How to Prepare for a Sales Tax Audit
- Sep 21, 2015 | Lee Polevoi
Receiving notification of a pending sales tax audit is no one's idea of a good time. But rather than feeling frozen with anxiety, you can prepare for the audit and, in the process, begin to feel more in control of the situation. The key, say numerous sales tax experts, is knowledge, organization, and thorough documentation.
Here are several critical tips to keep in mind should you find yourself the target of an upcoming sales tax audit.
Anticipate what the auditor wants
It's safe to assume that most auditors will require access to a wide range of sales tax-related documents, in order to "evaluate the validity and accuracy of the tax and the amount remitted." The possible range of requested records may include (but isn't limited to):
- Invoices, receipts, and credit memos detailing sales transactions
- Sales and purchase records (including sales tax and excise tax returns)
- Resale and exemption certificates
- Bank and financial statements
- Depreciation schedules and calculations
- Cash disbursement records
- Federal tax returns
- Documentation related to shipping
How daunting you find the task of compiling and preparing these documents in advance depends upon how well organized your record-keeping process is--another critically important function to maintain on a regular basis.
Be thoroughly organized
If you ever needed a good reason to keep your sales records in order, this is it. Not only will proper organization of sales tax records save you stress in the long run, it minimizes the likelihood the auditor will go snooping further than you like in the process.
"If your records are a mess and do not tie to anything, you will create doubt in the auditor's mind and give him or her a reason to dig further or use estimation procedures, which rarely benefit anyone outside the taxing agency," says Vincent Porter, CPA, head of Porter & Company CPAs. "If you have records of where your numbers came from, this will go a long way in helping you against the taxing agency."
Tax attorney John W. Sullivan III Esq., agrees, with this additional tip: "If you have a stack of revenue invoices that have been taxed in differing ways, stack the top with all the correct treatment. Some auditors won't review all similar invoice types, as long as all appears proper."
Also have exemption and resale certificates ready for the audit.
"Exemption certificates allow a purchaser to make tax-free purchases that would be otherwise subject to sales tax," says Jayson Mullin, owner of Top Tax Defenders. "Resale certificates are provided to suppliers to substantiate that the items purchased are intended for resale only and therefore are exempt from sales tax. Keeping these certificates can be difficult but this is one of the areas in which the most errors occur, leaving a company open to audit by state tax agencies."
Vincent Porter also advises documenting any deposits in the sales account that don't relate to sales tax. "Uncategorized deposits can be classified as income subject to sales tax, resulting in you paying tax on deposits that have nothing to do with sales tax."
Yes, you want to comply with the auditor's request for information, but in this scenario, you want to avoid giving more information than you have to. "Don't give them records they don't ask for," notes Will of Will's Whiteboard.
Also, Will says, don't invite others to participate "who might make off-handed comments that would spark something and make them dig a little deeper."
Brandon Baker, Owner and Head Chef of Loveletter Cakeshop, agrees. "The more information you give about unrelated topics, the more paths you provide for the auditor to explore. Your goal is to simply get past the audit unscathed, not to let the auditor in on every aspect of your business."
No matter how nervous you may be during the sales tax audit, Baker adds, "how you present yourself matters, and the most important weapon you have at your disposal is confidence." A visible lack of confidence "is going to give the auditor reason to pick through your records with a fine-tooth comb until he finds what he's looking for."
The best preparation for a sales tax audit involves consistent and thorough organization of records, as well as projecting an air of confidence during the audit itself and the presence of mind to answer what's asked of you, and offer nothing more.