What Triggers a Sales & Use Tax Audit?

Knowing what can cause an audit and how to get ready if you are subject to one is beneficial because navigating the sales and use tax audit process can take a lot of time and resources. Find out more about what you can do to safeguard your interests and the possible reasons for sales and use tax audits.

A Sales & Use Tax Audit: What Is It?

State and local governments want to receive their fair share of sales tax since it accounts for a significant amount of their yearly income. State agencies check your purchase and sales records against your paid taxes during a sales tax audit to make sure you paid what you owed.

A sales and use tax audit usually covers the three to four years that each state requires and includes numerous sales transactions as well as purchases of fixed assets and expenses. Depending on a variety of factors, including the quantity of invoices, incomplete data, the availability of the auditor and client, etc., the auditing process could take weeks or months.

What Leads to an Audit of Sales and Use Taxes?

State agencies typically conduct a sales and use tax audit when they suspect a business of not disclosing all of its taxable sales. A sales and use tax audit, however, can be triggered by a variety of factors, and many states have their own systems in place to flag possible candidates.

Since there are more sales and moving components and a higher chance of a reporting error, a business with high sales volume, multiple locations, or a complex return will inevitably be the subject of a sales tax audit. Businesses that frequently file late — which may be a sign of a rush job — will also attract more attention.

Other causes of a sales tax audit can include material changes to a company’s footprint or structure, such as adding a new manufacturing plant or research facility, and conversely declaring bankruptcy or closing a flagship store. A sudden, significant drop in taxable sales is another tax audit red flag, as is a disproportionate number of tax-exempt transactions. Of course, one of the largest triggers for a sales tax audit is previous exposure from the last audit. State auditors do not want to waste their time with companies that are compliant, so a net refund or minimal exposure might keep a company off an audit cycle. A company that owed substantial dollars will almost certainly be on the list for another audit once the statute runs full circle.

By avoiding these audit triggers, you can lessen the allure of your business. However, a company may still be the target of an audit due to a random selection or the existence of another element the state deems problematic, even if it files taxes on time, records proportionate sales, and keeps a constant number of locations. The best course of action for a business is to maintain good record-keeping and be as audit-ready as possible because this possibility cannot be completely eliminated.

How to Prepare for a Sales & Use Tax Audit

If you are the target of a tax audit, you should take proactive measures, beginning with contacting an audit defense expert. You can work directly with the auditor, re-examine the audit sample, scrutinize and reduce the assessment, find credits to offset the liability, and negotiate terms to close out the audit. Sales and use tax consulting will assist you in navigating the sales tax audit process from start to finish.

The specialist will assist in gathering and organizing all of the financial information and documents needed for the audit, working within the constraints you specify. Additionally, they will assist you in identifying any mistakes or missing data in your filings so that you can inform the auditor up front and obtain approval for credits or overpaid/over-accrued sales and use tax.

Being courteous and respectful is one of the best ways to speed up your audit and simplify the procedure. Your auditor is a professional with a task to complete, and if you cooperate and only provide the information they need, the audit can proceed more quickly.

Navigate Your Sales & Use Tax Audit With TaxMatrix

TaxMatrix excels in sales tax audit defense. When you engage our services, we’ll represent your interests versus the State to ensure you pay only your fair share—nothing more.

If you’re facing the sales tax audit process and don’t know where to start, connect with our experts for assistance.

Max Walker is a skilled and versatile content writer known for creating engaging, well-researched, and reader-focused content across multiple niches.