Sales Tax Audits Without the Angst

Businesses vary widely in their level of readiness for sales and use tax audits. Some have standard protocols and templates ready to go; others favor a more improvised approach. A state tax audit is nobody’s idea of fun, but the following practices can help you make the right moves when an auditor comes knocking:

• Audit preparation: Perform a thorough pre-audit review and define the scope of the audit. Assess your organization’s adherence to prior audit protocols. Consider all scheduling and location requirements: Will meetings be in-person, or are remote or hybrid communications possible? Will you need to organize plant tours? Perform a quick review of your record locations and access. Understand the audit issues and identify any experts you may want to consult.
• Audit management: Identify your liaison at the auditor’s office and schedule regular communications with the auditor. Review the audit workpapers regularly. Contact your vendors and customers to avoid any issues around double taxation, and where overpayments have been made, propose that a resolution be included in the audit. Network with your peers for insight. Escalate issues with the Department of Revenue when appropriate. If documents are missing, look for alternative options to present the information. Understand common tax data challenges, such as accrual of tax on goods movement and inventory withdrawals.
• Data and systems: Consider ways to provide copies of records or access to your systems. Pay close attention to exemption certificates. If you’re using Vertex data for the audit, you can maximize tax journal data and show documentation of systems changes.
• Audit policy: Consider the audit period and any applicable statute of limitations. Review your waiver management policy; for example, do you sign waivers for any period of time, or for the period after the audit commences and for as long as is needed to complete it? Determine whether information document requests are formal or informal. Resolve power of attorney considerations.
• Closing the audit: Assess the audit division’s resolution efforts and any informal DOR options. Consider any available penalty abatements, potential appeals and payment options. Undertake all documentation requirements and corrective actions. Organize the final workpapers and all details supporting the audit, including the Auditor’s Summary, the exceptions report and the assessment. Generate an internal audit report. Create internal communications to impacted departments. Plan and execute corrective actions.

In a related post, I share related tips on how to elevate your sales and use tax audit-readiness.