Sales tax audits are an effective way for the states to collect underpaid sales and use tax. I’ve been involved in helping clients manage audits for over 30 years and I’ve seen a wide range of audits and auditors. Most audits are pretty straightforward and are handled efficiently. The business has the correct records for the auditor to review, the auditor is prompt and capable, the taxpayer errors are not that controversial, and we can complete them in short order. Over the past few years, I’ve seen this pattern take a dangerous turn as the states are becoming more desperate for revenue and are having a hard time hiring and training auditors.
For the past year, I’ve been working on audits from most state in the Southeast. Based on my exposure (albeit limited to these specific audits) I’m seeing several troubling changes occurring. These changes may not be obvious to most businesses that are being audited, but failing to understand these audit trends may cost taxpayers huge amounts of tax, penalties, and interest. The following are a few of the trends I’m seeing.
1. Improper (or creative) sampling methods, 2. Undertrained auditors,3. Unsupported legal positions,
4. Unwillingness of auditors to consider non-standard audit procedures, and 5. Auditors not really understanding the nature of the business, its customers, and data.
Without taxpayers knowing that these things may be happening “right before their eyes”, there is no way to properly challenge the audit. Taxpayers need to make sure that the auditors understand their business, their customers, and their data. I’ve seen auditors quote statutes and regulations with gusto as fully supporting their audit position. In some cases, the taxpayer just agreed with the rules that the auditor was using. This is a huge mistake. Don’t accept anything the auditor says without asking for the exact provision and then reviewing it yourself. You may be surprised to find that the auditor cherry picked the provisions that works to their favor and eliminated provisions that benefit the taxpayer.
The state is not your friend and has no interest in providing you with guidance to mitigate your situation. Get help if you need it. The deck is stacked against small business taxpayers that may never have been audited before and may be putting some level of trust in the auditor. This trust is often misplaced.
If you get an audit notice get help before the auditor arrives. You may be completely blind to mistakes you are making and you may want someone other than the auditor to point these out ahead of time. This is even more true if you are being audited by a state that is not your ‘home’ state.