Navigating the Gross sales and Use Tax Audit

What do you do when your organization receives a letter that it has been chosen for a gross sales and use tax audit? There are issues that you must and mustn’t do earlier than the audit begins. We name this the Pre-Audit as a result of the auditor’s letter is the primary sign to “circle your wagons” and name an expert in asales and use tax.

On this weblog we are going to focus on what the auditor needs you to do and what your consultant will seemingly suggest you do. When you simply acquired an audit letter then we suggest the next: cease, breathe, don’t speak to the auditor with out illustration, and name an professional in gross sales and use tax.

The Gross sales and Use Tax Audito

We wish to remind our readers right here that we respect the job that auditors do, and we all the time purpose to interact with them respectfully and pretty. Sadly, the character of an audit is that it’s simple to see it as adversarial. So, what must you anticipate from the auditor? The auditors’ basic premise is that they’ve the legislation on their facet so the taxpayer should adjust to their requests. These requests are going to be demanding and, in some instances, unreasonable. As a taxpayer, it’s OK to push again on a few of these requests.

In California and different states, preliminary contact is mostly made through a letter informing the corporate in regards to the audit and requesting books and information. In some instances, the corporate could obtain a telephone name from the auditor. We are going to speak in regards to the books and information letter in a second, however the trickier scenario is when an auditor calls earlier than the books and information letter is acquired. Think about these questions:

  • Who in your organization may obtain the decision?
  • What questions will the auditor ask them?
  • How may your worker reply the questions?
  • Will your workers’ responses to the questions be appropriate?

Hopefully your workers know who to direct the auditor to. Then, we suggest that the preliminary contact worker reply with a brief remark: “Thanks for the decision, please give me your title and telephone quantity and we are going to get again to you. I hope you have got an incredible day. Bye.” There are only a few “random” audits. The state solely has so many sources, so it’s seemingly that the corporate was chosen for audit for a motive. Someplace, there was a flag. And it’s necessary to carry out the Pre-Audit steps to get forward of what these causes is likely to be.

The Preliminary Request For Info

As talked about above, the CDTFA all the time sends a “books and information” letter to let the corporate know it is going to be audited and to request sure books and information. The usual books and information letter will ask for the next for at the very least the final three years:

  • Gross sales and use tax returns, together with associated worksheets.
  • Normal ledger and associated journals – they need them electronically.
  • Gross sales invoices – once more, they need them electronically.
  • Buy invoices (paid payments) for consumable provides and stuck property (for instance, furnishings, fixtures, and gear).
  • Documentation supporting claimed exempt gross sales; supply documentation for out of state gross sales; and all your resale and exemption certificates.
  • Federal revenue tax returns, together with depreciation schedules and 1099 statements.
  • Property tax statements.
  • Gross sales invoices for fastened property bought throughout the audit interval.

Earlier than sending any information, take the time to arrange to be audited. Hopefully, you’ve completed the Mini Gross sales and Use Tax Audits (“MSUTA”) and are able to have a name together with your consulting agency. Even when not, throughout this name your advisor will wish to higher perceive what you are promoting and decide the place your danger is. What are your gross sales and use tax reporting strengths and weaknesses? If in case you have completed MSUTAs we are going to wish to assessment these working papers: the assessments carried out, the extent of the testing, the findings, any corrections already made and when these corrections had been made. This can give us an excellent image of the corporate’s potential publicity throughout the audit interval. And let’s not overlook about the opportunity of refunds.

If the corporate has not carried out any MSUTAs then the dialogue can be extra complete up entrance. We are going to wish to be taught in regards to the firm in-depth together with reporting habits over the interval to be audited; and the place the corporate has publicity. We are going to wish to work with you to find out essentially the most cheap methodology of testing the books and information for each gross sales and purchases.

Auditors look lengthy and onerous at nontaxed gross sales and purchases. Do you have got help for untaxed gross sales? Have you ever made purchases of fastened property or bills that weren’t taxed? Each may very well be publicity areas.

The Assembly – Firm, Advisor And Auditor

After we’ve got met with firm representatives, accomplished our evaluations, recognized your areas of publicity and attainable refunds, and developed our plan, it’s time to contact the auditor. We are going to want a correctly executed energy of legal professional in an effort to contact the auditor. The ability of legal professional permits us to behave as the corporate’s consultant relating to the audit.

Our first name with the auditor will cowl many matters – the next is a short record of what we are going to focus on:

  • We are going to ask for copies of all information for any prior audits. We wish to see how prior audits had been completed and if the auditor offered any recommendation in error or if we are able to apply prior percentages of error to the present audit;
  • We are going to focus on the opportunity of doing a Managed Audit Plan (“MAP”). A MAP is an audit that’s carried out by the consultant/taxpayer and it offers a fifty p.c discount of any curiosity legal responsibility from under-reported tax, this will typically lead to a major financial savings. Penalties are additionally usually waived below this program;
  • We are going to focus on what can be examined and the way it is going to be examined – is statistical sampling one of the best strategy or block samples (testing a month, 1 / 4, or a 12 months) or an examination of each transaction?

In Abstract

There’s a lot to think about within the preliminary stage of an audit, and far that we are going to do to just remember to are receiving one of the best audit protection. The important thing level we hope you’re taking away from this text is that what you say to an auditor is just like the proverbial bell that has been rung – it will possibly’t be un-rung. Please name an expert earlier than you speak to an auditor.

As soon as we work with you to find out danger areas, a plan for working via the audit, and a timeline, we are able to refine interactions between the events. However we all the time suggest to place somebody like us (your advisor) in between you and the auditor. It’s not as a result of you have got something to cover. You simply produce other areas you focus on throughout the Firm. We focus on state gross sales tax issues and in minimizing each the attainable tax publicity AND inconvenience of partaking within the audit. Permit us to assist.

Hopefully, your organization has adopted the suggestion in our third weblog and employed an skilled consultant to drive the corporate’s audit protection. An skilled consultant is your finest safety for a positive audit end result.