Sales Tax Colorado provides professional advocacy services for companies that are under Sales & Use Tax audit and need assistance in negotiating with state and local taxing authorities. We can represent you before the state tax department.
We will review your records to find the exemptions that apply to your business, defend your rights and fight to minimize potential liability. Our team of specialists can also assist you with preparing letter rulings requests and protesting rulings.
STC will represent you as needed in preparation for and throughout the audit. We will seek to minimize the resulting audit assessment and to bring timely closure to this matter. STC will assist you in identifying audit assessment reduction opportunities and advocating your company’s positions to the auditor.
Some of our typical audit services are listed below followed by some tips to help you better understand and prepare for an audit. We strongly caution that such information alone should not be considered a substitute for seeking the assistance of a professional advocate. Many states and local jurisdictions have a wide variance in tax laws and audit procedures. Even within a particular state, experience, knowledge of the law, fairness, and flexibility vary from auditor to auditor. Our professionals can help you handle these situations to minimize the time and costs of an audit.
- Review any relevant correspondence received from the department.
- Meet with and/or communicate as necessary with key personnel to obtain a proper understanding of your company’s facts and positions.
- Meet with and/or communicate (i.e., via mail, telephone, etc.) as necessary with the department’s representative(s) to present and advocate your company’s positions and to otherwise reduce the assessment amount.
- Prepare any necessary correspondence (e.g., Power of Attorney Forms, Letters of Protest, Abatement of Penalty Letters, etc.) that will be submitted to the department on your company’s behalf.
- Review any documentation necessary to understand the auditor’s methodology in arriving at the assessment amount.
- Request and review any additional available documentation and/or information that may assist us in further reducing your company’s assessment.
- Strategize to identify additional positions for reducing the assessment amount and to prepare the approach for presenting Sales Tax Colorado’ and your company’s positions to the auditor(s).
- Assist as necessary in pulling required documentation and communicating with your company’s vendors/customers to obtain additional information.
Preparing For An Audit
Dealing with a Sales Tax audit can be intimidating and full of costly pitfalls. However, with proper representation, you can walk away from an audit with a favorable outcome. A field Sales Tax audit generally begins when an auditor contacts you, the taxpayer, by letter or phone to schedule a pre-audit meeting. In this meeting, the auditor will typically:
- Present an audit authorization letter and other documents for you to sign.
- Explain what records are required to complete the audit.
- Ask you to provide additional information such as details of your accounting procedures.
To prepare for the scheduled audit, you will need to gather and organize various records that will be requested by the auditor. Auditors often request more than they actually need to see so it is best to have the information request reviewed by a qualified Sales & Use Tax specialist. Giving auditors too much or too little information is a quick way to get the audit off to a bad start. Too much information can potentially uncover liabilities that might otherwise have gone undetected and can also unnecessarily take up a lot of your time; too little information might cause the auditor to be suspicious and increase the scope of the audit. STC can review the auditor’s information request and help you narrow it down to what is absolutely essential. Also, prior to the audit meeting, it is generally a good idea to understand where you potentially have exposure and prepare associated defenses. This information will be useful for upcoming discussions about the audit approach (e.g., detail vs. sample), test period selection criteria, projection methodology, etc. Proper pre-audit planning will make the Sales Tax audit process move forward quickly and smoothly for everyone involved. Pre-audit planning can most efficiently be accomplished with the help of a Sales & Use Tax specialist.
During The Sales Tax Audit
When analyzing your sales, the auditor will check to see if you correctly charged, collected and paid state and local taxes. You should have charged tax on all taxable items and services. If you did not, you must have a record of why you failed to collect the tax, such as a valid exemption certificate or a bill of lading to show the item was delivered out of state. The auditor will also examine your purchases to verify that the proper tax was paid or accrued when applicable. Very often, auditors assess tax on exempt and/or non-taxable transactions. Many auditors are not well-versed regarding possible exclusions or exemptions. Their focus will generally be on assessing tax with any error being in the state’s favor. In addition, most auditors do not actively look for off-setting refunds or credits. Having a seasoned Sales & Use Tax professional involved to manage the flow of information can significantly reduce the assessment amount. It is generally easier to prevent an item from being assessed in the first place than it is to get it removed later.
Accordingly, an acute knowledge of the Sales & Use Tax laws and corresponding exemptions/exclusions is absolutely essential in order to minimize Sales & Use Tax assessments. In some cases, it is even possible for well-versed Sales & Use Tax professionals to convert assessments into net refunds.
When The Audit Is Finished
When the audit field work is completed, the auditor will present you with a copy of the audit work papers. These work papers will include questions that were raised, reporting errors and transactions that were not properly supported with documentation. The auditor will also schedule a meeting with you to review the items listed on the work papers. You will be given time to review the work papers and provide sufficient documentation to resolve any questions or concerns. To be successful in this process, an acute knowledge of the Sales & Use Tax laws is absolutely essential.
Afterward, the auditor will calculate the Sales Tax on any remaining taxable items and you can pay the additional tax due. If you disagree with his/her findings, there are typically different avenues at the administrative level (e.g., meetings with higher ranking revenue department personnel, conciliation conferences, etc.). Matters left unresolved at the administrative level can proceed to court. Each of the dispute resolution alternatives has unique potential benefits, risks and associated costs. No one alternative is ideal in all scenarios, and selecting the wrong dispute resolution alternative can significantly alter the outcome. At Sales Tax Colorado we understand the available options and the scenarios in which individual alternatives makes sense.
Sampling
Computer-assisted audits are becoming more commonplace, as fewer resources are being devoted to field audits. This type of audit involves the evaluation of your hardware and software systems. Computer-assisted audits may involve statistical or block sampling of data. Sampling is appropriate in Sales & Use Tax audits when records are so massive that it would not be feasible to conduct a detailed review of Sales Tax transactions due to cost, time, and resources. Most Sales Tax auditors will want to use sampling approaches to review sales and expense purchases and will generally review fixed asset purchases in detail.
Statistical sampling involves randomly selecting a pre-determined number of transactions from the entire population of transactions. In its purest form, each transaction has an equal likelihood of being selected and the selection process is free from bias. Statistical sampling is based on mathematically sound statistical principles and has the highest likelihood of rendering results that reflect the actual under-reported Sales & Use Tax amount. While statistical sampling is the most accurate sampling approach, it requires complete and accurate data in a sort friendly electronic format. Not every taxpayer can meet this request. To be properly administered, statistical sampling also requires an auditor who has a sufficient understanding of statistical sampling principles.
Block sampling may be necessary when records do not exist for the entire period. Block sampling generally involves reviewing all transactions during a selected time period and projecting the results across the entire audit period. Block sampling is likely to produce a skewed result since this approach by its nature will not reflect any liability impacting changes that might have occurred outside the sample period (e.g., changes in compliance procedures, purchase patterns, etc.). Despite the statistical short comings, block sampling is still a very common audit approach due to its simplicity. The skewed nature of this approach is not necessarily bad. Block sampling can also work in the taxpayer’s favor particularly if the taxpayer’s Sales Tax compliance level during the selected sample period happened to be better than usual.
It is vital to understand:
- Your rights regarding sampling
- How the auditor will perform the sample selection
- How the sample results will be applied in assessing a liability
The use of sampling methodologies can result in greater auditing efficiency, but variations in sampling methodology can significantly affect the overall assessment amount for better or for worse. A thorough understanding of the sampling method alternatives and the potential impact of each is essential, particularly in the initial planning phase of the audit. Professional assistance in proactively presenting the auditor with a reasonable sample and methodology can shape the direction of the audit.
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