Sales and Use Tax Audits

Sales and use taxes are a significant source of revenue for state governments. Businesses are charged with collecting and remitting sales and use taxes to the government.

An audit may arise in many different ways. A regular state income tax audit of your company may grow into a sales and use tax audit. Sometimes an audit of a customer or vendor may lead to an audit of your company. Late or amended returns may flag issues. When a company reports sales to the IRS that are inconsistent with what is being reported to the Department of Revenue, the inconsistency may trigger an audit. For service businesses that use, but do not sell tangible goods, use tax may fall under the radar.

The first step of any sales tax audit is being notified by the state that you have been selected for audit. Next, the auditor would issue an Information Document Request (IDR) to the business and request a list of records. As a general principle, all sales are presumed taxable unless the taxpayer can substantiate with documents that they should not be taxed.

This is a critical step of the audit as the documents selected to be provided and the format, in which they are provided, will form the basis for the auditor’s analysis. Seeking professional advice and assistance at this stage can prevent significant exposures.

Based on the documents provided, the auditor may request clarifications and additional information. The auditor may also request to visit the business and observe the operations and review documents on site. Once the auditor has completed the field work and analysis, the auditor will present the business with a report indicating the tax due and payment options.

These audits can represent a significant exposure for business taxpayers although the risks can be minimized and the damage mitigated when a business is strategic about the audit.