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Surviving a Sales Tax Audit: First Impressions Matter

author photo of Lloyd Geggatt

Hear the word auditor and generally a negative connotation goes with it. Sometimes an auditor feels like Pig Pen in Charlie Brown—you know, the kid who walks around with the cloud of dust hovering around him all the time. Well, that is what it is like being an auditor—we always have this negative connotation hanging over us.

When you receive notification of a sales tax audit, remember that first impressions matter. As I said in my last blog, “if you help me, I can help you.” Part of my responsibility as an auditor is to suggest improvements that will make your reporting process better and easier to audit the next time. How far I go with that responsibility is dependent on my relationship with your company and a big part of that is the first impression.

When an auditor visits, they will want a number of things, including:

  • Access to your facility
  • Access to all books and records for the audit period
  • Access to a staff member who is knowledgeable

Access to your facility

It is helpful to an auditor to understand your specific business before beginning the audit so the books and records are reviewed in context. He might want to tour the facility to view the workflow and the types of controls in your business process. He will be looking for any new machinery and how that machinery is currently being used. In Texas, the taxability of a forklift is dependent upon whether it is used in the manufacturing process or in shipping and loading. One is taxable, one is not.

Contrary to what you may hear from some sources, having a clean facility and a location for the auditor to perform the audit is not a bad business practice, especially if the auditor is a seasoned veteran. Putting the auditor in the coldest room of the warehouse might not incline him to feel overly warm toward your business and it really won’t make him perform the audit any faster.

Access to all books and records for the audit period

Providing clear and complete information is another way to present a good first impression. Ledgers that the auditor might want to review include: Accounts Payable (A/P), Accounts Receivable (A/R), General Ledger (G/L), Federal Income Tax Return(s) (FITR) and any books or records underneath those including, but not limited to: Purchase Orders (PO), paid bills, invoices, contracts and customer exemption certificates.

If you have this information available or if it can be easily obtained upon request, the auditor will appreciate the cooperation and will require less of your staff’s time. It may seem simple to you, but sometimes the trail of a transaction can get lost—especially if you had any charge-backs or returns that had to be accounted for that aren’t noted clearly. So when the auditor can’t follow that trail and find all the documentation, you want him recognize your willingness to cooperate and ask questions before he simply extrapolates an assessment based on lack of information. This latter approach just makes more work for all parties. Remember, it is better to keep a transaction out of an audit finding at the start than to have to fight to remove it from the audit findings later on.

Access to a staff member who is knowledgeable

In a MindTools blog on making a great first impression, they note that you should:

  • Be on time
  • Be positive
  • Be courteous and attentive

I left out a few in their list that really wouldn’t apply to this situation but one that I didn’t include in this list but might be worthwhile is to smile; some auditors are actually human. Getting off on the right foot means that you, the taxpayer, and your representative, whether it is a staff member, accountant or a consultant, should demonstrate a desire to communicate willingly with the auditor (whether it is true or not).

If you place a staff member with the auditor who is unable to answer questions or who is unable to find the things the auditor needs, the auditor may actually audit more since he’ll have free time while waiting for the first set of requests to be filled. Good first impressions mean developing a positive rapport with the auditor by showing you are knowledgeable about your business and his needs. For instance, if your business has unusual patterns of sales and transactions, such as a high rate of holiday sales and a low rate of sales at other times of the year (you sell Christmas ornaments), then you want to communicate that upfront so he can take that into account when reviewing the records.

Prepare Ahead

The best defense is a good offense, right? And a good offense for handling an audit is to prepare ahead of time, be able to explain how you charge sales tax in your business, how you report it and encourage the auditor to communicate with you throughout the audit so you have no surprises. But the best defense is to report correctly and on time and be able to prove it.

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Comments

2 Responses to Surviving a Sales Tax Audit: First Impressions Matter

  • Posted by Bob on March 21, 2013 9:11am:

    Lloyd,
    There is absolutely no question that having experienced colleagues available to answer specific auditor questions is critical.
    Based on my experience, if I felt knowledgeable, I would answer auditor questions confidently & without hesitation. However, if I was the least bit unsure of answer, I would advise the auditor that I would set up a meeting with a sales manager, billing director, inventory manager, in short whoever had the expertise needed to answer the auditor inquiries.
    There is no doubt that the auditor will not probe as deep (and thus save Tax Dept additional manhours of effort) if he/she sees that experienced people can readily provide answers to their inquiries.

    • Posted by Author photo of Lloyd GeggattLloyd Geggatt on March 21, 2013 11:37am:

      Bob,
      Thanks for sharing your experiences. As you indicate, providing auditors authoritative answers the first time will go a long way to making the audit a smooth and quick one. Better to delay answering the question until the right person is available than to risk giving the auditor the wrong information. If an auditor finds the facts are at odds with the answer received, the normal reaction is to dig deeper. Plus your overall credibility may take a hit depending how far off the mark you were. Not a good beginning to any audit.
      Thanks again,
      Lloyd

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