TIP ► It is a good idea to begin at an early stage of your audit to review your resale certificate situation, if it applies.
In other words, if you are a seller of goods and you sell to exempt purchasers, typically you are required to bill the tax or collect a certificate in lieu of the tax. An auditor will test your sales to see if you have the proper certificates on file.
A lack of exemption certificates generally results in large assessments by tax authorities. Depending on the time period sampled, missing just one exemption certificate could result in thousands of dollars of taxes owed. Hopefully your AC has already come to an agreement with the auditor about what to do if missing exemption certificates are discovered. You should be granted a reasonable timeframe to collect the exemption certificates.
Sales tax audits can mean that a lot of forms to be signed by the taxpayer. These include statute of limitation waivers, sample agreements, receipt of documents, and agreements to proposed assessments. These are legal documents and if you don’t know what you are signing, get help from someone who does. In most cases, once the document is signed, it can’t be rescinded. Signing a sampling agreement without knowing what it means or what the outcome could produce may end up costing you thousands of dollars in tax. The auditor will do some minimal explaining, but they don’t feel it’s their responsibility to tell you, and they may not even know all of the possible implications and ramifications of these documents.
FAQ ► What’s a good strategy for how to deal with the sales tax auditor?
We’ve seen two basic extremes when it comes to dealing with auditors. Some people are overly intimidated while others are ready to battle over every adjustment, no matter how minor. The best approach is to adopt a middle-of-the-road strategy. Neither extreme will result in successful negotiations for the taxpayer.
FAQ ► Is there anything in particular that you should NOT give to the auditor?
Auditors usually request more information than they really need. There are some things you should not give them, especially at the beginning. This includes the backup to the depreciation schedule. The reason for this is that schedule usually has rounded and combined figures. The auditor doesn’t need this document because they have the source documents that feed this schedule. If they get this schedule and start assessing the amounts there, it can be very difficult to get them removed later.
FAQ ► What should we allow the auditor to see?
It is up to the AC to provide alternatives or ask questions concerning the necessity of certain requested documents. Most taxpayers are usually willing for auditors to see the following without too much protest:
- Federal and state income tax returns
- Sales and use tax returns
- Worksheets used to prepare returns (be careful about the depreciation schedule)
- Reconciliation schedules
- Source documentation such as invoices, register tapes, contracts and other records
- Exemption certificates, product descriptions, contracts and other information supporting an exemption
TIP ► It is important to remember that there are other pieces of information that an auditor should not have (for example personal information about customers or proprietary information about the company).
Similarly, an auditor rarely needs an entire contract; they typically only need a limited portion of the contract and as such should only be provided what they need.
It can be tempting to treat the auditor in a certain way to get the best results. Some advocate putting them in a cold or hot room by themselves and limiting their contact with anyone at anytime. Some say that you should give them one document at a time and make them request every little thing in writing. Others go so far to suggest that the auditor be given a bright yellow name tag that says STATE TAX AUDITOR on it so people will know to avoid him/her. We say all of these things are way overblown. It comes down to what makes sense. We have handled many, many audits and have run into some downright unreasonable auditors to be sure, but we haven’t seen that any of these extreme measures have resulted in anything good.
TIP ► Don’t go overboard (in either direction) in your treatment of an auditor and cause yourself a lot of extra work and tension that won’t get you any improved results.
TIP ► Please understand: We’re not advocating being soft and just letting the auditor have her/his way. You must be assertive in claiming the rights you do have.
If an auditor senses you don’t know the procedures, he/she is likely to cut corners in performing the audit and you won’t get the best results. However, sometimes people get crossways with an auditor over things that won’t make a bit of difference to the bottom-line result, except to make matters less favorable for you in the end. There is a fine line there. Be tough about things that matter.
FAQ ► Should the auditor be given their own office?
This isn’t necessary. But, in our opinion, the auditor should be assigned a specific workspace, preferably away from company employees other than the AC. Larger companies generally have office space permanently set aside for the exclusive use of various auditors. Other possibilities include the auditor’s office, or the taxpayer’s CPA or attorney’s office. It is not unusual for larger companies to have the IRS and one or two state auditors in the office on a nearly full-time basis. Nevertheless, entertaining more than one auditor at a time should be discouraged, particularly among smaller companies that lack a large or sophisticated tax staff.
FAQ ► Should we allow the auditor to tour our facility?
The auditor may request a tour of the premises, particularly if you are a manufacturer. Plant tours often clarify technical issues and usually they are helpful, but they also can raise additional questions. If the auditor asks for a tour, the AC should schedule a time, arrange for a guide (typically a technical person, such as an engineer) and the AC should take the tour in advance. This will allow the AC to educate the employee acting as the guide on potential tax issues. The same guide, and the AC, should then accompany the auditor.
FAQ ► How often should the Audit Coordinator meet with the auditor during the audit?
The AC should have a preset schedule of meetings with the auditor. We do not advise that you position yourself as a “regularly available” person for the auditor to drop in and talk with. The AC’s schedule will dictate the meeting times. Typically, a scheduled meeting in the morning, early afternoon and end of day for 10 to 15 minutes per meeting will suffice. Important meetings, like the initial onsite meeting and audit closing meeting should be attended by two company personnel where possible. It is important to have a second person there for purposes of verifying auditor comments, and for completeness in asking questions.
FAQ ► When should the Audit Coordinator start working on the auditor’s schedules?
At the initial meeting, the AC should make arrangements to review the auditor’s working papers as each segment of the audit is completed. When items are scheduled by the auditor that the AC believes should be removed he/she can immediately begin gathering additional supporting documents from within and without the company.
Detailed investigations and follow-up should be assigned to people who know the applicable laws and are experienced enough to recognize the implications of their findings. You should focus your limited resources on the issues with the greatest impact.
Finally, the auditor will be done with the last of scheduling items on which he/she feels tax should have been paid and was not. Most likely there are many items on the schedules that are questionable if only you could find the appropriate documentation. You may be missing some resale certificates or proof that tax was paid. You will generally be given time to obtain this missing documentation before the auditor “turns in the audit for processing”.
TIP ► An auditor is usually highly motivated to get the audit in for processing. This can be to your advantage.
It may be that the State’s fiscal year-end is approaching or his manager or supervisor is requiring that it be turned in very soon. Sometimes deadlines are good in that an auditor may be willing to accept less documentation if she/he feels that it would help to get everything resolved now as opposed to later.
TIP ► If you need extra time to get documentation, be sure to ask for it.
An auditor will always tell you about the appeals procedure and will usually try to “just agree to disagree” on the remaining items. However, it is our experience that it’s best to get things solved before the audit is turned in.
FAQ ► Isn’t the auditor supposed to educate us about the law?
We hear this a lot. And some auditors say that’s what they do, but you don’t want to make this assumption. Auditor’s are sometimes misinformed about their own law and many times they are not aware of recent cases that have changed how the law is applied.
LET'S WORK TOGETHER