Property tax: How to make sure you’re prepared for a business personal property tax audit

It’s a fear for many businesses: Everything is prepared; all your assets are tied to the right locations, placed in the proper asset classifications, and depreciated appropriately. Then auditors swoop in to point out various errors, outdated forms, incorrect decisions, or disorganized records — and maybe even chastise you for your disorganized record-keeping.

While every property tax professional will likely face an audit at some point, it doesn’t have to be the stuff of nightmares. There are ways you can prepare and lessen the blow.

A business personal property tax audit can happen any time and may cover returns for one year or multiple years’ worth of returns. However, some states and jurisdictions have scheduled audits. California, for example, performs audits every four years, with each audit time frame covering the prior four years.

So, how do you help your business personal property tax audits go smoothly? Here are three key steps:

Understand what to expect during a business personal property tax audit
Prepare for a property tax audit ahead of time
Implement property tax software

Understand what to expect during a business personal property tax audit

Before being audited, you’ll receive a letter alerting you to the impending action. The letter will provide pertinent details, including:

When the audit will occur
Which accounts will be audited
What tax years will be covered

The jurisdiction will also request a fair amount of information. Generally, you can expect to provide:

Copies of the returns being audited
Chart of accounts
Detailed asset listings related to those accounts
General ledger and trial balances
Leased equipment status (what you leased and from where)
Other details depending on the rigor of the audit

Once you receive the request, you’ll gather and send documentation to the auditor. They may follow up with clarifying questions, additional requests, or necessary corrections. For example, if you have installation charges on your asset listing but not in your return, you may receive a supplemental tax bill to cover those charges for each year included in the audit.

Auditors will also require you to adjust any misreporting errors, such as using a depreciation schedule that had a shorter life than the jurisdiction requires for a certain asset. The auditor would assign the appropriate depreciation schedule, and you would be billed accordingly.

Once your business personal property tax audit begins, be sure to keep track of the auditors’ changes and the resulting impact on your tax liabilities. This way you know what to expect regarding supplemental bills to avoid penalties.

If you have cause to contest these kinds of decisions, you can appeal an audit by providing appropriate reasoning and supporting documentation. Auditors may not understand how certain equipment works. An explanation on your part may alter their initial determination and help mitigate additional tax liabilities.

For uncontested changes, apply the assessments going forward, like maintaining proper depreciation schedules, appropriately filing charges, and so on.

Prepare for a property tax audit ahead of time

One thing that makes an audit worse is going through one you aren’t prepared for. Rushing around to find proper documents or justification for tax decisions when you’ve got an auditor waiting is not only expensive and stressful, but often leads to errors.

To avoid last-minute scrambles, here are a few actions you can take to ensure your company is ready come audit time:

Maintain proper documentation. When it comes to paper trails, make sure they’re clear and purposeful. Create accessible, comprehensive systems to manage receipts, logs, records, and any other documents related to the purchase and value of your personal property.
Know jurisdictional rules. Brush up on rules and guidelines for the jurisdictions where you have property. Doing so may help you anticipate some specifics of their investigation and possible corrections they may request.
Perform your own internal audits. Look at your records and see if you, say, have $1 million on your asset listings but reported only $500,000. For any discrepancies you find, be prepared to say why you did something a certain way so you have the answer ready for the auditor.

And finally, once you receive notice of your audit, find out who’s performing it. Depending on the jurisdiction, an audit may be handled by the assessor’s office or a third party. In addition, in states with frequent audits, one auditor may cover multiple counties. These details impact how you deal with the auditor and what liabilities may be on the line.

Implement property tax software

Property tax software can help simplify all aspects of the property tax cycle — including audits.

For instance, Avalara Property Tax offers a single place for all your returns and associated asset listings to be stored safely, making it simple to pull documentation when requested.

Avalara Property Tax also helps you:

Quickly download asset listings and actions taken on assets for each tax year — reported vs. not reported, classifications, depreciation schedules, etc.
Easily change asset reporting status, move assets between accounts, transfer and dispose of assets, lock assets against changes, and add notes for yourself or other team members.
Set reminders for important dates and bills to avoid missing a due date or a supplemental bill as the result of an audit.

If you want to be ready for your next audit, we can help. To find out if Avalara Property Tax is right for your business, schedule a call today.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.