Sales Tax Audit Help – What to expect from a Sales and Use Tax Audit

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We’ve had an auditor in from The Illinois Department of Revenue on a sales tax audit for the past couple of days. We’re in the final phase of hopefully putting this one to bed with no additional tax due. I always get a lot of questions from my readers about the audit process, so let me take you through a typical exam. 1 – You receive a notice informing you that however many years are going to be audited. What’s next? Get representation. Find someone that you trust who has the experience necessary to guide you and your business through the mine field that you are about to travel through. You don’t want to do this yourself. Something triggered this audit. That means that you have done something wrong. If you knew what you were doing, then you probably wouldn’t be in the middle of an audit in the first place. If you like the accountant that you currently have, then use them. But again, please realize that something triggered this audit. You may want to seek help elsewhere. Either way, get help now. 2 – What should my representative do for me before the actual examination? My first step has always been to try to figure out what triggered the audit. Its very hard to represent someone, if you don’t know what the problem is in the first place. This means that I do a pre-audit examination of everything that will be looked at. Once I know what the problem is, I can normally determine a defense strategy. 3 – What will be examined in a Sales and Use Tax Audit? The state will look at all four of the taxes that they collect. Those taxes are Income, Payroll, Sales, and Use Tax. Please realize that an audit is an examination of claims. As example would be that we claim that we handled all of our payroll taxes properly. The state will look to see that all of your returns and payments were made timely as well as looking to see if you had an independent contractors that should have been treated as employees. On the sales tax portion, they will look to see if you collected and remitted sales taxes properly. If you had any untaxed sales, due to charitable, resale, or interstate commerce, that documentation will be examined as well. Your income tax returns will certainly be examined. They will also look for Use Tax. 4 – What is Use Tax? If you purchase something for use in your business outside of the state, and use it for the production of income inside your state, then the Department of Revenue is due a tax similar to sales tax for the use of the piece of equipment inside the state. If I am in Illinois and I purchase a desk from a retailer in Wisconsin, that Wisconsin Retailer is not going to charge me an Illinois Sales Tax. I need to report the purchase to the State of Illinois and pay a 6.2% Use Tax. 5 – How many years will be examined? That depends on what triggered the examination. Examination periods aren’t random. Someone at the State has determined that they want to look at these years for a reason. Sometimes it is only one or two. Other times it is as many as six or seven. Either way, once an exam period is set, there isn’t anything that can be done to shorten the period. 6 – What is the audit process like? One of the other reasons you need representation is that you don’t want to go into an audit and aggravate the auditor. They have a job to do. I have done an enormous amount of this work in my career. If treated professionally, auditors will normally respond in kind. If treated unprofessionally, many will unleash Hell. These examinations are not like what you see on cable. They aren’t fights. Poking the dragon will get you nowhere. If you walk into an audit clean, what is there to fight about? If you walk in dirty, then yelling and screaming will probably only double or triple the penalties they might have assessed if you had been reasonable. At the end. if you need to make a deal, then you want a friend rather than an enemy on the other side. If there is a way to keep you out of the room, then you should stay out. Getting through these audits with a “No Change” letter stating that the audit is closed and you don’t owe anything is very difficult. Find someone that you trust to help you. If you have a sales tax audit problem, we would love to help. I enjoy hearing from my readers. I can be contacted at Chris@AccountingSolutionsLtd.com Additional articles and information can be found at www.AccountingSolutionsLtd.com