How the Audit Is Conducted
You are notified of Sales Audit through an “audit engagement letter”. The letter tells you the terms of the sales tax audit and it provides you a preliminary list of documents to gather. Then you are request to contact the auditor. Do not worry; you will have plenty of time to consult a tax professional and to get your documentation together. An authorized auditor will use a range of methods to find any necessary information. A review of records will be performed and the sales tax auditor will most likely use:
• Covert observations
The auditor looks for two things.
- Taxable sales – not properly taxed
- Taxable purchases – not taxed
Therefore, these agents are looking at taxable sales which were not properly taxed. This process most often referred to as the “sales tax” portion of the audit. Unfortunately, the auditor will most likely find instances where you did not charge tax, or you charged the wrong rate. In the case of taxable purchases which were not taxed, the sales tax auditor will be checking for the “use tax” charges. Perhaps you purchased business-related goods or services online or from an out-of-state supplier, you are required to pay tax on the transaction.
Requested Documents and Records
Furthermore, a wide variety of documents may ask for by the sales tax auditor from the tax years under investigation. The list can include:
• Sales and tax returns and worksheets
• General ledgers
• Sales invoices
• Purchase invoices
• Property tax statements
• Till receipts
Also, the folks may request documents to support exempt sales, such as resale certificates. At any time in the audit process, the auditor can ask for more information or documents, including bank statements and depreciation schedules.
How Auditors Find Mistakes
These professionals “Auditors” generally find discrepancies while conducting a sales tax audit by comparing total sales recorded in your books to the total sales reported in your sales and income tax returns. However, they have other ways to find out if you made a mistake. Your business may be observed by the auditor/auditors to apply certain tests or procedures to make sure the sales and amount of sales tax was properly reported. Certain processes include:
• Statistical sampling
• Analysis of transactions
• Markup analysis
• Credit card percentage tests
Now, if you own a bar or restaurant, an auditor may even perform a “pour-over” test while undercover to confirm appropriate amounts are being dispensed. In addition, the Auditor can choose to contact your vendors directly for information. A scenario like this is something you do not want to happen. So now before the Sales Tax Auditors open up your can of worms, perhaps you should call us immediately!