5 Ways to Fail a Tax Audit
- Sales and Use Tax
- July 3, 2012 | Will Frei
All businesses relish a good sales tax audit. But did you know you can take action to spend more time, money and resources than you have to during an audit? Sound too good to be true? It’s not! These tips reveal 5 areas where you can up your chances of having to pay coveted audit penalties.
Give the auditor a hard time
Spare no inconvenience. Send the auditor on coffee runs. Give them the worst possible place to work, and the messiest records to sift through. When it comes to audits, first impressions matter–so make yours a terrible one! The harder you make it on them, the more time they will have to help you spend extra money and resources.
Pro tip: Give the auditor a clueless assistant. Former California state auditor Lloyd Geggat puts it like this: “
[i]f you place a staff member with the auditor who is unable to answer questions or who is unable to find the things the auditor needs, the auditor may actually audit more since he’ll have free time while waiting for the first set of requests to be filled.”
Assume you don’t need to collect tax
This tip is advanced, but the risk makes it well worth it. If you have nexus in a state, you have to collect sales tax there. Nexus usually refers to some sort of physical presence, but lucky for you states have gotten extremely creative with how they define nexus.
Take the recent case of Oregon-based Mattress World. Mattress World used a third-party delivery service to ship mattresses to Washington residents who came to Oregon in search of the perfect mattress. It turns out that hiring a third-party delivery service, gave them nexus in Washington. They assumed they didn’t owe Washington sales tax. The $1.7 million in penalties and interest that resulted from a Washington state audit forced them to close all 7 of their locations.
Put your exemption certificates in a box in the warehouse
This really gives you two advantages. First, it forces the auditor to dig through a potentially rat-infested box for the records they need, thus wasting more time. Second, it increases your chances of losing certificates to flood, fire or rats.
If you don’t have a complete certificate to prove a customer is exempt, you will owe the state for the sales tax you did not charge them plus bonus penalties and interest!
Keep Incorrect Records
You want to fail a sales tax audit? Make sure that your records don’t match the amount in Treasury. If you have more or less money in your account than shows up on your sales tax records, you are begging for an audit penalty.
Incorrect records too blatant for your taste? Strive for incomplete records. Don’t stress about recording every cent of sales tax that you charge your customers. Scribble your sales tax down on a sheet of paper to keep track–you’ll never know where to find it when you need it. In the end it amounts to the same thing: a clear discrepancy between how much you collect and how much you record.
Pay less than you owe
This one’s about your overall method. You can drastically increase your risk of penalties during an audit by manually managing sales tax. This will help you with your incorrect records, shoddy certificate storage and (purposeful) ignorance about nexus. Plus, think of all of the other opportunities you have for error when manually keeping track of the following:
- State and local jurisdiction rate changes
- Required filing methods and schedules for each taxing jurisdiction
- Changing product taxability rules
- Many more! Leave your own ideas in the comments below.
Ok, Ok. We know you don’t actually want to waste time, money and resources. But hopefully these tips give you some ideas of what not to do.
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