The new breed of audit

In years past, auditors could show up at your door asking to look at your records. Now that’s much less common. Usually, you learn about an audit through a notice or letter from the state or jurisdiction in question with instructions on how the audit will proceed.  Many audits are conducted remotely, and an auditor never visits your office. Audits remain an important tool for tax jurisdictions to evaluate the level, or lack thereof, of sales tax compliance within a business. Even though many audits have shifted to remote audit, the fundamentals of the sales tax audit haven’t changed. 

Fear and loathing 

The consultancy Agile has cited several stats on sales tax audits, including that one in five small-to-midsize businesses have been audited within the past five years. Almost half the companies were penalized for rate or rule errors; two out of five were slapped for missing exemption certificates; and more than a third were penalized for late filings and a third for failing to register. 

Fear and perception of audits are as tangible as the real examinations. In TaxConnex’s recent market survey, more than one in four (26.7%) top finance professionals reported seeing an increase in state sales tax audits in the past two years. Almost half (48.5%) of respondents expect sales tax audits to become more frequent in 2022-23, and nearly one in five (18.5%) cite being audited as one of their chief worries for this year.  

Virtual audit is a real threat 

Technology hasn’t just made interstate selling easier. It’s also changed auditing. The virtual audit is becoming a more common way for states to conduct business, in part due to restrictions from the pandemic.  

“In many ways, virtual audits are just like traditional audits, except audit activity takes place remotely and digitally,” reads the blog of the accounting consultancy Floqast. “Rather than meeting in person with an audit committee, for example, an external auditor might use Zoom … Other audit processes, like reviewing financial reports, might require sharing documents more online rather than looking at physical printouts.” 

The Minnesota Department of Revenue, for example, bids all a hearty welcome to its Audit Room and Virtual Room, billed as “a secure space online to exchange files and other information with Revenue.” The room gives taxpayers 24/7 access to upload files and respond to messages, transfer data and store documentation and “promote collaboration between Revenue, other state agencies, counties and customers.” And of course, save paper. 

“The [auditor] is provided with read-only access to the company’s general ledger with exceptions related to confidentiality,” reads a 2021 white paper commissioned by Oracle, which added that most organizations will adopt a virtual audit form by 2025. 

Virtual audits can be fueled by quicker exploitation of data that’s already in a tax jurisdiction’s system. Auditors can tap different data sources to select audits more accurately based on the level of risk, and to use new tools to automate the repetitive tasks of an audit. Auditors can also use artificial intelligence to dig up even more evidence. 

Good management 

Here are some top tips for successfully managing your sales tax audit, an abbreviated version of our eBook, Top 10 Tips for Managing Sales Tax Audits.  

• Documentation should be well-organized and easy to interpret by an auditor. Missing documentation can actually cause incorrect penalties.

• Assess your own records after being notified of an audit. Make every attempt to identify your exposure prior to the audit. 

• Always treat the auditor with respect and dignity. Assign one person from your company to manage the relationship with the auditor.

• Disclosing errors to the auditor proactively allows you to build rapport and shows you’re willing to help the process.

• Work with the auditor to understand their decisions. There may be room for negotiation before the final assessment. 

Sales tax audits can represent a significant distraction to your business. TaxConnex offers audit defense and support and can act as an intermediary between you and the auditor. Contact us to learn more.