7 Ways to Help Your Clients Survive a Sales Tax Audit
Imagine what life is like inside one of your most successful and fast-growing clients’ businesses. Maybe it’s an exotic spice shop at the farmer’s market, a car detailing shop, or even a landscaper who sells plants and trees. This client built its going concern through pluck, luck and, of course, your excellent advice. The business hired employees, scraped up some financing, developed a loyal customer base, weathered downturns and built on early successes. It marketed effectively, matches 401(k) contributions and has its accounting house almost in order.
Life is good for your client. Right?
Maybe not. Your client could be reckoning with a new challenge: an imminent sales tax audit. The company’s successes did not adequately prepare it for this day. Alas, “let’s build a bulletproof sales tax compliance solution” wasn’t included on the list above, was it? Frankly, sales and use tax compliance rarely raises serious concerns for young, fast-moving companies. Until today, that is.
Chances are good that your client got some kind of warning, so preparations have been made; but as the day draws near – “the auditor will be here, in this office at 9:00 a.m. Tuesday!” – here are a few ideas to help ensure a positive outcome:
- Designate a point person. It is strongly advised to avoid the short-straw method of choosing … so while this duty is probably hard to frame as a reward for good behavior, it is imperative that the right employee fulfills this role. This individual should have a strong working knowledge of the products the company sells and a strong knowledge of the company’s accounting processes, including the ones that work well and the ones that don’t. Unless impractical, all primary exchanges with a sales tax auditor should be undertaken by this same employee.
- Take a sales tax refresher course. Seriously, even a brief brush-up on basic principles will help avoid miscommunication and boost your client’s confidence when interacting with an auditor. To a degree, any resource will do. For example, many states offer decent publications or webinars on general or specific sales tax topics. Alternatively, search out thought leadership resources to help learn about trends in a state’s current enforcement efforts, and to develop more than a passing knowledge of pertinent forms and rules. Most importantly, this will help your client exude total confidence about the company’s sales tax obligations and how they are being fulfilled.
- Be responsive, not effervescent. Audited companies are legally bound to give certain information to an auditor if they ask for it. You should provide records, swiftly, and in an accessible form, to avoid any appearance of duplicity. On the other hand, don’t overshare! Discretion, and laser focus on requests, can help avoid miscommunication and any perception that the provision of excessive information is meant to complicate some larger deficiency. Give the auditor what he or she asks for: nothing more, nothing less.
- Get it in writing. Encourage your clients to document in writing the interactions they have with auditors, especially requests for documents or narrative explanations. For formal requests and exchanges of documents, this process may take care of itself, but also be sure to encourage contemporaneous note taking by your clients’ point person to record all formal and informal exchanges with an auditor. Anything aside from today’s weather, or the ballgame score, may be important to your clients, as the audits progress.
- Take the time to be prepared. There might still be some time left to leverage the timing of the audit, in order to aid your client’s preparation efforts. Encourage clients to take enough time beforehand to adequately prepare documentation and support for the positions they have taken. If that is not enough, most auditors will accept reasonable and timely requests for extensions of this timeframe, absent negative circumstances. Even in the midst of an audit, reasonable requests for time extensions are often granted in order for an audited company to better fulfill an auditor’s request. There may be a price to pay in the form of time limitation waivers, but it might be best to get it right the first time rather than rush it.
- Know what you are signing. Like most engagements with authorities, sales tax audits can produce all sorts of documented agreements. Items such as sampling method agreements, waivers of statute of limitations protections, receipts of documents, or even proposed or final assessments, can all be part of a sales tax audit. Encourage clients to seek out proper advice before signing any agreement of which they do not fully understand the implications.
- A sales tax audit is no fun, but don’t punish the auditor. Sales taxes are a pass-through accounting function that provide no revenue opportunities for your client, but can cost them dearly in the presence of poor compliance. That said, no matter how much your client detests sales tax collection obligations, it is ill-advised to make an auditor feel uncomfortable or uneasy. The auditor’s primary duty is to the revenue authority, and will express allegiance to the interests of the employer. However, positive professional interaction and a comfortable working environment might buy your client some leeway when it comes to near-misses on the compliance front.
A sales tax audit presents diverse and unique requirements on an auditor; besides detection of fraud and adherence to generally accepted accounting principles, a sales tax audit requires an application of a myriad of geographic boundaries, product and service specific rules, overlapping rates, multiple flavors of special exemptions, and quirky traps for the unwary. It is imperative that your clients approach sales tax audits with confidence and professionalism, in order to offset the native complexity of sales tax compliance experienced by auditors and accountants alike.
Editor’s note: This article first appeared on the Intuit® ProConnect™ Tax Pro Center. Be sure to read other articles by Avalara’s tax experts on the Intuit® ProConnect™ Tax Pro Center: “Global Tax Compliance for Small- and Medium-Size Businesses” by Shane Ratigan, and “Blockchain Technology and What it Means for Tax Professionals” by Peter Horadan.