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Avalara

Would Your Team Win Gold in the Audit Olympics?


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As the company’s tax manager, it’s your job to ensure your business is financially fit. You probably never thought to compare a sales tax audit to the Olympic Games. Surprisingly, the two events have a lot in common. If you’ve ever been through an audit, you know it’s a grueling test of will, strength, and perseverance. The bar is set high. Miss that mark and your dreams of penalty-free compliance are over.

Without the right training, come game time, your team could be running in circles. Clear common audit hurdles easily with these best practices.

Hurdle 1 – Qualifying Scores

In sports, competitive advantage often comes down to the luck of the draw. The same can be said for audit risk. Some companies raise more red flags. These tend to be cash-based businesses like restaurants and bars, retail, high-deduction industries like hospitals, and contractors where materials are being used versus resold. Business size and location can also trigger an audit.  Let’s say your number comes up. Are you performance ready?

Hurdle 2 - Get in Shape

Athletes go through rigorous training to get in shape for competition. Financial fitness is a big part of audit success. How your business operates day-to-day indicates to an auditor how well you are prepared or unprepared for the process.

First impressions count. Are you organized? Are your records in good shape? Is the office clean and tidy? Provide the auditor access to people within your organization with knowledge of the business. Show a good faith effort to get them the information they need and answer any questions.

Past performance can also be an indicator of future success. If you owed money in the past, it’s highly likely that the state will put you through your paces more than once. If this isn’t your first time around the audit track, demonstrate any fixes that you’ve implemented since the prior audit.

Hurdle 3 – Hit All Your Marks

There are five primary points an auditor looks for during an audit.

  1. Total gross sales
  2. Total tax
  3. Non-tax sales
  4. Applied tax rate
  5. Consumer use tax

You must account for all transactions and deductions and show the right tax rate was applied. An auditor is looking for discrepancies between recorded and claimed and any errors in tax collected.

Hurdle 4 – Know the Game Plan

Before your audit gets underway, understand the ground rules. Some states require auditors to have a written audit program, reviewed and signed off on by supervisor, before going out into the field. As the taxpayer, you should ask for a copy of that plan. If a written plan isn’t required, the auditor should still be able to give you a verbal outline of what to expect. There are three ways an auditor can review a return:

  • Sales down. This is typically done for in-house compliance. The auditor starts at the top of the return and works his way down.
  • Tax up. The return is done is reverse, starting with the accrued tax that needs to be reported. This is typically done when compliance is outsourced or when records are incomplete.
  • Industry specific. Often used for atypically taxed businesses like grocers or construction contractors.

Audit sampling typically takes one of three forms. Block sampling and statistical sampling takes a section of data and extrapolates it. The most accurate, Actual basis, looks at every single transaction.

Need more coaching? Find out if you're making mistakes that could trigger an audit by attending our FREE, live webinar "Are You Making Sales Tax Mistakes."

Webinar Details:
Date: Tuesday, March 25, 2014
Time: 10:00AM PST / 1:00PM EST

Too busy to attend? Register anyway and you'll auto-receive the recorded video.

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by Avalara, Microsoft Dynamics ISV partner

 

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