Sales tax is among the many taxes that businesses, whether big or small, must pay to the state. It uses the money to finance national projects like building roads, enforcing public safety, repairing public utilities, and establishing areas for schools, homes, and commerce.
If you’re selling a product or service, you’re mandated to collect sales tax audits from your customers any time you make a purchase. The entire process of determining, managing, and remitting sales tax can be very time-consuming, especially for small businesses. This affects those that focus on selling multiple products.
One thing you have to keep in mind is that it’s compulsory to file and remit sales taxes. Failure to do so can lead to serious consequences.
Fortunately, business owners aren’t left in the dark when it comes to their audit status. If your business has been chosen for a sales tax audit, you’ll receive an alert from the relevant authority in your area. In the US, that’s the International Revenue Service (IRS). Note that most auditors are heavy on the California tax audit statute of limitations and other related laws in their specific states. So, you can count on them to go in-depth when checking your remittance.
If you do get chosen for an audit, there’s no need to panic. Not all audits are related to fraud or criminal activities. Like other audits, sales tax audits are simply a part of everyday business processes and may happen because of chance. It doesn’t mean your enterprise is in trouble.
For business owners bound for a sales tax audit, here’s what you need to know about the procedure:
1. You’ll Be Required To Give A Full Account Of Your Finances
It’s essential to organize your financial records for the audit in case you’re told to present evidence. In light of this, make it standard practice to record all your financial data. Bookkeeping software can save you tons of time and effort for this task. You either get this down right from the get-go or risk having to pore through all of your transactional records.
Auditors typically look at the following things:
- The annual federal tax return compared to the yearly sales tax returns
- Whether you followed exemption rules when including exemption and resale on your financial records
- An analysis of whether you paid a sales tax on fixed assets
- Your expenses account to confirm that you paid taxes on your purchases
- Whether you can reconcile your sales tax payments versus your sales tax payable account (failing to remit sales tax while collecting it is a felony)
Again, automation can make producing all the documentation you need much easier. Plus, saving all your financial data on the cloud reduces the risk of information getting lost. Record all your business transactions organized in files and folders for easy retrieval.
These folders should be named and even have the dates of when the transactions took place. This will help significantly if the auditor needs a record of transactions on a specific date or period. Apart from general financial records, it’s also essential that you keep income statements and any deductions. It’s best to have information from your latest sales to those from four years ago.
Doing this benefits you and the auditor as they try to check whether you’ve been adhering to financial regulations as you go about your business operations.
2. Expect Certain Questions From The Auditor
The auditor will want to collect and corroborate as much data as possible to confirm whether you’ve followed sales tax protocols. So, it helps to anticipate certain questions from them regarding collecting, filing, and remitting your sales tax.
Now that you have all the financial records in place, you’d want to check again and look for any discrepancies. The reason is you’ll be answerable if the professionals detect any form of fraud, miscalculation, or inaccuracy on your records.
If you didn’t notice an error, like an omission made by accident, you need to have all the necessary documentation to explain to the auditor that such is the case when they discover it. Another thing they may ask is if you have a right to tax benefits and deductions in case you’ve claimed any.
To learn more about what an auditor may ask and what the appropriate responses are, you can talk to a professional sales tax expert who can give you proper advice.
3. Have Physical Receipts Prepared
While most transactions have gone digital, you may still get physical receipts for most of your purchases. You might want to store them properly for easy retrieval in case the auditor wants to check them. Difficulty producing receipts may only warrant further investigation, which runs counter to your aim of making the audit as smooth as possible.
The chances of convincing the auditor that you have accurate records usually drop if they can’t connect your records to the actual documentation. On the flip side, they can give you the benefit of the doubt if they see you present organized receipts.
The bottom line is that you should keep all the receipts from past transactions tidy because they may be necessary for the sales tax audit. For a greater level of convenience, you can scan them and keep them in an electronic format. The chances of the documents in the e-format getting lost or misplaced are usually low if you’re using a reliable storage system. Also, unlike physical receipts, they can’t fade. That makes them more dependable than physical receipts.
4. Re-Evaluate Your Level Of Compliance
As the auditors check your financial records to see how well you’ve kept up your remittances, they’ll also check if your business upholds industry standards. This usually affects the level of cooperation they expect from you. In light of this, maintaining professionalism is essential to be on the safe side.
Try as much as you can to treat the audit team with utmost respect and hostility. Always be charitable and honest with your responses to their queries, and make sure you uphold your due diligence in making the process easy for them, as well. Also, ensure that you professionally present your staff, business premises, and documents to gain credit.
Sales Tax Audits Should Be Easy
A sales tax audit is an audit that auditors execute to confirm if your business follows the correct procedure in determining tax rates, collecting taxes, and remitting them to the state. You must do what you can to keep yourself from having to undergo an audit. But if it happens, you can keep these points in mind to make it a smooth process. Reach out to experts to learn more about the ins and outs of audits.
