We subscribe to some of the best resources available today when it comes to state and local tax research. Chances are, whatever question you could possibly have, we can find the answer. Today, we want to address some basic questions surrounding managed audits.
Managed audits are somewhat unknown except perhaps in the fairly small state tax consultant community. But they ought to be more well known, because they can lead to some great benefits in many states. We recently completed a managed audit for a major cable television provider and saved them in excess of $1Million so we know from experience how beneficial they can be.
But what is a managed audit, first of all?
A managed audit generally refers to a process whereby you the taxpayer conduct your own audit subject to agreed-upon procedures with and pursuant to a review by the taxing jurisdiction. It may sound crazy for a company to audit themselves, but there can be substantial benefits in time and money saved. You pull your own invoices, schedule purchases/sales where tax is due and then turn those schedules into the auditor. They review the schedules and process the audit. You can typically protest questionable items.
Managed audits are probably most appropriate in a situation where you know at the outset that you will have a large liability and you want to save the assessed penalty (and in some states the interest also). A managed audit can save you vast amounts of time because you yourselves who are familiar with your company and record storage. If you want to participate in a managed audits, usually you have to request one before an actual audit begins or very soon thereafter. We wish more people knew about this option.
You have to be careful in putting together a managed audit agreement. Here are factors to consider:Audit Period;Sampling Methodology;Policy on Missing Invoices; and Deadlines.
We have some tax matrices already put together based on survey questions made to the states each year. We offer this basic research to you at no charge for up to 10 states. If you like to receive one of these charts, please email us here and just request it. But remember, this chart is the result of a survey performed by the states and is research provided to us by CCH. The charts are fantastic resources, but cannot substitute for professional advice based on your specific facts and circumstances. By all means, have a look at the charts we can provide but then do your own research and consult a professional.
Top 4 questions:
- Does Your State Provide a Managed Audit Program or Similar Program? What is the Program Called?
- Are There Any Limitations on the Taxpayers' Participation in Such a Program?
- Is Interest Waived for Participation in the Program, or Does a Special Reduced Rate of Interest Apply?
- Is Penalty Waived for Taxpayers Participating in the Program?
What's the Best Way to Get Answers to Your State Tax Questions?
CALL THE STATE?
This may not be the best thing to do. Clients frequently remark that when the call the state for guidance, they often get hazy and even conflicting answers. We usually say that it's not that people at the state don't know what they're talking about. In fact, if you get a hold of the right people with experience in your industry, and they understand your question correctly, then you can almost always trust the answer you get from them. Just try to get the answer in writing, so you're protected in the event of a future audit.
But you have to get the right people and you have to phrase the question appropriately using correct terminology so that misunderstandings are avoided. Certain words carry meaning in the sales tax world that might not be immediately apparent to a non sales tax person. Sales tax is much more a "form over substance" type of tax than income tax and how things are worded in a contract or invoice can be crucial to the taxability. How a question is worded can also make a big difference. Don't get me wrong, I'm not saying there's some sort of trick or code language that you must conform to or else, I'm just saying that you want to understand all the implications of the words you choose in asking for guidance so that you get the most accurate answer.
Plus, how do you know if you got the whole answer on your situation? You may have described your facts and circumstances accurately but left out something that you did not think was important. The answer you get would be dependent on the facts you presented. But in reality, the answer you get may not be appropriate when you consider all the relevant facts.
With so much information available on the Internet these days, you can Google your question and chances are, you'll find something that seems to match your situation. The problem here, of course, is, does this answer really apply to your situation? Is there another contradicting ruling or law on this matter? Has this item you found been superseded?
GET A RULING?
What if there is no law, regulation, court case or state ruling that addresses your exact situation? Yes, this does happen and quite frequently. State revenue departments have not produced answers to every possible question. This is in stark contrast to the IRS, where it seems that no matter what situation you face, there is a regulation or revenue ruling or court case that addresses it on point -- it's just a matter of finding it. At the state level, we frequently run into situations where there is simply no documented answer to your question. In this case, we usually recommend obtaining private letter rulings from the revenue departments. Each state has their own procedure. We usually recommend only seeking a letter ruling where you have already discussed the question with a subject matter expert at the state, and gotten a pretty good idea of what you're going to get in the ruling. It's not always possible to do, but you don't want bad precedent, if you can help it.
ASK THE AUTHORITY?
Have you tried calling the state or just searching the Internet and came away wondering if you got the right answer? Have you considered consulting a professional? You probably have, but hesitated, considering the cost. Well, this is what we do -- We Solve State Tax Problems.
And, we don't always charge for this service. How can that be, you ask? We subscribe to just about every service available and can find just about any law, regulation or court case that would bear on your facts and circumstances. And more than that, we use our many years of experience to evaluate your facts to form the correct questions. With that experience we can draw conclusions you can rely on. And we maintain contacts with key state personnel that we can confirm how the state will treat certain transactions that fall in gray areas.
Sometimes we just flat know the answer to a question you have. We always tell our clients: "If you have a question, just call us or email us. If we can answer you off the top of our heads, we're not going to charge you. If we need to do some research, we'll tell you before we do the work and seek your approval before we do it." You can expect no surprise invoices from us.
So What Questions Do You Have?
Like we said earlier, we can deal with any state tax question you can think of. Of course, the answer to many questions we get is, "it depends!" And that may sound like a cop out, but it really does depend. The answer depends on which state we're talking about number one and then on other possible variances in the facts. One of the helpful resources we subscribe to is provided by CCH. And one of the resources they give us access to are certain charts or tax matrices.
CAUTION ON CHARTS
A big word of caution is in order when it comes to charts. A chart is just a starting place when you want to do some research, and not the final answer by any means, but it's still interesting and insightful. One particular chart they provide is unique in that it is based entirely on surveys of actual state tax departments and as such it is a good representation of state tax policy. But it is just state policy and this survey is not binding on them. Sometimes, a state's own policy is at variance with the law, so take this with a grain of salt. But, it still makes for good state tax conversation. We're here to help, give us a call.