Being audited is similar to being the prosecutor in court – the burden of proof resides with you. “Most state bureaus of revenue will look for sales and use tax documentation going back three or four years, depending on the state’s statute of limitations. If your documentation is inadequate and the auditors can’t tell which transactions are taxable, they may just assume they all are, until you can prove otherwise. ‘Auditors use indirect audit methods to estimate taxable activities when the records are not clear, and those estimates are usually high,’” says Dan Davis, CPA, Sales and Use Tax Consultant. http://smallbusinessreview.com/regulations/Smile_Your_Way_Through_a_Sales_Tax_Audit/ If you can’t provide proof that you were correctly calculating, collecting and remitting sales tax on your transactions, the defense counsel, in this case the state government, will run you over. And you can be sure that you will feel like you’ve been hit by a Mack truck when you get the bill.
With the deficit crisis that most state governments are facing, they are looking to find ways to bring money in. An average audit can net about $30,000 – $40,000. One to two audits may not make a huge dent in the deficit, but that is why states are stepping up their game, increasing liability and limiting exemptions (oh and doing more audits of course). All of those constant changes make an administrative nightmare (and significant costs) for businesses to keep up in order to maintain compliance.
Each state sets its own legislation around sales and use tax and exemptions, which adds to the complexity of the process if you do business in more than one state. It would be nearly impossible to define the law so it applies to all business scenarios – so if you do get audited, the law is open to interpretation and it is left to the discretion of the auditor as to how to apply the laws to your specific business. A few things to keep in mind:
- With audits on the rise, new auditors are being brought on to help carry the workload (Indeed.com lists over 1000 openings for sales tax auditors). Unfortunately, the lack of experience of new auditors and the ever changing laws has made it difficult for even the auditors to keep up, exposing your business to the potential of misinterpretation or inappropriate application of the law.
- Description of an auditor’s job listing taken from apply2jobs.com : “Revenue enhancement support services to state and local governments in the areas of tax administration, revenue discovery/recovery and compliance audit examination.” While the auditor’s job is to verify whether your business has been accurately collecting sales tax where due, their position is not a balanced one. They are appointed to look for money owed to the state as opposed to money owed to you.
THE RESULT: Audits can be inflated and cost your business more money. “Opportunities are expected to be substantial for sales tax audit managers during the next decade. According to the U.S. Bureau of Labor Statistics, jobs for auditors will grow by about 22 percent from 2008 to 2018–which is a considerably faster rate than all occupations.” State governments are gearing up – will you be ready?
THE COURT RULING: Variable and generally not for the prosecution. Minimize cost. Eliminate risk. Make sure you are on the right side of the law by implementing consistent, repeatable, DOCUMENTED processes to ensure sales tax compliance.
Find out how to put the best sales tax compliance process in place. Join our webinar, “Become Best-In-Class by Automating Sales and Use Tax Compliance,” Thursday, July 7, 2011 at 10:00 am PDT.