Here’s everything you need to know about the audit process to reduce the cost to your business.
The audit process consists of 4 basic stages. We’ve already discussed the first two stages: the pre-audit and selection of sampling methodology phases. In this chapter, we’ll review the third and fourth. The third phase is when the actual fieldwork and auditing happens. The fourth, and final, phase is the post-assessment period where you decide if and how you will appeal the assessment.
The preparation stages of the audit are vital to ensuring your success during the fieldwork phase. The Audit Coordinator (AC) should have already had a pre-audit conference with the auditor as we discussed in Chapter 1. In that pre-audit conference, you set the date for the first on-site meeting when the field work begins. The auditor will have given you a list of records they will need to begin the audit. The AC should be there to make sure the records are available and answer the auditor’s questions promptly and accurately.
First On-Site Meeting with Auditor
This first meeting is extremely important, as it sets the tone for the remainder of the audit. The goal in the early stages of the audit is to take steps that will help you gain some control over the audit process. Don’t expect to have complete control, but if you’re cooperative, professional and knowledgeable, things will go smoother. Taxpayers who appear disorganized or uninformed about state laws at the initial meeting can create a negative impression that persists throughout the audit.
Review Resale Certificates
If you are a seller of goods and you sell to exempt purchasers, you usually have to bill the tax or collect a certificate in lieu of the tax. An auditor will test your sales to see if you have the proper certificates on file.
A lack of exemption certificates often results in large assessments by tax authorities. Depending on the time period sampled, missing just one exemption certificate could result in thousands of dollars of taxes owed.
One way the AC can mitigate this is by coming to an agreement with the auditor about what to do if they discover missing exemption certificates. You should be granted a reasonable timeframe to collect the exemption certificates.
Be Careful What You Sign
During a sales tax audit, you can expect to sign a lot of forms. These include statute of limitation waivers, sample agreements, receipt of documents and agreements to proposed assessments.
These are complex legal documents. If you don’t know what you are signing, get help from someone who does. The auditor will do some minimal explaining, but they often don’t feel it’s their responsibility to tell you. They may not even know all of the possible implications and ramifications of these documents.
In most cases, once the document is signed, it can’t be rescinded.
Signing a sampling agreement without knowing what it means or what the outcome could produce may end up costing you thousands of dollars in tax. You can minimize your exposure by conducting due diligence before you sign every document.
Negotiating with Sales Tax Auditors
We’ve seen two extremes when it comes to dealing with auditors. Some people are overly intimidated while others are ready to battle over every adjustment, no matter how minor. Neither extreme will result in successful negotiations for the taxpayer. The best approach is to adopt a middle-of-the-road strategy.
To get a favorable audit, you have to be assertive in claiming the rights you do have. If an auditor senses you don’t know the procedures, they are likely to cut corners in performing the audit and you won’t get the best results. However, sometimes people get fixated on things that won’t make a bit of difference to the bottom-line result. There is a fine line there. Be tough about things that matter.
Finally, the auditor addresses the final scheduling items on which he/she feels tax should have been paid but was not. Often, there will be outstanding items that would be questionable if you could find the appropriate documentation. You may be missing some resale certificates or proof that tax was paid. You will have time to obtain this missing documentation before the auditor “turns in the audit for processing.”
An auditor is usually highly motivated to get the audit in for processing. This can be to your advantage. It may be that the State’s fiscal year-end is approaching, or their manager or supervisor is requiring that they turn it in soon.
Sometimes deadlines are good in that an auditor may be willing to accept less documentation if they feel it would help resolve everything sooner.
If you need extra time to obtain documentation, be sure to ask for it. An auditor will always tell you about the appeals procedure and will usually try to “just agree to disagree” on the remaining items. However, it is our experience that it’s best to get things solved before the audit is turned in.