It starts with a letter in the mail – you receive the Notice of Audit from the Texas Comptroller’s office or another state’s taxing authority. Whether you’ve been through the process before or you’re a first-timer, this likely strikes terror in your heart. In Texas, the statute of limitations is four years, so an audit can cover a lot of transactions, a lot of changes to a business, and a lot of “oh yeah, I forgot about that” moments.
The best way to prepare for an audit is by reviewing and analyzing your processes and procedures long before you ever receive the Notice of Audit. Below we’ve highlighted some key things to keep in mind.
Perhaps your business has evolved over time, and you’re offering more products or services than when you first established the business. Some of the products and services may be subject to different taxability rules. Therefore, be familiar with the laws that apply to your line of business. If you haven’t charged your customers sales tax on taxable products and services, you could be left holding the bag for tax that should have been charged to the customer.
Are you obtaining properly documented resale and/or exemption certificates from your customers when they are making tax-free purchases? Good recordkeeping policies will help you avoid trouble down the line.
Are you charging the proper tax rate? Local tax rates can be tricky. It’s important that you understand what local rate to use when charging tax to your customers.
Analyze your purchases and when you’ve paid tax. Have you paid tax on all taxable purchases? Or, should you be remitting use tax? Are you properly using resale and exemption certificates to purchase inventory, supplies and equipment tax-free when applicable?
Are there any exemptions that you’re not taking advantage of? Consider the exemption for qualified research or the manufacturing exemption (which often applies to many businesses that you wouldn’t even think of as manufacturers).
Once you’re notified of an audit, don’t panic. There may still be time to correct a few things before the auditor shows up for fieldwork. Additionally, here are a few tips for surviving the audit process.
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Be prepared.
Understand the tax law as it applies to your business. Make sure a knowledgeable employee or your CPA is representing you. And, have all of the requested documentation available before the audit begins.
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Be organized.
You always want to appear that you know what you’re doing. Being organized prevents the auditor from poking around in more than what they really need. Additionally, only provide them with the specific documentation that is requested. Giving them more than they ask for could open up an unintended can of worms.
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Be nice.
Never underestimate the benefit of being cooperative and professional with the auditor. Uncooperative taxpayers come across as having something to hide. If you act like a jerk, the auditor is likely to reciprocate.
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Ask questions.
Find out how long the auditor anticipates the fieldwork will take or when you are likely to receive a report of their findings. If a document request doesn’t seem relevant, ask why it’s necessary.
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Comply with deadlines.
Failure to meet certain deadlines may result in loss of certain rights to refunds, negotiations and remedies.
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Know your rights.
Make sure you understand your rights and the options that are available if you disagree with the auditor’s findings. There are often simple, easy remedies that can save you the time and expense of going to court.
In the end, investing a little time up front to ensure your business is properly complying with the sales tax laws and recordkeeping procedures will save you a lot of time, money and aggravation if you’re ever audited. ATKG is available as a resource if you need help.
By: Annette Goodson, Senior Manager
