Top 10 Indirect Tax Audit Triggers
New York (March 28, 2013)
By Michael Cohn
The top 10 issues that, when uncovered, are most likely to prompt an audit of indirect taxes, such as sales and use taxes, according to the Tax & Accounting business of Thomson Reuters are the following:
- Nexus, but no registration. Nexus is a confluence of factors that make a business liable for sales and use tax payment and reporting. It is likely that you have nexus with a state if you are paying payroll or other taxes. If you are not registered for sales tax, but do pay another kind of tax in that state, it is very probable that you will be contacted for an audit. All a state has to do is perform a little cross-checking.
- In the phone book or on the Web. If you cannot be found in the state system, a simple check of the phone book or of websites can lead an auditor to call you an inquire about your registration status and number.
- Issued resale certificates. Resale certificates can be a major red flag. Using them to purchase items that will be used rather than resold can result in enormous penalties. If you have issued a resale certificate and are not registered for sales and use tax, you are an audit candidate.
- Use tax auditing. If one of your vendors has not charged proper use tax, and that vendor gets audited, then you will likely get audited in turn. Current audits provide the best sources and leads for future audits.
- Visual inspections. Auditors will often visit large construction projects and take note of the contractors on site. Audits can quickly follow.
- Whistle-blowers. Auditors are happy to take hotline calls. Disgruntled employees, upset customers, aggressive competitors, and even neighboring businesses upset that you have not paid taxes when they have they can all dish out the dirt.
- Casual observation. Auditors are people too, and are out there buying items and living normal lives. But that does not mean they turn off their professional antennae when purchasing from you.
- Non-remission of use tax. Companies that file sales tax without filing use tax paint themselves with a large target.
- High net sales. High sales volumes can harbor high volumes of errors and omissions. Hence, a successful and growing business can be fertile ground for an audit.
- Exempt items. Companies that purchase or sell a lot of exempt items are another happy hunting ground for auditors as there is ample room for misinterpretation, error and fraud around what is exempt and what is not.