As the critical Wayfair decision from 2018 continues to unfold in terms of its implications, sales and use tax audits have skyrocketed as states look to recapture critical revenues. If your business is selected for a sales and use tax audit, understanding the process will help you minimize any potential pain. There also may even be opportunities to recoup overpayments.
How Do State Auditors Select a Business for a Sales and Use Tax Audit?
States have the right to audit taxes they administer. While it may seem like a personal reflection on your business practices or integrity, that’s not always the case. A state could be focused on a certain industry in which they are seeing significant liability on audits, or you just got “lucky” being selected. Or perhaps one of your customers or vendors was audited, and your selection is a result of the trickle-down or “audit referral” system, which generates more revenue for the state.
Then again, there are missteps that could flag an audit. You may have filed your sales tax return incorrectly, or reported high amounts of tax exempt sales in relation to total sales, in which case an auditor may want to see your exemption certificates on file. If you are unregistered with a state and they find out, you can likely expect an audit.
How Will I Be Notified of an Upcoming Sales and Use Tax Audit?
You will receive a letter in the mail or a phone call notifying you of the audit. Even when receiving a paper letter, it’s important to make sure it is legitimate. The letter should outline the following items:
- Name of legal entity being audited
- Audit period (generally three to four years)
- Tax type (sale and use tax, income tax, etc.)
- Records needed for the audit
- Audit start date
Can I Request to Change the Start Date of My State Sales and Use Tax Audit?
The start date of your audit will be stated in your notification letter. If this date does not work, you can in fact negotiate the start date. However, you don’t want to extend it too long. Interest will continue to accrue until the audit is completed and the liability is paid. Also, if you try to push an audit out too far into the future, the auditor may suggest to extend the audit period they are reviewing.
If you do negotiate a later start date, the state will want you to sign a waiver to keep the older periods in the audit open. Waivers could actually benefit you in some cases, so playing hardball with the auditor on this point may not always be a good practice. Plus, being flexible and maintaining a good relationship with the auditor is never a bad move.
