In jurisdictions that collect sales tax, taxation authorities usually have the right to audit businesses to be sure that all sales taxes owed have been properly paid. A sales tax audit is the process through which a taxation official examines a company’s accounting to ascertain whether there are outstanding taxes owed. Sometimes audits are performed in cases of suspected abuse, but most of the time, they are conducted randomly. A business that is audited is typically required by law to surrender all records and account books to the examiner, and if errors are found, must usually pay with penalty.
Sales tax is an important stream of revenue for the states and countries that collect it. Smaller countries, particularly those in Europe, assess sales tax at the national level. In the United States, sales tax is a state taxation issue. Not all states assess sales tax, and those that do have different rates and different rules. In all places, the auditing process is one of the most common ways for government tax agencies to determine whether the local tax remission rules are being followed.
The rules for what kind of tax records companies must keep varies by jurisdiction, and the specifics of what happens during a sales tax audit do, too. In general, a taxation agency will select the businesses it will audit on a somewhat random basis. It will then contact those businesses, and advise them to be ready with their records on a certain date.
Sales tax audit procedures center around records inspection. In most places, businesses must file their own tax records with the government, and in those records must disclose how many sales-tax generating sales were made. Sometimes, businesses can use tax return documents to claim certain exemptions and deductions on taxes owed. The audit begins with the tax records on file. The tax agent is looking, first and foremost, for evidence that those self-filed records reflect accurate financial information.
Businesses are required by law in the majority of jurisdictions to keep records of all of their transactions, noting when sales taxes were collected and how much of those sales tax proceeds were remitted to the government. Often times, they are required to keep those records current for a period of years. During a sales tax audit, the auditor will inspect the records that the business has kept alongside the tax return documents the business has self-filed. If the auditor finds any discrepancies, or if he determines that taxes were collected improperly or inaccurately, he may fine the company for taxes owed plus penalty.
The auditor may also discover, however, that the company has paid too much in sales taxes over the years. If this is the case, the company can file for a government refund to recoup the excess. Some companies will routinely self-audit their books to check for overpayment. This is known as a refund audit or a reverse sales tax audit.
There is typically no requirement that audited businesses retain legal counsel or outside accounting help, although many businesses, particularly small businesses, elect to anyway. Hiring an outside audit consultant to handle an audit and to deal with the auditor can be a way for business owners to continue operating their business without the stress of the audit consuming their time and energy. Many audit consultants have expertise in managing certain types of audits, and seeking fair outcomes. Outsourcing a sales tax audit can be expensive, but depending on the circumstances, it may be worth the investment.