Here's an often overlooked fact about your taxes: not only can you be audited based on income tax returns, but states can also investigate a company's sales tax compliance. And sales tax regulations can be every bit as complicated as the rules for income tax–especially at the state level.
Nobody wants the attention that comes with an audit. Marketing folks might say there's no such thing as bad publicity; however, being identified for a tax audit comes pretty close. And on top of any PR issues, there's the time used preparing for the audit, which could have been spent on something to help grow your company.
The tax experts at Avalara have identified 5 steps you can take to help ensure you stay out of the tax audit limelight. Some of them might surprise you:
Be Punctual – file your returns on time: Individual state governments set the deadlines for when you will file; this is their way of ensuring consistent communications about tax matters. And you know how it looks when someone doesn't return your calls. Besides the suspicions it might raise there's also the small matter of late penalties, so be sure you know the dates for each state where you conduct transactions.
Seriously, Be Punctual – make your payments on time: If not communicating is a signal of trouble, you can imagine what it looks like to not deliver funds. Payment is often due at the time of filing, but just as often it involves a separate step, whether paying by check or electronically. An important detail to be aware of is whether there are any processing delays for your payments–even if it's all digital. If you submit payment on the due date but there's a delay in processing the payment, you could be liable for a late penalty.
Be Precise – double-check the math: Miscalculations or variations on amounts that should be identical make number-crunchers raise an eyebrow. Then they look a little closer. Sure, it might be an innocent clerical error. But what if it's not? For the auditor's peace of mind–and your own–plan in enough time to verify your calculations.
Be thorough – document all sales tax exemptions: There are a variety of reasons why you are perfectly justified in not charging sales tax on a purchase. Governments use these policies to promote valuable transactions and to keep things fair for resellers. Tax examiners know this, but they'll want to see certificates that justify your actions. Ideally you'll be able to obtain each exemption certificate right when you conduct the sale, but even if that's impossible, you need to make sure the documentation is complete by tax day.
Be alert – verify the locations for sales tax rates: Don't trust zip codes. They are not reliable marks of tax jurisdictions. One of the most striking examples is the situation with Englewood, Centennial, Cherry Hills Village, and Greenwood Village in Colorado. These cities all share zip code 80111, but there are distinct differences in the sales tax rates across the area. The best way to ensure you're getting the numbers right is to use geo-location tools for where your transactions take place.
This might seem like a lot to manage. Unfortunately, the options are to a) make it happen, or b) show up on a tax examiner's computer screen. You can get assistance though, including powerful software for tracking all the rates and percentages and time-frames. If that seems like a useful investment to you, explore more of Avalara's solutions. And to really increase the velocity of your business, learn how your tax automation tools can integrate with other inventory, accounting, and CRM automation features of aACE 5, the best-kept secret in business software.