Synopsis: Auditor relationships can significantly influence the outcome of an audit. Get general tips on relationship building and specific tips on how to identify a good auditor, an average auditor, and a bad auditor and different ways to approach each.
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Effectively Managing Relationships with Auditors
The Company's Role in the Relationship:
Effective management of relationships with auditors can significantly affect the results of an audit. Treating the auditor as an adversary or a nuisance is generally not as effective as treating the auditor as a partner in improving the company. Effective management involves working with the auditor to achieve the desired outcome.
An audit is best handled by attempting to establish a professional, non-confrontational rapport with the auditor. Auditors are human and, as such, are subject to thoughts and emotions that can influence their decisions. An audit is an irritation to a company at the very least, but it is important not to aim that irritation at the auditor in any way that can be taken personally. In an adversarial situation, an auditor is just as likely as anyone else to put up defenses that can make it difficult to get the auditor to consider the company's positions.
The company does not have to agree with and accept every conclusion an auditor presents in attempting to create the desired relationship with the auditor. Within every situation there is usually some room to maneuver. For example, many statutes are difficult to interpret and many business operations cross statute boundaries or do not fall into a predefined statute. Frequently, a company has taken one position and the auditor has taken another. When the taxability outcomes are conflicting and the result is detrimental to the company, having a good relationship with the auditor can determine whether or not the auditor will be open to the company's position.
In practice, with some effort, many audit assessments are reduced based on the provision of additional documentation, further explanation, or reference to statutes contrary to the auditor's initial opinion. Rebuttals to assessments must be realistic, well-grounded in practice or statute, and make sense in the given situation. Even under these circumstances, the parties involved will not always be in agreement. A company that handles disagreements professionally and courteously will probably end up with a more sympathetic auditor who is willing to inform, instruct, and offer various solutions to the company's compliance burdens.
Understanding the auditor's limitations is a key issue. No matter how much the auditor may want to change a statute, the auditor does not have the authority to do so. When there is disagreement as to how to interpret a statute, the presentation of the disparity is extremely critical. Heated discussions can be personally gratifying, but are not often rewarded with change. A calm, rational discussion of the company's position is needed. The auditor may know methods for dealing with an unreasonable statute in a rational way. The auditor may or may not present a known method based on how that auditor feels about the company.The Auditor's Role in the Relationship:
Many states present taxpayer instruction as a critical component of and reason for audits. Even if the state that is auditing your company does not have taxpayer instruction as an audit mandate, make it your company's mandate to learn from your auditor. The purpose of an audit is to correct flaws in your company's compliance. This means that the auditor should not only point out where your company is less than compliant, but also where your company is doing well and is over-compliant. The auditor should tell you the reason for every request. If not, ask. The auditor should also offer you suggestions on how to improve. However, the quality of the auditor will likely affect what your company takes away from the audit.
Fortunately, in our experience, most auditors are good auditors. Good auditors are reasonable, well-informed individuals who can be excellent resources, even after the audit closes. These auditors are forthcoming with instructions on ways to improve the compliance of the companies they audit. They are flexible in scheduling the audit and give plenty of time for the company to gather requested documents. They will generally tailor their sampling methodology to suit the company's accounting/filing system. They have familiarity with the company and the industry, and are willing to use their knowledge to help ease your compliance burdens. They do not make unreasonable assessments and are willing to adjust their assessments appropriately to the circumstances. What they usually will not do is reduce legitimate assessments (1). A really good auditor will let you know if there are any potentially impending changes that may affect your business compliance.
At the close of an audit with this type of auditor, ask if they mind being contacted with sales tax questions in the future. Be sure to keep the auditors contact information readily available. Savvy and experienced auditors have their fingers on the pulse of the sales tax environment and are often well connected within their revenue department. As a result, even if they cannot answer a question, they often know someone who specializes in that area (2).The Bad...
There are auditors who lack ability. With a bit of effort, these auditors can still sometimes be good resources after the audit closes. For example, auditors who don't communicate well or who are inexperienced may need special handling. Any lack of understanding and/or uncertainty must be clarified. It is unfortunate and often costly when a business implements compliance practices based on a misunderstanding.
After talking to an auditor that is difficult to understand, paraphrase the conversation and send it to the auditor in written form asking for verification that what is written is accurate. Request a response in writing. Some auditors who do not communicate well verbally, may have better writing skills.
Being assigned an inexperienced auditor is not necessarily detrimental to the current audit. The company may end up teaching this type of auditor more than learning from them, but an inexperienced auditor is often times more open to new ideas and arguments. Inexperienced auditors are usually monitored closely, so don't expect to get away with anything outrageous.
The danger is when the inexperienced auditor and the company do not pick up on a compliance discrepancy. With each audit, a state expects better compliance from a company. During early audits, states may be willing to abate penalties and possibly even interest (3). In later audits, the general belief is that your company has been through this before and should be educated enough to know how to maintain compliance.
With these two types of auditors, it is appropriate to initiate contact with the auditor's supervisor, if need be. Many times, the initial request for contact can be made through the auditor. The request to contact a supervisor should be made with care. Be sure to not disparage the auditor. Having an unhappy auditor is not good, but having an auditor that is not happy with the company is worse. An auditor's supervisor also makes a great contact for future tax matters!The Ugly...
There are a few bad auditors out there. Some auditors may think they know it all. Nobody does... even those that have been with the department for 20 years (4). Some may make unreasonable assertions. Some may just be generally unpleasant or disagreeable. Many of these types of auditors will try to bully their way to acceptance of their conclusions. The worst of the auditors are those whose sole agenda is to maximize the final assessment. It is even more important to maintain a professional and courteous demeanor with these auditors. Do not give these types of auditors any ammunition to make your company out to be the bad guy!
But... do not be intimidated by these auditors, either. Document everything! E-mail is the great equalizer in this situation. Use it to reiterate each conversation, their side and the company's, and ask for verification of agreement with the company's understanding of what was said. Sometimes, if these auditors know their position is unreasonable, an unwillingness to document their position is enough to get them to back down.
Hold these types of auditors to an even greater level of assistance you would expect from a more professional auditor. If they make an assertion, make sure they provide you with a statute to back that assertion. If they tell you that you have to implement a certain practice that seems impossible, ask them to tell you how other companies have gone about implementing that practice.
Finally, when you are audited again and, if you are assigned the same auditor, ask for a reassignment. Again, when making this request, be professional and courteous. Chances are that any auditor will be better than this one and another auditor will probably know the reputation of the previous auditor and be more sympathetic to your company. On the other hand, the new auditor might be the last auditor's best friend, so be careful when bringing up a bad audit. Mentioning the confusion and frustration that occurred in the last audit and ways that you hope this audit will be better is appropriate... mentioning that the previous auditor definitely fell into the "ugly" category is not.For All...
After discounting any negative opinion you may have of the auditor, you may have a sound basis for believing the audit results are unfair or controversial. Put the rebuttal in writing and mail the response. It will become a part of the audit documentation and viewed by the auditor's supervisor. The auditor will have to provide a succinct response to each point you make. Often, the auditor will request additional documentation to support the rebuttal as well. If a point is not addressed, reassert it (5). Do not sign to close an audit until each point that you have made has been addressed in writing.
Unless agreement is reached, request that the auditor set up a formal or at least a telephone conference with the auditor's supervisors before signing off on the final audit results. If you are told that you can't speak to a supervisor because of policy, let the auditor know that you understand that the auditor does not want to be seen as going outside of policy, but that the company intends to try to make that call anyway. It is always easier and less costly to handle issues before the close of the audit. At this conference, ask what the procedures are for appealing the assessment. Also, ask for the statute or guidelines that outline the procedure (6). Remember to make your requests in a professional and courteous manner.
Possibly the most important factor affecting an audit outcome and the probability of future audits is the auditor's perception of the company's level of commitment to compliance. Chances are that there will be agreed upon assessments, assessments that the company decides to accept without agreement, and/or assessments that are mandated upon appeal. For each of these, the company should let the auditor know how the assessment situation came about, if and only if that situation is one with which the auditor can sympathize... and what practices the company plans to implement to avoid future assessments.Footnotes:
1 Some states do negotiate lesser payments of legitimate taxes in certain circumstances, so it does not hurt to ask and/or investigate the policy of the auditing state.
2 Never rely solely on taxability advice from a hotline! Use a hotline to confirm a conclusion you have already reached or ask for a statute or regulation to back up the information that you receive from the hotline.
3 If some kind of abatement is not offered in an audit ask for it.
4 A good auditor who has been with the department 20 years will usually be the first to tell you they don't know it all.
5 On one audit with at least 10 written points of contention, only 5 were addressed in the first auditor response. Two more responses were needed to get each point of contention addressed.
6 Even if you have the statute and regulation in hand, ask. Auditors generally don't like to have their assessments appealed... That doesn't mean that they will reverse a legitimate assessment over a threat to appeal.