If you’re a business owner, then you should be aware of the possibility of a sales tax audit. This is an examination of your sales and uses tax records by the government. It can be a daunting process when it comes to your Business Taxes, but it’s important to know what to expect.
In this blog post, we will explain what a sales tax audit is, how it works, and the different types of audits conducted. We’ll also provide some tips on preparing for an audit and making the process as smooth as possible.
What’s a Sales Tax Audit?
A sales tax audit examines your business’s records to ensure that you have been correctly collecting and remitting sales taxes. The auditor will review your sales invoices, receipts, bank statements, and other documentation to verify that you have reported the correct amount of tax.
The auditor may also contact your customers to confirm that the transactions listed on your records are accurate. This is done to ensure that you haven’t underreported your sales or overstated any deductions.
How Does A Sales Tax Audit Work?
Auditors will usually give you a few days’ notice before they arrive to conduct the audit. They will request specific documents and information from you, which you will need to provide for the audit to proceed.
The auditor will then review your records and may ask you questions about specific transactions. Once the audit is complete, the auditor will provide you with a report detailing their findings. If the auditor finds that you have an underpaid sales tax, you will be required to pay the back taxes plus interest and penalties. If you disagree with the auditor’s findings, you can file an appeal.
Types Of Sales Tax Audits
The type of audit you will experience depends on several factors, including the size of your business, your industry, and your location. There are three main types of sales tax audits:
Mail Audits
A mail audit is the most common type of sales tax audit. It is also the least invasive. With a mail audit, the auditor will request specific documentation through the mail. You will then have a set amount of time to gather and submit the requested information.
Office Audits
An office audit is similar to a mail audit. Still, with an office audit, the auditor will come to your place of business to request the information. This type of audit is more invasive than a mail audit, but it is still less intrusive than a field audit.
Field Audits
A field audit is the most invasive type of sales tax audit. Field auditors come to your place of business and conduct their on-site audits. They may also request to see your books and records. Field audits can be disruptive to your business, so it is important to be prepared if selected for one.
Industries Known For Substantial Non-Compliance
The IRS has identified certain industries as having a higher risk of non-compliance with sales tax laws. If you are in one of these industries, you may be more likely to be selected for an audit. These industries include:
- Automobile Dealers
- Construction
- Food And Beverage Services
- Gasoline Stations
- Gambling Establishments
- Manufacturing
How To Prepare For A Sales Tax Audit
The best way to prepare for a sales tax audit is to keep meticulous records. This means saving all your sales invoices, receipts, bank statements, and other documentation. If you use accounting software, make sure that it is updated and that all of your information is entered correctly.
It’s also good to review your records before the auditor arrives. This way, you can identify any errors or discrepancies and make corrections before the audit begins. Finally, make sure that you and your employees are familiar with your company’s sales tax procedures. This will help ensure that the audit goes smoothly and that all of the necessary information is provided to the auditor.
How Are Companies Referred For A Sales And Use Tax Audit?
There are a few different ways companies can be referred for a sales and use tax audit. The most common way is if the company has filed multiple tax returns with errors. Another way is if the company hasn’t been audited in a while and it’s randomly selected for an audit. And finally, if the state receives information or complaints that suggest there might be missing taxes, they could refer the company for an audit.
While being selected for an audit can feel bad, it’s important to remember that most audits result in no additional taxes owed. Many times businesses are due refunds because they’ve overpaid their taxes. So try not to stress too much if you find out your business is being audited. Just be prepared and cooperate with the auditor, and everything will be fine.
What’s An Information Document Request?
An information document request (IDR) is a list of documents and information that the auditor will need to conduct the audit. The IDR will be provided to you when the auditor gives you notice of the audit. The IDR will usually include bank statements, invoices, receipts, tax returns, and financial records.
The auditor may also request employee manuals, inventory lists, and other types of documentation. It’s important to note that you are not required to provide any information not listed on the IDR. However, if you do not provide the requested items within the time frame specified by the auditor, they may issue a subpoena for the missing information.
Sales Tax Audit Reviewed Records
The auditor will review a variety of records during the audit, including:
- Sales Invoices
- Receipts
- Bank Statements
- Tax Returns
- Financial Records
- Employee Manuals
- Inventory Lists
The auditor will use these records to verify that the correct sales tax amount was collected and remitted to the state. They will also look for any errors or discrepancies.
Sales Tax Audit Statute of Limitations
The statute of limitations is the time frame in which the IRS has to assess additional taxes. The IRS may waive the statute of limitations if it believes there is a significant understatement of tax liability or if the taxpayer acted willfully to evade taxes.
If you are selected for a sales tax audit, one of the first things you will be asked to do is sign a waiver of the statute of limitations. This means that you agree to extend the time frame in which the IRS can assess additional taxes. If you do not sign this waiver, the IRS will not be able to audit your return.
How Far Back Can A Sales Tax Audit Go?
The statute of limitations for a sales tax audit is three years. However, if the IRS believes there was a significant understatement of tax liability or if the taxpayer acted willfully to evade taxes, You may waive the statute of limitations. The IRS may go back further than three years.
There are a few exceptions to these time limits:
- If you do not file a return, the IRS can assess taxes at any time.
- If you commit fraud, the IRS has six years to assess additional taxes.
- If you underreport your income by more than 25%, the IRS has six years to assess additional taxes.
The best way to avoid an audit is to report all your income and sales tax accurately. If you are selected for an audit, the best thing to do is cooperate with the auditor and provide all requested information. Tax Services can help you out with all this and more.
Outcomes of a Sales Tax Audit
The outcome of a sales tax audit will depend on several factors, including the type of audit you had and the auditor’s findings. If the auditor finds that you have underpaid your taxes, you will be responsible for paying the back taxes, plus interest and penalties. If the auditor finds that you have overpaid your taxes, you may be eligible for a refund.
If you are audited and found to owe back taxes, it is important to pay the taxes as soon as possible to avoid accruing additional interest and penalties. If you cannot pay the full amount owed, contact the auditor to discuss payment options.
What Happens if You Don’t Pay Sales Tax?
If you don’t pay your sales tax, the IRS can assess penalties and interest on the unpaid tax. The amount of interest and penalties you will owe depends on how much tax you owe and how long you have been delinquent in paying the tax.
The Connecticut Department of Revenue Services
The Connecticut Department of Revenue Services (DRS) conducts sales tax audits to ensure that businesses are remitting the correct amount of taxes to the state. The DRS may select a business for an audit based on several factors, including:
- The business’s history of filing accurate and timely tax returns
- The type of business
- The volume of sales
- Complaints filed against the business
If your business is selected for an audit, you will be notified in writing by the DRS. The notice will list the items that will be audited and request supporting documentation. The auditors will also schedule an appointment to visit your business premises to review your records.
Get In Contact With A Professional
An audit can be a stressful experience, but it is important to remember that you have rights and options during the process. At Nesso Tax, we’ll show you what to expect and help you be prepared to navigate an audit successfully.
Our Nesso Group tax professionals have years of experience with sales tax audits. We can help you resolve your audit in the best way possible. We understand that dealing with the IRS can be daunting, but our team is here to help. If you have any questions about sales tax audits or think you may be selected for an audit, don’t hesitate to contact us.
