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hi we're sales tax and more today we'd like to discuss sales tax audits and how you can prepare for one to begin let's discuss why you may be audited in the first place states rely heavily on tax revenue for budget funding and now with the expansion of nexus in 2018 sales tax audits are becoming increasingly common for states to find sellers who underpay or don't pay their taxes at all there are many reasons why a state may decide to audit a certain seller or business these reasons may be different for registered sellers and unregistered sellers for registered sellers there are some common red flags that may trigger an audit but an audit may also be completely random so if you're being audited it could mean the state is aware of a potential issue or it could be nothing at all some of the red flags that may trigger an audit for registered sellers include the following a pattern of filing your returns late a pattern of filing substantial amounts of exempt sales filing returns that do not balance with what the state expects to receive the use of incorrect forms the use of incorrect rates industry issues sometimes states will focus on all companies in an industry and tips from former employees competitors customers or vendors working to ensure you limit red flags will greatly lower your chances of being audited but it will not completely eliminate the possibility for unregistered sellers here are some of the ways states find companies to audit auditing of a seller's customers and seeing tax not being charged being registered for another tax type like payroll taxes and not sales tax web searches and website reviews either manually or by specialized software information sharing with the irs or other states being registered with any agency within the state and not registered for sales tax amazon sharing inventory information inquiries to u.s customs and border patrol to track imports and again tips from former employees competitors customers or vendors there are many more ways that states may choose both registered and unregistered sellers for audit but the ones we have listed are some of the most common now let's discuss the audit process the audit process will be unique depending on the state conducting the audit the auditor the seller and the fax however there is a general process you can expect if audited for example the texas controller outlines the following procedure notice of audit the seller or business receives a letter notifying them of the audit in the mail this is often accompanied by other documents such as a questionnaire that must be returned pre-audit research the auditor studies the accounts reporting history and prior audits of the seller or business taxpayer contact the auditor decides what documentation is needed from the seller or business the taxpayer should then gather and provide all documentation required by the auditor entrance conference the auditor discusses the plan for the audit with a taxpayer field work transactions are studied either entirely or by sampling the auditor should keep the seller or business informed and relay any findings exit conference the auditor explains any taxes penalties or interest owed the seller or business can ask for a reconciliation conference or an independent audit review conference for any disputes at this time finalization and review the auditor finalizes the audit and has it reviewed by their supervisor results are then mailed to the seller or business throughout the audit process it is important to maintain a good working relationship with your auditor be sure to provide any information requested in a timely manner but never volunteer information on your own you should also keep in mind that auditors can be wrong so never hesitate to ask for clarification or for their supervisor and finally if you believe the results of the audit are inaccurate you may request a hearing to amend the outcome last let's discuss how to proactively prepare for a sales tax audit when a seller or business is audited for sales tax there are typically seven topics that come into play nexus taxability and rates use tax exemption certificate management registrations sales tax returns and sales tax audit defense a large majority of the issues found during an audit can be traced back to one of these topics so it is important to understand and work to perfect each of them now by doing so you are likely to eliminate exposure and avoid many issues that could arise during a sales tax audit of these topics nexus is arguably the most important nexus is the link your connection with the state which must be present before the state can require you to collect and remit its taxes if you have this link your connection with the state then you may be required to collect and remit the state's taxes dependent upon other factors such as taxability understanding your nexus footprint is very important and is the first step towards compliance when it comes to taxability each state is unique what may be taxable in one state may not be taxable in another furthermore it is important to have a reliable source of information for rates you should then understand where the sale is sourced and understand which state's rate should be charged thorough research should be completed for both taxability and rates to ensure compliance the next important topic is use tax sales that cross a state line are subject to use tax rather than sales tax while the terms sales tax and use tax are sometimes used interchangeably the difference between the two does matter when it comes to registrations tax rates and return forms again the use of correct forms is an important part of sales tax compliance so understanding use tax is essential this is followed by exemption certificate management exemption certificate management includes the collection of certificates as well as the validation of those certificates they must be on the correct forms completely filled out and without error next are registrations and returns when doing returns make sure that the returns match the type of registration that you have the best way to limit exposure for a future audit is by being proactive make sure you have good policies in place concerning nexus taxability rates use tax exemption certificates returns and registrations by keeping these items in line you will lower your chances of ever being audited in the first place however if you do get audited having good policies in place will help limit any exposure and as previously mentioned you should also keep a professional relationship with your auditor and avoid volunteering information while audits are never fun they're very important understanding and practicing compliance in each of the topics discussed can help you to avoid issues that may arise during an audit if you require assistance in any of these items discussed let us know we'd be happy to help and thanks for watching