Sales Tax 101

Sales Tax Audits Part 3: After the Audit

by Ned Lenhart

sales tax audit

Over the past two days we’ve walked you through why states audit and what to do if you are subject to a sales tax audit. Today we wrap up with some notes on the aftermath of a sales tax audit.

Protesting the Audit

Many auditors like to view themselves as the final arbiter of audit and push taxpayers to pay the tax assessment, interest, and penalties. In reality, the auditor is just the gatherer and processor of information. If you don’t believe that they have made an accurate tax determination, there are many levels of review and appeal that taxpayers can pursue. These vary by state. Don’t be afraid to offend the auditor if you don’t like what they did. It’s not personal, it’s just business! I once had an auditor tell a client that she had never had an audit protested and that it would make her look bad if they challenged the audit. I promptly protested the audit, requested an informal hearing, and had 90% of the auditor’s work thrown out because she relied on an administrative rule that was no longer valid.

Do not rely on what the auditor tells you about your protest rights. If the state law says you have 30 days and the auditor tells you that you have 45 days, you only have 30 days. The law determines your remedy not the auditor.

Conclusion

Many businesses may never have the pleasure of going through a sales tax audit. Only a small fraction of companies ever get audited. But, if your business is ever selected for an audit, you need to be ready. In fact, your need to build certain processes into your sales tax function that will prepared you for an audit even if one never occurs. Once you’ve been notified, the opportunity to make changes has passed and you will be judged on your activities as portrayed by your business records.

Most auditors have an appreciation for the position they are putting you in and do what they can to reduce the stress as much as they can. In most cases, you are at an automatic disadvantage. Even the most inexperienced auditor has more experience in auditing than you do. That’s all they do and they become pretty good at it. There is not an even playing field between you and the auditor. Get help as soon as you need to. Once the audit is complete is not the time to get help. By then it’s too late.

Have you ever been the subject of a sales tax audit? We’d love to hear your stories and even include you (anonymously if you’d like) in a case study on the TaxJar blog. Comment here with your story or email us at support@taxjar.com if you are interested. In the meantime, leave any questions or comments about sales tax audits below!

Yes, Let's Start the FREE Trial

  • Scarred for life

    So, my story is a horror story that still triggers nightmares. Mr Lenhart, you wrote a nice story: you do this, auditors can do this, auditors can’t do that… What I learned through my experience is this:
    1) Mr. Lenhart. Please write an article on (or hyperlink to a previous article on) setting up proper sales tax collecting within a company. I understand some are simple and some are complex, and a single article wouldn’t do it justice. At least there would be a start to a resource so when the audit does come, horror is marginalized.
    2) Speaking of resources. BUSINESS OWNER: don’t be afraid or concerned with calling the State’s Revenue Department to make sure you are including all (ALL, did I mention ALL) of the applicable sales tax allocated for your business. My business had 6 tax rates that were to be collected.
    3) (part of my horror story) My conclusion as to how to accurately allocate sales tax to each of the 6 specific tax rates was a) either impossible or b) a full time job (that the company couldn’t afford), and still close to impossible. Here’s the specific to help understand: the company was a remodeling company that conducted business out of a central office and worked throughout a decent sized metro area. The company did about 300 projects per year. Turns out the sales tax law said that taxes were calculated based on the location or work, not the office location, nor the store location where materials were purchased (and sales tax paid). In addition, my state law states that sales tax is not directly listed on the invoice and in the construction industry, some activities are taxable while others are not. Materials purchased from one part of town (and sales tax paid in that part of town) may not reflect the appropriate sales tax rate when those materials are installed in another part of town.
    Software, you ask? Turns out Quickbooks isn’t that sophisticated. Also turns out Intuit wasn’t willing to custom modify my version to help me with sales tax allocation.
    4) I would recommend to the business owner that a phone call to the Department of Revenue is done in addition to working specifically with your accountant…….to make sure the accountant is doing sales tax correctly. YES. Have a specific effort (which means multiple meetings) to make sure your sales tax is being collected correctly.
    5) Mr. Lenhart. Please include in any future article about business taxes or any kind, the business owner(s) is personally responsible for any and all taxes the company accrues. Yes, this means, at least in my state, the corporate veil has zero shielding power for business tax debt(s). Any and all business tax debt(s) (including unemployment insurance liabilities) carry over to the business owner(s) as being personally liable for the debt in the event the business closes its doors. Maybe this could be your lead-in paragraph to help capture the reader’s attention.

    I am still in amazement that my (our) legislators have written the laws that are on the books. I have found that laws are written based on things that have happened and to make sure those things don’t happen again. Again, wow! I can tell you from personal experience, the State has ultimate power when it comes to anything related to taxes and tax collection.

    Oh. My final comment on the subject. My attorney’s fees for the audit totaled ~$8000. Even today as I look back upon it, I couldn’t imagine going through my experience without the attorney.

Start your 30 day free trial of TaxJar. No credit card required.
Processing...
Thank you! Your subscription has been confirmed. You'll hear from us soon.
Subscribe to the TaxJar Sales Tax Blog
ErrorHere