Sales Tax Fundamentals
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5 Reasons Why Your Company May Get Audited
byFebruary 10, 2022
The word “audit” is one of the more unpleasant words in the English language if you’re a business owner or handle corporate finances. An audit can be a time consuming process where your books will be analyzed to make sure your business has been compliant. But why do audits occur? Are there certain triggers that cause an audit to take place?
We spoke to Connie Zoerink, CPA, a State and Local Tax (SALT) expert at the tax advisory firm TaxOps (and a TaxJar Partner). Zoerink has over 20 years of experience in the tax field, and filled us in on why companies commonly get audited.
Press releases, articles… or being parked at a rest stop
If you’re part of a growing company and you have some good news, it’s natural to want to spread the word. After all, it could spur additional investment in the brand, and it may also provide a morale boost to everyone at the company. But it also could be a red flag to auditors.
“If your local business journal comes out [with a story] that says, ‘This company had huge, unprecedented growth this year,’ all the auditors ears perk up and say, ‘Did we get a piece of that?’” Zoerink says.
Sometimes, businesses don’t even need an article written about them for auditors to become interested in examining their books. “Years ago, one of my clients got selected for an audit in Nebraska,” she explains, saying the company was not based there. “They were driving through the state and parked at a rest stop. An auditor saw their [businesses’] truck. There’s a rule in Nebraska that if you have a certain amount of miles driven in the state that you have nexus and an obligation to file.”
While that might be an extreme example, Zoerink said that it’s not necessarily that uncommon. “All [an auditor] has to do is see something! You can give them any reason to audit you, it can be super random,” she notes.
Acquisitions and raising funding
If a company is in the process of getting acquired, the acquiring company typically does a deep dive into the businesses’ books. (Learn more about compliance issues related to being acquired here.) “Within an acquisition, did the company being acquired do tax right?” Zoerink asks. “If they didn’t, it’s possible the acquiring company can take on the liability, depending on how it’s set up.” Not only that, Zoerink says that the acquiring company can also be audited for the entire transaction.
Earning revenues that don’t line up with a company’s industry
Revenue is a key metric when it comes to evaluating a company’s financial statements. But it’s also key for auditors when they’re deciding whether to audit or not. “Auditors have industry guidelines,” Zoerink says. “For example, if you’re a software company, they’d expect to see a certain amount of sales or use tax [remitted] based on your revenue.” If it diverges too much from the industry standard, it’s a red flag that could trigger an audit.
If you have been audited before
It seems like a Catch-22 to say that the most common audit trigger is to have a previous audit. But that’s the reality. If there’s any indication that something that may have missed taxation, whether it be an acquisition or a new business, Zoerink says that auditors will audit again. “Most auditors frame the audit as, ‘We want to make it a learning experience for the taxpayer,’” she says. “They’re usually making sure that everything is on the up and up.”
And if you’ve been audited before and your business had to pay any money, Zoerink says the odds are that the auditors will return, again and again. “As long as they continue to get money, it’ll be a continuing audit until you clean up your books,” she says. How do companies stop this from happening? Zoerink says that when there are indications that the company is paying tax up-front instead of waiting to get audited, the audits will cease.
Making misleading statements around registration
Knowing when to register for a sales tax license is a question your business must determine based on a number of factors, including the home state where your business is based, and whether or not you sell on marketplaces. (We take a deeper dive into these questions in this article.)
Some companies may earn significant revenue in a state without collecting and remitting sales tax, and then only apply for a sales tax license long after it was required. This action has consequences. “If you put on your registration that you just started doing business and you didn’t, they can say, ‘No, we believe you’ve been here for a while,’ and audit you,” Zoerink says.