By: Kristian A. Gerrets and Geoff Campbell, CPA
Prepared by Advantous Consulting on November 25, 2020
Say you’re in charge of keeping up with the sales tax compliance duties at your company, and you carry out the related tasks dutifully and effectively. Your Accounts Payable professionals review the tax charged by vendors on your purchase invoices for accuracy prior to paying. If the vendor fails to charge sales tax on the invoice for a taxable purchase, you are sure to accrue for the use tax. Then, on the 20th of the month, you file your sales tax returns with both the state as well as the appropriate local taxing jurisdictions in which your company is doing business, reporting the sales tax paid and remitting the use tax accrued. Great, so what’s the problem?
Sooner or later, if your company makes taxable sales and/or taxable purchases (and what company doesn’t?), your number is likely going to be pulled and your company will be the target of a dreaded…SALES AND USE TAX AUDIT! Now, your first inclination might be to fall to your knees and implore the heavens for mercy. But, that is likely to be met by the deafening silence of a cold, indifferent universe. The only real option is to engage in the process with a spirit of courage and determination, knowing that it really is just a process and there are techniques that will help and pitfalls that can be avoided, if you know what to watch out for.
First, communication is key. Any taxing jurisdiction that wishes to initiate an audit must first notify the taxpayer whom they intend to audit by issuing an Audit Notice. Local taxing jurisdictions are actually required to send this notification via certified mail, per La. R.S. Sec. 47:337.26(D)(1). The Audit Notice should identify the taxing jurisdiction for whom the audit will be conducted as well as who will be performing the audit. This is fairly straightforward for a state audit, as the state employs its own in-house staff of auditors. Local jurisdictions, however, often utilize third-party contract auditing firms to conduct sales tax audits on their behalf. In such situations, the local taxing authority must send notification to the taxpayer that an audit will be conducted and identify the firm that will conduct the audit; only then is the third-party auditing firm allowed to make contact with the taxpayer.
Additionally, the Audit Notice should inform the taxpayer of the time period under examination, identify the records being requested, and provide a proposed start date for the review of the requested records, traditionally referred to as fieldwork (it is not unusual in this day and age for the fieldwork to be conducted remotely by electronically transmitting records, but sometimes it can be more beneficial to conduct the audit onsite—it is up to the auditor and taxpayer to determine the most efficient method of conducting the audit).
You may have a strong urge to ignore this notification – this temptation should be resisted. It is best to negotiate these sorts of things head-on. Notifying the auditor of your receipt and acknowledgement of the Audit Notice is a good first-step and being professional and courteous in your communication will serve you well. The worst thing a taxpayer can do, aside from ignoring the notice altogether, is to start the audit off in an adversarial tone.
Providing the auditor information in a timely and efficient manner is a key step in the process of bringing the audit to a swift and effective resolution. So, keep this in mind as you prepare for the auditor to begin the fieldwork. Having the data ready for the auditor’s review at the start of the period designated for fieldwork is important to ensuring that the audit gets off on the right foot. Accomplishing this is often a function of the condition of your company’s records. Missing or poorly maintained records will put your company at a distinct disadvantage in the effort to survive (or thrive) during the rigors of a sales tax audit.
It may be a good idea to designate one person from your company as the point of contact for the audit, which is a good way to ensure that all communication pertaining to the audit can be managed effectively. The designated individual should be available and present during the fieldwork, especially if that fieldwork is being performed onsite. Having such an individual will allow for your company to answer the auditor’s questions in a timely manner and hopefully resolve issues in real time, reducing the number of issues that will have to be resolved after the fieldwork concludes and allowing you to focus on bona fide taxability issues as opposed to missing documentation or other, more administrative concerns. However, achieving this requires constant communication with the auditor throughout the fieldwork.
Once the fieldwork is complete, your company should be provided a copy of the auditor’s findings. This is your opportunity to address transactions identified by the auditor for assessment prior to the taxing jurisdiction issuing a formal notice of its intent to assess for those transactions. Some of these items may be easily resolved and removed from the assessment schedule, while others might ultimately turn out to be a bit more complicated and remain on the assessment schedule.
Eventually, the time for addressing these initially identified items will come to an end, and the taxing jurisdiction will issue a formal notification entitled the Notice of Intent to Assess. This notice will indicate the total tax due as a result of the audit examination as well as the penalties and interest associated with that tax deficiency. This notice is sometimes referred to as the “30-day Letter” because you have 30 days to respond before the assessment amount becomes final and formally due. Responses to the Notice of Intent to Assess must be in writing. If there are transactions on the assessment that you still disagree with, a hearing with the auditor and his or her supervisor can be requested during the 30-day period following the issuance of the Notice of Intent to Assess.
Following discussion and deliberation (and hopefully resolution) of the transactions in dispute from the Notice of Intent to Assess, the remaining assessment amount becomes final and another notice is issued by the taxing jurisdiction formally notifying the taxpayer of the tax, penalties, and interest due as a result of the audit. This is often referred to as the “60-day letter” because the recipient then has 60 days to either pay the balance due or protest the assessment through a more formal administrative process at the Louisiana Board of Tax Appeals.
Managing a sales tax audit is not on anyone’s “bucket list”, but believe it or not, there is much to be learned from the experience. Hopefully, there are no big surprises and ultimately your company comes out on the other end no worse for the wear. But, if you have concerns about the prospect of handling something like this on your own, then feel free to contact the sales and use tax professionals at Advantous Consulting for assistance in either maneuvering through the choppy waters of an audit or preparing your staff and records for the unappealing inevitability.