What a sales tax audit for a small business looks like
- Small Business
- September 6, 2018 | Mike Plaster
Even if you think you’ve been doing everything right when it comes to sales tax and other business processes, an audit is one of the most intimidating challenges a small business owner can face.
Do you have all the right records? Should you hire someone to represent you? How long will the process take? Will your business suffer because your focus will be divided?
These are just a few of the questions you’ll probably have if you get an audit notice.
While nobody wants to go through an audit, a lot of fears about them stem from a lack of knowledge. When you know more about what a sales tax audit involves, you’ll breathe a little easier (we hope).
Here, we’ll walk through the general audit process from beginning to end, so you’ll have an idea of what to expect if it ever happens to you. (Keep in mind that audits can differ from state to state, and may also vary depending on your specific situation.)
Common reasons for an audit
First, it’s important to remember that being selected for an audit doesn’t automatically mean your company has done something wrong. There are many reasons you might be audited:
It might just be your turn. Some companies undergo audits regularly as part of a cycle, and others are selected purely at random.
Your industry or your associations with other companies. States sometimes target specific industries for audits. They might also flag your company if one of your suppliers, customers, or even a competitor is audited.
Data analysis. Today’s technology allows states to perform automated reviews of various records. That analysis can cause a state to question whether your business has physical presence there, which would require you to collect sales tax.
Geography. Even something as simple as your location can make you a target.
Several of the reasons above are completely out of your control. However, other red flags can alert states to potential errors and trigger an audit, such as a large number of exempt sales, or inconsistencies in your filings.
No matter the reason for an audit, the process will start with a letter — typically from the state’s department of revenue. No one is going to show up at your door unannounced and surprise you with an audit. This letter will include a request for records and information about various areas of your business, which might include:
Sales tax returns
Invoices for both sales and purchases
Some states now use “stratified audits,” which are initially done by computer. All purchases during the audit period will be downloaded, and criteria applied to determine which purchases should be reviewed. Auditors also can gather information from other sources, even your vendors.
You’ll have a period of time to gather this information, as well as to retain a tax professional if you want expert representation during the audit. It’s extremely important to respond as promptly as possible and keep the lines of communication open.
After you’ve provided the necessary records, an auditor will prepare preliminary schedules and sub-schedules; these schedules can include expenses, purchases, sales, etc. They usually reflect the items the auditor believes were not handled correctly with regards to sales tax, or where more information is needed. You then have an opportunity to provide comments, clarifications, and any additional information required.
Using the new information and taking your comments into consideration, the auditor will create revised schedules — or request even more information from you. This process can continue as many times as necessary until the auditor feels the schedules are complete and correct.
The Proposed Assessment
You’ll either have an exit conference with the auditor to receive a final assessment, known as the Proposed Assessment, or receive it by mail. This details what the auditor believes you owe the state or tax jurisdiction. If you agree with the assessment (or at least agree to abide by it), you simply follow its requirements for payment and other actions.
If you disagree with the assessment, however, you have a few options: You can continue discussions and see if the auditor is willing to make changes. If that’s not successful, or if you’re still not satisfied, you also can appeal the findings and potentially even open a court case. Each state has specific requirements and procedures, but typically you have 30 days to appeal.
After the audit
However your audit turns out, you have a great opportunity once it’s done: You can use the experience to determine what’s working in your organization, and what isn’t. It’s also the perfect time to consider how you want to manage your tax obligations going forward — and how Avalara’s options for small businesses can help you take the stress out of sales tax. Visit Avalara.com for more information, or get in touch at 877-759-6520 today.
How to understand your nexus, which documents you'll need for 2018 filing, and more!
Avalara offers simplified filing and automated tax calculation solutions for small businesses and ecommerce sellers
Stay up to date on sales tax changes and managing tax in your business