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Gross sales tax audits could also be an unlucky truth of company life, however not all audits are the identical. After a gross sales tax audit is accomplished and an organization is lastly delivered a discover of proposed evaluation by the state, the corporate should determine one in all two issues: whether or not to contest the audit findings or just pay the evaluation and transfer on.

Each choices require one other set of choices. Contesting the audit means going by way of a fancy choice tree, the steps of that are detailed beneath. And even when an organization decides to pay an evaluation and get on with enterprise, it should determine whether or not to repair the difficulty that led to the audit within the first place, or comply with disagree and combat the difficulty once more within the subsequent audit.

Neither choice is straightforward. However contesting the audit does require rapid motion.

In keeping with Bobby Bui, a state and native tax (SALT) lawyer who now serves because the Director of Enterprise Improvement for excise and gross sales tax within the oil, fuel, and chemical industries at Thomson Reuters, the choice to contest an audit needs to be primarily based on an evaluation of the probability of successful, the good thing about the win (measured in each {dollars} and future affect of precedent set), and whether or not the price of defending the audit exceeds the good thing about the win (which can be unsure as effectively).

“There are usually two points that drive a gross sales tax audit evaluation,” Bobby says. “The primary is a documentation subject, corresponding to lacking invoices or contracts to show whether or not tax was due and correctly assessed or owed. The second is lacking buyer an exemption certificates to show a transaction was exempt, which is a tax-technical place taken by the taxpayer on a transaction that the state disagrees with and seeks to evaluate.”

When must you contest an audit? 

To justify contesting a gross sales tax audit over documentation points, Bobby says an organization should first imagine it has the bill(s) or exemption certificates(s) to show to auditors that their evaluation is invalid. And even when this documentation is on the market, he says, earlier than contesting the audit the corporate ought to think about the trouble and price essential to defend their place.

For tax-technical positions, Bobby advises corporations to investigate their underlying place with advisors and conduct a extra in-depth evaluation of the affect of a win or loss. There could also be extra than simply the {dollars} at stake, in any case, particularly if a present evaluation might affect future transactions.

In keeping with Bobby, earlier than contesting a gross sales tax audit, some basic elements to contemplate are: 

• The probability of success: Do you might have the required documentation? And if that’s the case, is it adequate to make sure victory?

• Price-benefit evaluation: Contemplating advisory and authorized charges, inner prices (time, cash, effort), and different ancillary bills to contest the audit, is the reward going to outweigh these prices? In that case, by how a lot?

• Different enterprise elements: Would dropping jeopardize another space of the enterprise? Authorities contractor bids in that jurisdiction, for instance, or different areas past tax the place good compliance is a must have qualification for doing enterprise?

• Damaging publicity: Would possibly contesting the audit end in dangerous publicity that impacts different areas of the enterprise or tarnishes the corporate’s fame? And does that potential value outweigh the worth of the audit legal responsibility in query?

• Future affect: Would a unfavorable choice now set a nasty precedent and have worse repercussions in future audits and/or future capital tasks?*

*For instance, Bobby says: “Suppose you obtain one compressor within the 2022-23 tax yr and that’s the solely subject auditors are involved about, so the greenback quantity of the evaluation is small. However suppose you obtain 1,000 compressors in 2024, and you recognize auditors will increase the identical tax subject sooner or later. In that case, you would possibly determine to defend a single place even when the quantity is small, as a result of you recognize that when you let it go and the choice goes in opposition to you, it may come again to hang-out you.”

How must you put together for an audit protection? 

If after weighing these concerns the corporate decides to contest a gross sales tax audit, the tax workforce is usually tasked with making ready the corporate’s protection. Although in reality, Bobby says, tax groups ought to begin making ready the corporate’s protection as quickly as they’re knowledgeable of the audit.

“The second you get notified of an audit, it’s best to begin making ready—each for the audit itself and contesting it—as a result of it’s a must to assume that the evaluation goes to be unfavorable,” he says.

Making ready for a gross sales tax audit protection means: 

• gathering all the required documentation (invoices, exemption certificates, tax memos, workpapers, and so on.)
• reconciling the corporate’s accounts, balances, and so on.
• figuring out what data is lacking and find out how to discover it

By the point the auditors arrive, Bobby says, the tax workforce ought to already know what subject(s) the auditors are involved about, whether or not the data they’re searching for is admittedly lacking (and if not, the place it could be), and whether or not the corporate can credibly defend its place.

How can automation assist in an audit protection? 

After a couple of conferences with auditors, the tax workforce will know what data auditors have requested and have a superb sense of what key points might come up within the audit. At this level, the tax workforce also needs to have a superb really feel for how sturdy the corporate’s protection is (for instance, availability of documentation, validity of tax positions, errors, and so on.).

At this stage of the method, there’s usually a interval of information-sharing forwards and backwards, Bobby says, throughout which auditors request data to make clear questions. Each the data-gathering and data-sharing levels of the gross sales tax audit course of are the place automated tax know-how and sturdy instruments for tax evaluation can actually assist.

“The fitting know-how and IT infrastructure permits you to present information to auditors in a fast and well timed method,” Bobby explains. Moreover, he provides, “having the ability to reply to auditors with structured, standardized stories—versus stories which might be manually cobbled collectively—builds quite a lot of belief and confidence in each the method and the info. It additionally builds confidence within the tax division, as a result of the info isn’t being manipulated, it’s a push-button report that’s coming from a single supply related to the ERP system, which is the supply of reality for every part.”

A sooner, extra correct audit course of 

So, for instance, if an auditor is anxious a few single transaction that occurred three years in the past, a succesful tax engine ought to be capable of pinpoint that transaction, and in addition present the logic upon which the choice was made. If the corporate can present that their tax system has already flagged the difficulty and corrected it, “that sort of proof could be very persuasive,” Bobby says. Such proof can persuade auditors that they don’t have to scour by way of an organization’s complete transaction historical past for related occurrences of the identical subject, Bobby says, “as a result of given the identical set of info, an automatic resolution will make the identical tax choice—so when you belief the info and the method, why check different transactions?”

The power to shortly reply questions for auditors and entry information when it’s requested additionally ends in a sooner audit, Bobby says, saving money and time.

“Automation makes responding to audit requests a a lot faster course of, not solely as a result of the velocity of data-gathering and reporting is a lot sooner, however as a result of the auditor can take a look at the method and the software program and be assured that the data you’re offering them is correct and reliable.”

What if a gross sales tax audit must be appealed? 

Typically, the difficulty beneath audit can’t be resolved and should be addressed by an administrative board or, worst-case, in courtroom. In such instances, Bobby says, members of the tax workforce usually take a supporting position to the authorized workforce, offering related information, affidavits, and testimony.

Right here once more, an automatic tax system’s capacity to isolate related information and supply quick, correct stories helps velocity up the litigation course of and, if exterior authorized counsel is getting used, cut back their billable hours. Likewise, if the corporate is using exterior advisors to help with the audit protection, an automatic tax engine “might help streamline the entire course of and cut back the necessity for additional advisory assist,” Bobby says.

Win or lose the audit, there’s extra work to do 

Lastly, even when an organization wins an audit attraction, the tax workforce’s work is just not completed. Upon successful an attraction, Bobby says, the tax workforce ought to return and ensure the state’s evaluation is appropriate and, if cash is due again to the corporate, that everybody agrees on the ultimate quantity.

After the shut of any audit, Bobby additionally advises corporations to evaluation their tax coverage and, if warranted, make any mandatory modifications. He additionally advises corporations to replace configurations of their tax engine in order that the processing of future transactions is in step with the agreed-upon audit findings.

And if an attraction is misplaced? “Dropping means going again to the unique cost-benefit evaluation to determine if persevering with to combat is value it,” Bobby says. “It’s solely going to get dearer the farther you progress down that chain, as a result of then it’s a must to re-do the work and re-litigate your complete case.”

Implementing gross sales tax know-how corresponding to ONESOURCE Dedication in your tech stack can save time and make making ready for an audit protection a lot simpler. Automating oblique tax processes takes the danger out of the equation by driving higher effectivity and giving numbers you possibly can rely on.