Tax Audits: Understanding IRS and State Tax Audits
When you get a notice from IRS for State Audit, it evokes a mix of responses and you may get frightened. If this is the first sales tax audit your business has experienced, your first reaction may be to panic, and wonder why you were chosen. If you have previous tax audit experience, you may be a bit more relaxed, but the inconvenience and disruption caused by tax audit may have you looking for ways to delay the audit until a better time.
Regardless of your reaction, there are important steps to be taken while preparing for sales tax audit. There are also serious things for you to avoid as you deal with the tax auditor. When it comes to sales tax audit preparation, and audit management it is different. It depends on each business and each state audit and these suggestions need to be evaluated in light of your specific situation and the types of transactions your business conducts.
State sales tax audits are conducted for a number of reasons. First and foremost, the states will tell you that the audit is to make sure that the state sales tax laws are being followed by the businesses. In reality, the tax audit is a significant and effective way to increase tax collections and state revenue. Although auditors are not generally evaluated or compensated on the number of audit collections they generate, the unspoken expectation is that they will collect enough unpaid tax to cover a multiple of their salary. Tax Audits improve state revenue straight through the valuations of tax, interest, and penalties paid by the taxpayer. It will also result in future increased tax payments of the business once the errors have been identified and corrected.
In addition to generating immediate tax revenue, sales tax audits also provide productive and valuable information for future audit leads. As auditor gathers more information on untaxed purchased made by from out-of-state companies, this information is further evaluated. This often leads to link inquiry from being sent to these out-of-state businesses that may be audited if it can be proved that they have the connection with the state
Finally, audits provide a very clear picture as to what types of transactions are occurring in the marketplace. States laws and regulations delay significantly from realities of the marketplace. As auditors see new sales transactions and new types of products/services being sold that do not neatly fit into the existing tax framework, they often give this data to the tax policy folks. This will further result in the change of regulations to better define the tax treatment of the transactions.
To sum it up to states audit in order to:
- Collect revenue for the state
- Make sure businesses within the state are collecting sales tax (and in the right amounts)
- Generate future revenue for the state as businesses become compliant
- Find out-of-state trades that may possibly have connection in-state
- Find out what types of transactions are occurring in the marketplace in order to make new tax laws.
Despite of all these things, the first step you need to do is to avail the service of qualified and experienced auditors. IRS – Audit- Group is a team of Tax Professionals, CPA’s and Enrolled Agents who major in in Tax Audit Representation & Resolution. Besides the IRS, agencies such as the California State Tax Audit and the Board of Equalization can also inquire about the taxes you filed. Complete the Audit process with ease and stress-free with IRS AUDIT GROUP.