Are You (gulp) Being Audited?
Audit: A word that can make even the most even-keeled business owner blanch. And while large corporations expect regular IRS audits, and have a large team of attorneys to support them, smaller business may be taken off-guard.
In fact, sole proprietors are audited more frequently than small business corporations, according to Forbes. This means having all of your tax-records ready to go makes even more sense for burgeoning eCommerce sites.
That said, an audit isn’t as scary as it sounds. There are some simple steps you can take now to avoid any headaches later. Below, we’ll outline some common triggers for IRS sales and use tax audits, plus give you some valuable tips for organizing your tax records so the audit is just like any other day for your business.
(Oh, and be sure to check out our past posts on avoiding audits. This steps decrease the likelihood of your business being audited and help you keep your business compliant.)
“But why ME?”
It’s impossible to know what triggers an audit every time it happens. Although companies who consistently file accurately and on time are least likely to be audited, every state uses different criteria for audit selections, and nothing can completely safeguard your business.
You could be chosen simply because of your company’s size, sales volume, or the level of complexity in your tax return.
So relax, take a deep breath and remember, it’s just a part of being in business. In general, though, some common “red flags” that may trigger an audit include:
- An event like a store closing, bankruptcy, or dissolution of the business.
- Significant exempt sales or an increase in exempt sales.
- A drop in taxable sales.
- Claiming frequent refunds or large tax credits.
- Filing returns late.
- Nexus, which is when an out-of-state business selling products into a state is liable for collecting sales or use tax on sales into the state.
“I don’t have a fancy system!”
To begin the process, the auditor will ask to see “your books.” Small businesses aren’t required to keep a formal set of books, so don’t panic if you don’t have official ledgers or journals.
That said, you will have to substantiate your business expenses with some sort of record. So whether you keep track of everything in an accounting software program or in a spreadsheet you update yourself, be sure the tracking system you are using is organized in a logical manner for the auditor.
Just like when you were in school, neatness counts! Having your tax records neatly organized builds your credibility. After all, if you can’t find a record support a business expense, it may appear you are trying to hide something. Seeming disorganized can be shady, and result in an auditor dig deeper into your records, looking for discrepancies.
While you only have to provide documentation for what the auditor is requesting, it’s a good idea to have the following documents on hand, in case questions come up during the auditing process:
- Bank and credit card statements
- Receipts for items paid in cash
- Business diaries or online calendars supporting business expenses
- Records for certain equipment like cell phones and computers bought for work but used, at home
- A mileage log for business travel
- Entertainment and expense records
“This is the end of me!”
For almost all businesses, the idea of sales tax audit is enough to send anyone into a panic. Keeping track of sales tax by state, county, and town can get complicated, and anything questioning your business can seem alarming.
It may help to understand the purpose of a sales tax audit is simply to prove that the correct amount of sales tax was remitted to the proper agency. That means that in addition to the documents mentioned in the previous section, it’s critical that you provide records of your paid sales tax, i.e. past tax returns.
Here’s a list of documents you should have on hand:
- Sales tax returns
- Excise tax returns
- Use tax documentation
- Retail sales tax documentation
- Business and occupational tax documentation
During the audit, the auditor will also scrutinize your company’s sales transaction records. You’ll want to be able to quickly find past transactions when the auditor requests them, so ensure you’ve gotten yourself organized to do so. It’s worth noting here that there are tools out there to provide support with this sort of thing, but if you have the hours to invest and the organization system in place, you’ll be good to go.
Our Final Words of Wisdom
On the day of the audit, we recommend offering the auditor a comfortable space in which to work on site. Keep in mind, auditors are people, too. Don’t make their jobs unnecessarily difficult!
And finally, to ensure that your sales tax audit goes as smoothly as possible, consider consulting an experienced sales tax professional ahead of time. This can be pricey, but this can take some of the pressure off of you so you can get back to building your business.
The best way to be prepare for an audit is to keep your business compliant. Check out our past posts on managing exemption certificates correctly, under-filing in remote states, and getting those taxes in on time for our tips on avoiding audits.
Have some more questions? Let us know! We’re happy to help, and we love talking taxes.
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