Free whitepaper that will help you prepare for any sales tax audit that may come your way. *Newly updated February 2020*
Does the thought of a sales tax audit keep you up at night? If the answer is yes, you’re far from alone.
An audit can strike fear in the heart of even the most seasoned sales tax professional. Whether you’ve never been through an audit or have had the pleasure of being audited numerous times, it pays to have some expert advice on how to negotiate with the auditor.
Negotiate? Yes! One of the most important pieces of advice I give to businesses and tax professionals about audits is that when the auditor hands down his or her assessment, that is rarely the final word on the audit. In many cases, there are items that you can negotiate with the auditor in order to reduce your assessment and save your company big money.
Let’s outline three different scenarios where you may be able to counter the auditor’s findings to negotiate a more favorable assessment. You’ll get practical pointers on how to negotiate with the auditor. In the final scenario, I’ll share a word-for-word script that you can use with an auditor to negotiate your position and potentially reduce your assessment.
First off, always remember this: Just because an auditor has handed down a hefty tax assessment on your company doesn’t necessarily mean that he or she is right.
Auditors are human – they make mistakes all the time. They are typically under intense pressure to complete audits as quickly as possible, and under pressure, they may make incorrect determinations.
Let’s say you’ve uncovered an area where the auditor has made an incorrect analysis of the applicable tax law. What you’ll need to do is present a legal analysis that identifies the errors in the auditor’s analysis. So how do you do this?
Look at the legislative history of the item that you are arguing. You’ll want to look for court cases or letter rulings that have interpreted the position that you are taking. Auditors frequently rely on regulations, which are the Department of Revenue/Taxation interpretations of tax law. So look at the actual law and the legislative history (hearings that were held when the law was enacted) to see what the true intent of the legislation is. Because there is a chance that it could differ from the regulations that the auditor is relying on.
Once you’ve gathered the relevant items supporting your position, you can present them to the auditor to argue your case and demonstrate that the auditor has made an error in their analysis. And remember: in all negotiations, behave respectfully towards the auditor. Trust and respect between you and the auditor will benefit the outcome of any audit.
For our second audit scenario, let’s say that the auditor isn’t necessarily wrong in his or her interpretation of the facts, but rather the legislation that the auditor is relying on isn’t crystal clear. In this scenario, there may be some wiggle room in the legislation for you to argue your case against the auditor’s interpretation.
Your first step is to identify the appropriate legislation and all of the pertinent facts. Next, do your research and find court cases or letter rulings that have interpreted the position that you’re taking. Research could potentially lead you to court cases with nearly identical facts but result in different holdings. Don’t limit this research to the state in question. Many states have very similar provisions, so widen your research for any state with similar laws and see what you can find.
Once you’ve done your research, you can present your arguments to the auditor as to why the legislation is unclear then present your side of the story. Your argument should be presented thoroughly and honestly. When making your argument, place the position of the taxpayer (you) in the best possible light.
Point out the correct application of the law in question, and make sure to reference the relevant code, regulations, and case law that you’ve researched. Present your argument in such a way that the desired result flows as natural logic from the analysis.
As with all audit negotiations, do not challenge the intelligence of the auditor. You can allude to the fact that the auditor may have overlooked a provision or fact in reaching his/her conclusion. And with luck, your interpretation of the legislation may win out.
One additional tip: if there are items that can’t be resolved with the auditor, you may request a meeting with the auditor’s supervisor before the audit is finalized. This is strongly recommended.
For our third audit scenario, let’s say that something was said to the auditor over the course of the audit by your office manager and it has been taken out of context and used against you. This happened because you weren’t present when the auditor talk to the office manager about a question.
The office manager didn’t realize the importance of the words used to explain the purchase. This led to the auditor setting up the purchase as taxable instead of exempt.
The auditor found an invoice from an HVAC company that did work on your Dallas office. The invoice didn’t have a description of what was done. The office manager explained that the company provides HVAC repair and maintenance services for the air conditioner. The invoice was dated in June.
Assuming it was for a repair, the auditor assessed it as taxable since there was no tax on the invoice. But, upon researching the transaction, you discovered it was for the annual A/C maintenance check. It was scheduled much later than normal as there had been a lot of rain in May and they weren’t able to come any earlier.
Maintenance services are exempt, but repair services are taxable. So, here’s how you would make your case to the auditor:
Negotiating with the auditor is just one piece of the puzzle when it comes to audit defense techniques that you can put to use in your company. In fact, there are steps that you can take before you are even audited to help make you and your company audit-proof.
By putting these best practices into use and learning about the practical techniques and tips you should use throughout an audit, you can take control of an audit. No more sleepless nights and no more feeling defenseless come audit time.
If you’re looking to learn more about audit defense, check out our Effective Sales Tax Audit Defense Techniques webinar on-demand, which you can take anytime at your own convenience. For more details, click here.