6 Tips for Surviving a Sales Tax Audit

Rex Halverson
  1. Have a Game Plan Before the Auditor Calls – Understand that the auditor has time constraints and will appreciate your efforts in promoting a quick and easy audit. You should anticipate and prepare for potential issues and questions that an auditor may have. That is to say, you must strategize. Pre-audit your business and identify potential issues. Don’t forget the skeletons in the closet. Consider alternative but workable responses and strategies to the auditor’s proposed audit methodology. If you think you will need professional assistance, i.e., a state and local tax attorney or CPA, call him or her now without delay.
  2. Remember the Golden Rule When Dealing with the Auditor – Treat him or her as you would like to be treated. That is, treat the auditor as a real person and not an adversary. Also, be prepared, kind, respectful and professional.
  3. Control the Audit From the Get Go – Designate an audit coordinator and require the auditor to give all information and document requests to the coordinator. Provide the auditor with adequate workspace that is away from other employees.
  4. Answer the Auditor’s Questions, But Say No More, No Less – Give the auditor exactly what he or she requests, but do not volunteer ANY extra information or documents for the auditor to scrutinize. Do not invite the auditor’s suspicion; instead, deliver verified facts confidently to the auditor.
  5. It is far Easier to Keep a Questioned Item off the Auditor’s Worksheets by Providing a Good Explanation Than to Get it Removed Later – In other words, similar to a diet, it is easier to keep it off than get it off. Also, don’t forget to request credits for any errors made by your company when filing the original tax returns.
  6. Exhaust All Administrative Remedies Timely – Make sure that you timely respond to all requests for documents and notices from the taxing authorities. Your appeal depends upon it. After the audit, request a complete set of the auditor’s work papers. In California, you may appeal to the Board of Equalization once a Notice of Determination is issued. To do this, you must file a Petition for Redetermination within 30 days of receipt of the Notice of Determination. Request an oral hearing with the Appeals Unit and a formal hearing before the full 5-member Board. If you do not prevail at either level, you can appeal to a Superior Court but your complaint must be filed in a county that has an office of the California Attorney General. Finally, don’t forget to consider making a Settlement Offer or an Offer in Compromise. This will not impact your Petition for Redetermination except to hold it in abeyance while the BOE considers accepting the Settlement Offer or Offer in Compromise. If the Settlement Offer or Offer in Compromise is rejected, your appeal remains intact.