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Seven Ways a Business is Selected for Audit

As we entered 2021, many industry experts believed that state sales tax audits are likely to increase sharply due to the loss of state revenue during the pandemic. A recent survey by TaxConnex stated that two out of five respondents agree with the experts, saying that they expect sales tax audits to become more common over the next two years. 38% of respondents said they believe audit levels will stay the same, and in a separate question, 66% have already seen an increase in the number of audits in the past two years.
Evidence of tax jurisdictions’ ramping up audits remains anecdotal, but with the addition of economic nexus in Florida to start later this year and Missouri set to potentially follow suit, the realization that money received from economic nexus liabilities is top of mind for states. And states are looking to collect.
But what does this mean for your business? How does a business get selected for an audit? Is it the luck of the draw? Like most things in sales tax, there’s not an easy answer. But many triggers can result in an audit. The seven most common ways:

  1. An audit of your customer – A customer undergoing its own sales tax audit may produce one of your invoices, resulting in the auditor questioning why you are not charging sales tax and potentially leading to an inquiry or nexus questionnaire being sent to your company.
  2. An audit of one of your suppliers – If one of your suppliers is investigated in an audit, there’s a potential for questions to arise on an exemption certificate for example. If they believe something should be taxable that you were not taxed for, it could result in a red flag for your business as well.
  3. An audit of one of your competitors – Auditors know that competitors tend to have similar business models and that some industries are more susceptible than others to tax deficiencies based on the complexity of the taxation scheme. Audits of similar companies in your industry may lead a state tax authority to run comparison data on you and your competitors, such as your percentage of taxable sales. Even being off just a little bit could lead to you being audited.
  4. A disgruntled employee – Hopefully, you have no employees that would do this to you, but a disgruntled employee that knows you are not in compliance and not charging sales tax correctly in a state or jurisdiction may report you to a tip-line. This is a fast ticket to an audit.
  5. Name recognition and general inquiries – It may just be luck of the draw, your good news or growth, but brand name recognition could incite an audit. A random drive-by past one of your locations, noticing your company’s name in the news, an auditor seeing your business at a tradeshow, all could lead to a potential audit.
  6. You have recently been audited – Jurisdictions do speak to each other. And usually, simply being audited by one does not mean all of them will be coming after you, but an audit by one state or jurisdiction could lead to another jurisdiction sending a notice shortly after.
  7. Chance – Sometimes it’s just your unlucky day. Not much you can do or say, sometimes it just happens.

No matter the reason you are selected for audit, it is  not a welcome surprise. Sales tax audits can represent a significant distraction for any business. Pulling paperwork, managing the audit, answering the auditor’s questions, and negotiating an outcome can be time-consuming at best and risky at worst. Seek a sales tax expert to act as an intermediary between you and the auditor.

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About Davis Davis & Harmon LLC – Sales Tax Experts: Headquartered in Dallas, Texas, Davis Davis & Harmon LLC – Sales Tax Experts specializes in sales/use tax refund recovery and audit defense. Our team of consultants is comprised of former Big 4 sales tax consultants and state sales tax auditors. Each of our consultants has 15 to 20 years of experience, providing our clients with access to a highly specialized team of sales/use tax professionals. At Davis Davis & Harmon, LLC we are committed to maintaining the highest standards in our talent pool. We work hard to meet our clients’ needs by ensuring that you view our firm as an extension of your company and a member of your team.

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