Sales Tax Audits: A Refresher

“Transaction tax teams may be a little rusty when it comes to preparing for and undergoing sales tax audits,” reports Vertex Tax Director-Chief Tax Office Larry Mellon. “That’s understandable, but it’s time to shake the dust off.”

Larry emphasizes that the pandemic-driven lull in sales tax audit volumes is over, so it’s important for transaction teams to revisit and refresh their auditing strategies. For seasoned tax professionals, this involves assessing plans and approaches they’ve executed in the past. That said, newer, less experienced members of the tax department may not have been exposed to sales tax audits at this point in their careers. A white paper published by the Sales Tax Institute and consulting firm YETTER can help both sets of tax professionals. 

The paper, Best Practices for Managing a Sales Tax Audit, identifies which activities to conduct at each stage of the audit, including preparation, the audit (including negotiations and reviews of the audit workpapers) and post-audit work. 

Each phase is important. “Preparing for the audit is your first line of defense and is crucial to your success in audit negotiations,” the paper asserts. Preparation includes conducting a review of relevant records prior to the auditor’s arrival. These records include sales and use tax returns that have been filed – something that auditors will request. Selecting where (in the office) an auditor will work, preparing staffers for interactions with the auditor (if and when they occur), planning for audit offsets and developing waiver strategies are also part of an effective preparation approach.

The actual audit process begins with an opening meeting in which ground rules are established. The paper lays out eight items to considering during the audit, including assigning an employee to serve as an internal audit liaison, creating a sign-in/sign-out sheet for the auditor to use to document time spent on premise, and specifying what information the auditor will need to include in their requests for records and other materials. Audit negotiations audit workpaper reviews are also major components of the audit (and the paper devotes several pages of guidance to these processes).

Finally, a savvy post-audit plan lays out how the tax team will respond to concerns revealed during the audit while identifying ways to manage future audits more effectively: Once the audit is complete, take action on any problems uncovered throughout the audit process, the paper concludes. “While the issues are still fresh, begin corrective actions so they don’t pop up again in case of a future audit. If you wait, you are less likely to do so at all.”

In other words, don’t wait to make improvements after an audit concludes. The same guidance applies to tax groups that have not received a call from the auditor for some time.