Sales tax audits are conducted by tax authorities to ensure correct payment of taxes. Audited companies must provide records and may face penalties for errors. Sales tax is a major revenue stream for many jurisdictions, and audit procedures vary. Companies may also apply for refunds if they have overpaid. Some businesses hire outside consultants to handle audits.
In jurisdictions that collect sales tax, the tax authorities generally have the right to audit businesses to ensure that all sales tax due has been paid correctly. A sales tax audit is the process through which a tax official examines a business’s accounting to determine if any outstanding taxes are owed. Sometimes audits are done in cases of suspected abuse, but more often than not, they are done randomly. An audited company is generally required by law to turn over all records and account books to the examiner, and if errors are found, you usually have to pay a penalty.
Sales tax is a major stream of revenue for the states and countries that collect it. Smaller countries, particularly those in Europe, assess sales tax at the national level. In the United States, sales tax is a state tax issue. Not all states assess sales tax, and those that do have different rates and different rules. In all locations, the audit process is one of the most common ways for government tax agencies to determine whether local tax remittance rules are being followed.
Rules about what kind of tax records businesses must keep vary by jurisdiction, and the details of what happens during a sales tax audit do, too. In general, a tax agency will select the companies to audit on a somewhat random basis. It will then contact those companies and advise them to be ready with their records by a certain date.
Sales tax audit procedures focus on inspection of records. In most places, businesses must file their own tax records with the government, and in those records they must disclose how many sales taxable sales were made. Businesses can sometimes use tax return documents to claim certain exemptions and deductions on taxes owed. The audit begins with the tax records on file. The tax agent is looking first and foremost for evidence that those self-filed records reflect accurate financial information.
In most jurisdictions, businesses are required by law to keep records of all their transactions, noting when sales tax was collected and how much of that revenue was remitted to the government. Often times, they are required to keep those records current for a period of years. During a sales tax audit, the auditor will inspect the records that the business has maintained along with the tax return documents that the business has filed. If the auditor finds any discrepancies, or if he determines that the taxes were collected incorrectly or inaccurately, he can fine the business for the taxes owed plus the penalty.
However, the auditor may also discover that the company has paid too much in sales tax over the years. If this is the case, the company can apply for a refund from the government to recover the excess. Some companies will routinely audit their books to verify overpayment. This is known as a refund audit or a reverse sales tax audit.
There is generally no requirement for audited companies to retain outside legal advice or accounting help, although many companies, particularly small ones, choose to do so anyway. Hiring an outside audit consultant to handle an audit and deal with the auditor can be a way for business owners to continue operating their businesses without the stress of auditing consuming time and energy. Many audit consultants have experience managing certain types of audits and seeking fair results. Outsourcing a sales tax audit can be expensive, but depending on the circumstances, it may be worth the investment.
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