The Ouch of Sales Tax Audits

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Sales tax is the largest source of income for state and local governments in the United States. Mixed reports tell us that revenue may be trending up this year, but it’s still far below 2008 and 2009 levels. States are struggling to fund programs and cover basic services, and the current political environment is unfriendly for tax increases. So where are states turning to increase their revenue? Sales tax collection enforcement. That means more audits.

The hardest hit companies are small to medium sized businesses (SMBs) who do not have an audit defense or process in place to prove accurate collecting and reporting. An SMB usually has a simpler tax portfolio than a larger corporation, making them less diversified and less able to handle negative audit results that include penalties and interest.

The OUCH of an audit includes:

  • Overtime: Staff are pulled from other duties to help the auditor follow the trail to verify compliance.
  • Underpayment Penalties and Interest: Penalties and interest are applied when underpayment is found. Even if you have brought your business into an improved compliance process recently, auditors rarely look at just the current or previous years—most auditors will pull 3-7 years’ worth of records to discern where accurate sales tax calculation and reporting is missing.
  • Credit worthiness impairment: Negative audits can result in damaged credit worthiness. Many SMBs rely on credit lines to operate on a day-to-day basis and a disastrous audit can hurt a company’s cash flow.
  • How your business is perceived: A company’s reputation can be damaged when customers or fellow business associates find that they have endured an audit with negative findings. Customers may be uncomfortable purchasing from a company found to not be collecting and remitting accurate sales taxes.

In addition to the damage a negative audit can cause, once a process is determined to be faulty, auditors may “lather, rinse, repeat” on a regular basis until a company proves they have a handle on their sales tax compliance processes and documentation.

Fortunately, technology today has enabled many SMBs to affordably manage their sales tax compliance without a lot of overhead costs. Automation provides a repeatable, documentable process of sales tax calculation and application that helps prevent being flagged for an audit due to poor processes or returns that are inconsistent with expectations for the industry.

In addition to helping to reduce audit exposure with a documented, consistent process, automation enables a company to quickly respond to auditor inquiries, which not only helps prevent an audit, but makes an audit much less painful by making answers easily available.

Take the OUCH out of your sales tax compliance! Join our webinar, “Become Best-In-Class by Automating Sales and Use Tax Compliance” on Thursday, July 7, 2011 10:00 am PDT and learn how to reduce your audit exposure and risk through automation!

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