Sales Tax Audit Preparation

Tax audits are relatively painless for those who keep good business records. For those who don’t pay proper attention to detail, however, a sales tax audit can be a real hassle. In this article, we will define sales tax as it relates to businesses, and explore the sales tax audit process. We will identify common so-called “red flags”, and consider ways to minimize the chance of a sales tax audit.

Sales tax defined:

Sales tax is a flat tax collected by state and local governments. The rules and regulations can vary depending on where your business operates. As a result of the local nature of sales tax, it typically does not apply to interstate commerce. Furthermore, sales tax is only collected on final consumer goods. A business which distributes goods to other businesses – a middleman – is typically not required to pay sales tax. With the rise of online commerce, however, there have been movements in government to change this principle.

Sales tax audit process:

Since sales tax is a flat tax, it is fairly easy to compute. In contrast to audits of complex transactions – like corporate mergers and takeovers, for example – sales tax audits are quite simple. The sales tax due for a company is computed in two steps. First, the company’s revenue from sales of final goods (those sold to end consumers) is multiplied by the local sales tax rate. After that, In many cases, it is the responsibility of the business owner to provide evidence of .

What causes a sales tax audit:

  • Larger businesses – with their larger revenues from sales - are typically audited more frequently than smaller businesses.
  • Cash-only businesses are watched closely by tax officials. With no checks, or credit card payments for tax officials to verify, the income of a cash-only operation is essentially whatever the business says it is. There are many advantages to cash-only businesses – they are simpler, easier to run, and save money by avoiding the three to five percent fee charged to the business by credit card companies. These same advantages, along with revenues that are difficult to trace, make cash-only operations a favorite for fraudsters and money launderers.
  • Unpaid sales tax – When tax officials can prove you didn’t pay sales tax when you should have. If the government verifies a transaction performed by your business did not include proper sales tax, you can be certain they will take a closer look at the rest of your business.

While officials do investigate certain circumstances surrounding business, many audits are simply done at random. Sooner or later, your business will be examined by tax collectors. The best defense against a tax audit is always compliance and transparency. By being prepared, keeping good records, and hiring a licensed tax professional, your business may not require an audit. There won’t be anything to audit, after all, if your business complies with all regulations, files the proper paperwork on time, and has.

No matter your location, sales tax is fairly easy to account for. Failing to properly document your transactions, however, can have very serious consequences. The best way to avoid a sales tax audit is the same solution to deal with the reality of an audit I progress – be prepared! Have an accountant or bookkeeper help keep track of your company’s transactions, and consider hiring an experienced tax professional to handle your sales tax returns. With an accountable professional staff on your side, you can rest assured knowing that your books are correct and complete.

In this article, we have reviewed the sales tax audit preparation, process and some of the causes.