Is it ever a good time for a sales and use tax audit? Still, they somehow seem to come at the very worst times. Preparing for the audit can be a time-consuming project in itself, but if you’re unprepared, the audit may even become disruptive to your business operations.
Sales and use tax compliance is a fact of business life, and the more prepared you are for an audit — and the more you understand the tax process — the less it will distract you from running your business.
Why are you being audited?
There are several reasons why your business may be the lucky winner in the audit lottery:
- You may have made enough online sales to trigger Nexus, or sufficient physical presence in a state to make your business liable for collecting sales tax in that state.
- You have a large amount of tax-exempt sales or if your tax-exempt sales have increased significantly since you last filed.
- Late filing or filing a sales tax return without paying any use tax.
- Are you a sole proprietor? That also raises your risk of an audit. If you can form a corporation or LLC, you’re less likely to be audited (though not entirely immune).
- You are more likely to be audited if you were audited in a previous year and significant adjustments were necessary.
Or, you may be audited even if none of these conditions are present. So whatever you think your risk of a sales and use tax audit might be, it makes sense to be prepared.
What to expect from the audit process
When the auditor contacts you, don’t drag your feet about setting a date for the audit. That won’t help, because the audit is going to happen anyway!
So set an appointment with the auditor, and collect the following documentation:
- 3-4 years of sales and use tax records
- 3-4 years of tax filings
- Exemption certificates to prove that tax-exempt entities you did business with are really exempt
If you have enough time before the actual audit, you might want to do a “trial run” with your accountant to identify any obvious problem areas.
It’s also a good idea to find out early how much time you will have to collect any missing documentation (such as exemption certificates, for example).
What’s the best way to combat a disruptive sales and use tax audit?
MSCCM is offering a Sales and Use Tax Seminar to help our Colorado colleagues learn how to prepare for this necessary review.
On Thursday July 23, 2015, 8:00 a.m. to 1:00 p.m. at the Renaissance Denver Hotel, our speakers will address sales and use tax application for the State of Colorado, the City and County of Denver, and Aurora.
Learn how sales tax affects your business every day from three noted experts:
- City & County of Denver — Douglas Schellinger, Tax Audit Supervisor
- State of Colorado — Ruth West, Taxpayer Education Specialist
- Aurora — Jeff Edwards, Tax Audit Supervisor
Registration is limited! Please download our registration form and RSVP by July 3, 2015.
We hope to see you at our upcoming seminar so we can help you make sales and use tax compliance a little easier.