with a potential client to see if they would benefit from a reverse audit. It all begins with a conversation about their current practices. Again, our process is specifically designed to identify areas of concern with the least amount of intrusion to you and your staff. If you think your company might be a good candidate for a reverse audit to see if you have potential overpayments, please reach out to us at info@milesconsultinggroup.com to start the conversation.
