Ensure that your process for keeping sales records will help (not hurt) you in the case of an audit
Sales tax audits strike terror into the hearts of many small business owners. What does an audit make you think of? Painful, protracted dealings with state auditors? Dangerous drains on your business’ resources? Or do you think of audits at all?
The current economic climate has increased your chances of being audited. With so many states trying to balance their budgets, they are hiring auditors by the score. And, indeed, some audits can significantly drain a businesses’ time and resources. But this is not a message of doom and gloom! If you take the time now to review your process for keeping sales records, it will go a long way towards minimizing your costs in the event of an audit (and it will help you sleep better, too).
When you review your process for keeping sales records, look for the following:
- Clear and complete information. Ledgers that the auditor might want to review include: Accounts Payable (A/P), Accounts Receivable (A/R), General Ledger (G/L), Federal Income Tax Return(s) (FITR) and any books or records underneath those including, but not limited to: Purchase Orders (PO), paid bills, invoices, contracts and customer exemption certificates.
- Easily accessible documentation. If you have the above documentation available or if it can be easily obtained upon request, the auditor will appreciate the cooperation and will require less of your staff’s time.
- Show the flow of each transaction. An auditor must be able to follow the trail of each transaction and match up all of the documents pertaining to each transaction. Watch for items like charge-backs or returns that you may not have adequately documented. First impressions matter! If the auditor sees that you can effectively show what they ask for, you will save money from penalties you might have otherwise incurred for incomplete or incorrect documentation.
If your process doesn’t support the above points, then take steps to ensure that it does now, before you get that audit notification.
For more tips on how to make an audit as painless as possible:
Maryland’s sales and use tax law says the following concerning records (emphasis added):
You are required to make your business records available for inspection by an auditor from the Comptroller’s Office at any time during business hours. Your records must adequately distinguish taxable sales and purchases from nontaxable sales and purchases. If you do not have adequate records, the Comptroller may compute a liability by projection from available records, by a survey of similar businesses or on any other reasonable basis. You must keep all records pertaining to sales and purchases for four years. The burden of proof is on you to demonstrate that you collected and paid the sales and use tax correctly.