How to Prepare for a Tax Audit
Tax audits are complicated, and hard to predict. If you’ve never experienced one, it can be hard to imagine the material impact of a tax audit. And the time ensure you’re compliant isn’t when the state auditor is knocking on your door.
If you’ve never been audited in the past, then you probably don’t know why certain businesses get audited, what the most common errors are that auditors look for, or how much a negative audit could affect your business—financially and in many other ways. However, with the right information and tools, you can fully prepare yourself and your team should your company get audited in the future. Let’s dive right in.
Why Are Companies Audited? What Triggers an Audit?
State auditors aren’t looking for companies that are managing their taxes correctly. Why would they, right? Especially since audit penalty fees provide revenue for state budget deficits. With that being said, you’re probably wondering why some companies get audited in the first place and others don’t. Sometimes it’s simply bad luck. Other times, companies are selected based on a number of factors, such as their:
- Past audit history
- Volume of sales reported to the state
- Volume of exempt sales claimed
- Ratio of exempt sales to total sales
Along with targeting specific companies based on the factors above, there are also certain industries that get targeted over others. The ones who get targeted probably don’t know they’re putting themselves at risk in two ways:
- How the industry they’re in operates. Bars, restaurants, grocery stores, and liquor stores are all cash-based businesses, and auditors
- Not adhering to state and local sales and use tax regulations. Let’s face it, these regulations are complex, ever-changing, and require a lot of research and due diligence on the part of the company’s accounting and finance teams. But it’s still an important step in staying compliant.
How Much Can a Negative Audit Outcome Cost?
A typical negative audit can cost a small-to-medium sized business more than $114,000. For larger businesses, that amount can be substantially higher. But it’s not just the dollar figure you have to worry about. It’s the wasted time and disruption that can also cost you. On average, sales and use tax audits can last 30 to 45 days, and auditors can be on-site for two to four weeks. During this time, staff and leadership are taken away from more productive tasks.
There are two ways you can handle a tax audit, which will probably come as no surprise. You can either handle it yourself or hire a tax expert. If you’ve never been audited before or you’re dealing with lack of available staff, it’s probably safer to outsource some of the complexities that come with preparing for an audit yourself.
How Can You Ensure Your Business is Compliant?
Tax audits are difficult to understand and predict—and just plain stressful. Sometimes it’s easier to hire a tax expert so they can help you through the overwhelming and confusing process. However, it doesn’t just start with having someone else help you. It starts with being proactive. Simply keeping up with the different rates, rules, and regulations can keep you compliant. Plus, you gain peace of mind that you’ll pass a tax audit should one ever come your way.
But how can you possibly keep up with all these important details? Start with automating your sales and use tax compliance from within your accounting system, ERP, or e-commerce system. Avalara’s tax management software ensures accurate tax calculation, proper management of tax exemptions, and streamlines the remittance and filing process for sales tax returns in every U.S. jurisdiction. Using an automated tool like this one saves you from the hassles of sales tax and sends you through compliance checks with ease and confidence.
Want to know more about tax audits, staying compliant, and Avalara? Using extensive data acquired from the Texas Department of Revenue and the California Board of Equalization (BOE), Avalara and Peisner Johnson & Company conducted a joint study that provides in-depth information on the most common compliance errors by business type and industry, the typical costs in audit penalties and fees, cost of support and defense, what triggers an audit, and much more. Download the study and discover the key findings, tips, and tricks that will help your company get through a tax audit error and stress free.