Armanino Blog

A Sales Use Audit May Be in Your Future

by Malcolm Ellerbe
October 05, 2010

Given this environment of increased enforcement activity, there are a few things companies can do to effectively manage a sales/use tax audit:

Be Prepared - Conduct a pre-audit before the examination begins. Ensure that exempt/resale documentation is current to support non-taxed sales. Review your fixed asset addition and other purchase invoices for tax paid to vendors or self-accrued if no tax was paid to the vendor (e.g., out of state vendor). Take a “no surprises” approach and confirm that your records reconcile with your sales tax returns.

Understand the Auditor’s Methodology – Understand your auditor’s methodology and process. Understand the auditor’s document request list and why each is needed. Understand the issues the auditor is pursuing in detail.

Work with the Auditor – Don’t wait for the exit conference. Misunderstandings about how your business is conducted and accounted for can lead to improper sample selection and other avoidable variances. The time to address these issues is not when the auditor has concluded the fieldwork.

Meet with the Supervisor – Addressing audit issues in the field frequently is much easier (and less costly) than on appeal. Attempt to provide adequate documentation to support you position if you and the auditor disagree. In fact, it’s best to do this with the auditor in the first place (see “Work with your Auditor” above).

Review the Auditor’s Workpapers! – Take the time to review the auditor’s workpapers/proposed assessment. Simple mistakes/oversights by the auditor can be magnified when extrapolated across a population in a sample. Review the auditors sample for appropriateness. Review each proposed invoice for taxability – the auditor may not understand how the item is being used in your business or how your customer is using the item sold. If you don’t have time to perform this step, enlist a consultant to perform it for you. A thorough workpaper review can easily cut a proposed assessment in half.

October 05, 2010

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