Most companies can expect to be audited at some point, so it’s important to have a plan for when this inevitably happens.
You can get flagged for a sales tax audit for a variety of reasons. These include sales volume, high volume of exempt sales, errors on sales tax returns or consistent late filing, and having a previous state audit. Having remote employees or an office in the state can make it more likely to be subjected to an audit. You can also be flagged at random.
You can begin preparing now to reduce your exposure. The first step is to understand what to expect in the sales tax audit process, then learn what you can do to prepare and limit your liability. This can save you and your team valuable time down the road, too.
Being unprepared for sales tax exposure can be as costly and tricky to manage as failing to abide by payroll tax requirements.
How does the auditor identify sales tax outstanding?
The goal of a sales tax audit is to determine if sales and/or use tax was under-reported to the state. To do this, the auditor will review your sales tax returns, general ledger, chart of accounts, invoices, exemption and resale certificates, income tax returns, and financial statements. A big red flag for auditors can be if the gross sales reported on sales and use tax returns do not match gross revenue reported on your income tax returns.
How much will I owe?
Whether or not you are registered and have been collecting tax and filing returns in the jurisdiction will make a huge difference in how much you could expect to owe. If you have registered and have been filing timely returns, the statute of limitations is 3-5 years. If you have never registered with the state, the audit period could go back as far as when you originally gained nexus in the jurisdiction.