2014 - Issue 20—For many companies, it happens every three to four years like clockwork — you receive a questionnaire or letter with those infamous words "you have been selected for a sales and use tax audit." Depending on the number of legal entities a company has and the jurisdictions in which it operates, the number of ongoing sales and use tax audits at any particular time can reach an unmanageable number.
Whether a company is operating with a robust tax department dedicated to sales tax or has a small team of tax professionals handling all tax issues, the impact can be equally overwhelming. How does a company maintain operational integrity in the daily job requirements and still adequately manage multiple audits? Where do you begin? You have monthly sales tax returns due, you are likely short-staffed, and every time you look at your desk the stack of audit notification letters keeps getting higher and higher. Relax — here are a few key ideas you can use to streamline the audit process and better manage your audit workload.
Organization Is of Utmost Importance
Maintaining organization in the audit management process is the key factor to effectively managing an audit. Typically, a company with a dedicated sales tax team has individuals focused on either audit or compliance, or both. When you are inundated with audit notifications, it is best to designate at least one and possibly multiple team members (if you have the staff) to audit management. Idea ly, you should strive for consistency in the delegation of assignments. It can also be advantageous to assign a l audits within one state or within a certain business operation to one team member. Doing so a lows the team member to gain expertise in a particular jurisdiction or business operation, which can lead to efficiencies when reviewing schedules and communicating with auditors.
Once you have the audits assigned to a team member, the next step is to create a master spreadsheet listing a l ongoing audits. Helpful information on the spreadsheet should include the fo lowing information: tax type, audit period, auditor’s name, statute waiver expiration date, taxing jurisdiction, preliminary assessment amounts, comments associated with the audit, and what stage the audit is in — ongoing auditor fieldwork, pu ling documentation, etc. It may also be beneficial to prioritize each audit listed on the spreadsheet to establish which audits should be addressed first. This prioritization could depend on factors such as expiring waivers, anticipated assessments, the retirement of an auditor, etc. Having a priority incorporated within a master spreadsheet a lows team members to focus their efforts on the most important audits.
Maintain Control Over the Audit Process
Now that the audits have been assigned interna ly, it is time to focus on contro ling the flow of information that the auditor receives. The primary goal should be to make the auditor’s review of the company documentation as easy as possible. However, it is important to ensure that the company is not providing information that is outside the scope of the audit. Unless you are performing an internal audit or managed audit, it wi l be the auditor’s responsibility to perform many of the preliminary tasks involved in the audit fieldwork such as merging data received, tying control totals, validating accruals, reconciling data, etc. As a general rule of thumb, avoid providing data for periods that are not listed in the audit period. Furthermore, for local tax audits, if you are dealing with specific cities, counties or parishes, you should only provide the data associated with the jurisdiction codes related to the respective taxing jurisdiction.
What else can you do to maintain control and manage the flow of information interna ly? Design an audit checklist. This checklist can help the tax team identify key project milestones and monitor what information has been provided.
What should the checklist include? Typica ly, the checklist wi l include the fo lowing categories associated with a sales and use tax audit: data analysis and reconciliations, sampling design versus detail review, and the review of transactions. The checklist wi l also include an area where you can capture whether the task has been completed and the date of completion. Each main category wi l include subcategories or tasks related to thetopic. For example, the data analysis subcategories may include the fo lowing tasks: general ledger – trial balance reconciliation, tax reconciliation, account activity, etc. Having a checklist and consistently updating it when information is transferred a lows the team to confirm that key project milestones were completed, while also maintaining an audit trail.
Maintain Positive Relationships With the Auditors
The last and possibly most important area is responsiveness. One of the key attributes of a successful audit is establishing a good working relationship with the auditor. The simplest way to ensure that you get off to a good start is to respond to auditor requests in a timely way. Creating internal guidelines for communication can assist in this process. For example, you might begin by establishing a requirement that a l team members strive to respond to emails and voicemails within 42 hours.
Auditors are never “welcome guests,” but the company representatives should try to treat them with kindness throughout the audit process. Also, avoid placing the auditor in an uncomfortable work environment; if you have the space, place the auditor in a dedicated work area with easy access to the necessary facilities.
Lastly, plan for when the audit is complete; be prepared to take action if the audit results are overstated or unreasonable. It is also best to have an idea going into the audit of what additional taxes might be due (or potential refunds). If the audited amount is not what you were expecting, be prepared to discuss potential recourse with the auditor.
These sma l changes in corporate protocol can go a long way in creating long-lasting relationships with tax auditors and potentia ly result in a positive audit result.
Alvarez & Marsal Taxand Says:
Managing multiple audits can be a daunting task for tax departments, as some audits can be time-consuming and may require an extensive amount of attention to ensure they are completed in a timely way. When team members are organized and take the initiative to implement internal processes to help track audit progress, it helps a leviate some of the intimidation caused during the audit process.
Understanding the audit life cycle and what key tasks must be completed to perform an accurate audit are essential to contro ling the flow of information. Tax team members should be focused on providing only relevant information within the scope of the audit review to prevent the generation of inflated assessments. Most importantly, being responsive to your auditor at a l times throughout the audit life cycle can create a rapport that can last for several years to come. There is nothing better than having developed the trust and respect of an auditor who wi l be visiting you consistently every audit cycle.
As provided in Treasury Department Circular 230, this publication is not intended or written by Alvarez & Marsal Taxand, LLC, (or any Taxand member firm) to be used, and cannot be used, by a client or any other person or entity for the purpose of avoiding tax penalties that may be imposed on any taxpayer.
The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.
About Alvarez & Marsal Taxand
Alvarez & Marsal Taxand, an affiliate of Alvarez & Marsal (A&M), a leading global professional services firm, is an independent tax group made up of experienced tax professionals dedicated to providing customized tax advice to clients and investors across a broad range of industries. Its professionals extend A&M's commitment to offering clients a choice in advisors who are free from audit-based conflicts of interest, and bring an unyielding commitment to delivering responsive client service. A&M Taxand has offices in major metropolitan markets throughout the US., and serves the U.K. from its base in London.Alvarez & Marsal Taxand is a founder of Taxand, the world's largest independent tax organization, which provides high quality, integrated tax advice worldwide. Taxand professionals, including almost 400 partners and more than 2,000 advisors in nearly 50 countries, grasp both the fine points of tax and the broader strategic implications, helping you mitigate risk, manage your tax burden and drive the performance of your business.