Sales Tax Audits and Risk ManagementTax Professionals' Resource
October 24, 2012 — 1,140 views
Sales Tax Audits and Risk Management
Whether you are running your own practice or part of someone else's, attention to detail is an obvious must for any accounting professional. An area of concern for business owners today is audit exposure. Even when no grave errors are detected, the sheer cost of audit compliance and clarification can be enough to make businesses take pause. Extra expenses are rarely tolerated, so anything that can be done to mitigate audit risks is universally welcomed.
Sales tax audits don't have to be the order of the day -- here are some risk management techniques that can indeed minimize future audit exposure.
First and foremost, it is important to educate clients about the nature of their state sales tax. Identify specific occurrences where sales tax would be due. For example, if the company in question is taking in Internet sales from people that have addresses within the state, are they counting those sales as part of what's owed in terms of taxes? Many companies assume that all Internet sales are exempt from state sales tax, but this isn't the case at all.
From here, it is also critical that the client is already keeping good records. Many times, sales tax noncompliance stems from not having proper recordkeeping in place to capture the data necessary to compile appropriate tax records. It may sound self-explanatory, but there is something to be said about appropriate accounting. If your firm is the first professional accounting service that is handling the client's needs, then these issues need to be addressed immediately. As already mentioned, education is the key to building long term understanding of these serious issues.
Checking for exemptions ahead of time can reduce sales taxes, and therefore the risk of audit by default. Doing reverse audits can assist with this process, as every qualified transaction is checked to look at whether or not sales tax was actually due. If there are overpayments that are discovered, this can go a long way to reducing the company’s tax bill in terms of state taxes.
The industry involved matters a great deal when it comes to reducing audit exposure. Industries such as manufacturing, telecommunications, utilities, and even the automotive sphere tend to generate better data when it comes to reverse audits. Service-oriented industries that don't deal in specific products tend to not yield as many exemptions, but a reverse audit is still beneficial.
Going the extra step to truly minimize sales tax audits can go a long way in terms of overall client satisfaction. This is the perfect opportunity to bring these points up to your client -- why not start today?