Sales Tax Audit Procedures

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A sales tax audit occurs when a state or government agency reviews a private company’s accounting information. The agency will send an auditor to the company and complete a review of accounting and business information. This review may also include a review of sales tax returns sent to the agency by the company. Finding discrepancies is typically the purpose of the audit.

Initial Contact and Planning

The sales tax agency typically sends a notice to alert companies of upcoming audits. The audit will often last several days; in some cases, an entire week may be necessary depending on the company’s size. The agency will indicate how many months or years the agency will audit for sales tax collections. The company will usually gather this information and place it in a location where auditors can comb through the documents while on site.

Stage I Procedures

Sales tax audits often have two stages. First, the audit will compare sales tax returns filed with historical sales information from the general ledger. Bank deposits, sales tax payable records, federal tax returns and procurement documents may all be part of this process. The purpose of this stage is to ensure the returns initially filed with the sales tax agency are accurate and include all sales for the given time period.

Stage II Procedures

The second audit stage may occur at the same time as the first or at a later date. The auditor uses this stage to review additional information relating to sales tax returns. Exemption certificates, state nexus agreements, resale certificates, sales tax licenses and similar information are under review. This proves the company follows all state laws and mandates in accordance to sales tax laws. Additional samples relating to current sales and tax calculations are also under review here.

Audit Findings

Auditors will usually prepare a fieldwork statement that provides a brief look into the sales tax audit. A formal letter is necessary to provide an official statement on the company’s sales tax procedures. This formal letter comes directly from the state agency and either provides a statement of approval or request to remit unpaid taxes, along with penalties and fees. Though a company can dispute the findings, states do not have to change the findings based on this commentary.

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References

  • "Principles of Auditing & Other Assurance Services"; Ray Whittington, et al; 2010
  • "Federal Tax Research"; William A. Raabe, et al.; 2009
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