Risk management experts like to define risk as a two-sided coin: one side features threats and the other contains opportunities.
A similar dynamic holds true for sales and use tax audits. Embracing a positive approach to a dreaded audit notification can play a pivotal role in minimizing the threats that it poses while maximizing its upside. These positives are more plentiful than many tax professionals might expect.
While the frequency of sales tax audits returned to their pre-pandemic norm 12 to 18 months ago, there are several reasons why auditing activity may further intensify into 2024.
First, state fiscal conditions are not as rosy as they might appear. A substantial amount of funding increases in the past few years were driven by federal funds delivered to state and local governments via the American Rescue Plan Act’s (ARPA’s) Coronavirus State and Local Fiscal Recovery Funds (SLFRF) Program. That program is winding down, which means that government revenues will no longer get an artificial bump. Second, many states increased spending in the past 24 months and will need more revenues to sustain those expenditures. Third, the ongoing growth of e-commerce combined with post-Wayfair economic nexus rules for remote sellers and marketplaces make sales tax compliance more complex. Tax authorities are well aware that this complexity has given rise to more audit exposure. Fourth, many state departments of revenue continue to invest in advanced analytics and other emerging technologies to strengthen their oversight and investigations. These advancements may uncover more tax compliance discrepancies and errors.
While these factors make audits more likely, tax groups can still make the best of an audit notification by taking the following steps:
- Define what a successful audit looks like: Success varies by company. For some organizations, a swift resolution – even one that concludes with writing a check – is the optimal outcome. For others, success may translate to a zero assessment or the opportunity to correct errors (and to make related process and technology improvements).
- Reduce the risk of future audits: Treat the audit as a learning opportunity while identifying specific ways to reduce audit exposure in the future. Leading tax groups often share the audit’s results with the senior leadership team and the rest of the organization. Doing so can help pave the way for subsequent investments in compliance-related process and technology improvements while underscoring the value of a company-wide effort to reduce audit risks.
- Underscore the tax group’s expertise: Sometimes, accurate compliance documentation will help render a zero assessment. In these cases, tax leaders can use the audit results to demonstrate to the C-suite and the rest of the business the value they provide to the organization.
- Make the case for tax automation improvements: Regardless of their outcomes, sales and use tax audits can help tax leaders build a convincing case for upgrading supporting technologies. Understanding where tax data comes from is a crucial first step in the auditing process. Reducing liability requires the tax group to have a complete and detailed grasp of the taxation of all the products and services the company sells and/or purchases. Gaining, and sustaining, this understanding requires periodic evaluations of tax mapping and products and services sold and purchased. Advanced tax automation can help deliver insights on each of those areas and more.
Most tax professional dread having to say, ‘We’re being audited.” Looking on the bright side – and taking concrete “audit-positive” steps – can help transform a threat into valuable opportunities.
Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in Tax Matters are those of the authors and do not necessarily reflect the official policy, position, or opinion of Vertex Inc.