sales and use tax audit strategies -...

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Sales and Use Tax Audit StrategiesSales and Use Tax Audit StrategiesAnticipating Auditor Requirements for Documentation, Samples, Nexus and More

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, OCTOBER 20, 2011

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

James Tauber Managing Director WTAS ChicagoJames Tauber, Managing Director, WTAS, Chicago

William Ault, Director, Crowe Horwath, New York

Tom Johnson, Director, Ryan, Fort Lauderdale, Fla.

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S l d U T A dit St t i Sales and Use Tax Audit Strategies Seminar

Oct. 20, 2011

William Ault, Crowe [email protected]

James Tauber, WTAS [email protected]

Tom Johnson, Ryan [email protected]

Today’s Program

Preparation For the Audit[James Tauber]

P d l A dit A t /Mid t M t

Slide 7 – Slide 16

Slid 17 Slid 21Procedural Audit Aspects/Midstream Management

[William Ault]

Current Auditor Priorities



[Tom Johnson]

Alternatives To The Traditional Audit Process[William Ault]

Slide 27 – Slide 29[William Ault]

After The Audit[Tom Johnson]


PREPARATION FOR THE James Tauber, WTAS LLC

PREPARATION FOR THE AUDIT

Obj i F Thi S iObjectives For This Section

• Assignment of auditors

A di ’ di h• Auditor’s pre-audit research

• Your pre-audit preparation/research

• Initial contact with auditor

• Preparation for the opening conference

8

State Procedures For Assigning Auditors

• Capacity

G hi i i h / d• Geographic proximity to the taxpayer/records

• Industry experience

• Overall experience relative to the complexity/size of the

company

9

Scope Of Auditor’s Pre‐Audit Research

• General informationGeneral information

― Google

― Company Web site

― Public financials

― Advertising (Yellow Pages, billboards, representatives, etc.)

― Press releases addressing recent activity (e.g., dispositions, acquisitions)dispositions, acquisitions)

― Visit retail locations

― Store

― Retail Web site

10

Scope Of Auditor’s Pre‐Audit Research (Cont.)

• Other tax filings

― Tax returns

N ti― Notices

― Statement of accounts

Nexus questionnaires― Nexus questionnaires

• Prior audit workpapersPrior audit workpapers

11

Your Pre‐Audit Preparation/Research

• Audit starts before the auditor callsAudit starts before the auditor calls

― Know where the skeletons are

― Credit/refund opportunities

― Consider impact of sampling methodologies and/or sample periods

― Know what issues have occured and how they could affect the audit

― In what condition is your exempt sales documentation?In what condition is your exempt sales documentation?

― How long it will take to get the required information?

― Impact of recent changes in law for potential exposures/opportunities (e.g., amnesty)

12

Your Pre‐Audit Preparation/Research (Cont.)

• Develop a proposed audit plan/work program

C i ti t th b i• Communication to the business

― Let information resources know that you will be contacting themg

― Let the facility know there will be an auditor in the house

― Remind employees not to talk to or around the auditors

13

I i i l C Wi h Th A diInitial Contact With The Auditors

• Confirmation of companies and periods to be audited

• Confirmation of information requests and the request process• Confirmation of information requests and the request process

• Confirmation of timing of field audit and anticipated return visits

• Inquire about their level of audit and industry experience

• Discuss the auditor’s plan and address any gaps compared with your • Discuss the auditor s plan and address any gaps compared with your

plan

• Set the tone

14

fPreparation For Opening Conference

• Develop an outline of what to cover

― Timing

― Records/information requestsRecords/information requests

― Rules of the road

― Communication plan

― Process for resolution of issues

• Determine availability of requested documents

B f ili i h i /• Be familiar with tax requirements/processes

• A few words about sampling agreements …

• Determine your rapport with the auditorDetermine your rapport with the auditor

15

I SIn Summary

• Be prepared • Be prepared ...

― Know your issues

― Have your resources lined upHave your resources lined up

― Review your documentation

• Develop an audit plan …

• The more you prepare in advance …

― The smoother the audit will go

― The more likely you will achieve good results

16

PROCEDURAL AUDIT William Ault, Crowe Horwath

PROCEDURAL AUDIT ASPECTS/MIDSTREAM MANAGEMENT

Reviewing Questioned InvoicesDuring The Field Audit

• Managing an experienced tax auditor’s negotiation strategyManaging an experienced tax auditor s negotiation strategy

― Leave an auditor with the files or check in regularly?

― The risk of surprise and a weaker defensive position

His/her time production expectations and risk of an assertion of no ― His/her time production expectations, and risk of an assertion of no cooperation

― File copies vs. pulling the invoice and contract again

Mitigate the risk of the roving tax auditor― Mitigate the risk of the roving tax auditor

― When to ask for draft workpapers

• Do I always answer their questions on the spot?

― Three truthful answers, one resulting in tax and the others in non-taxability

― Checklist for all questioned invoices: Contract, PO, complete, geography, use tax, audited

dl d d ― Bundled transactions and accounting entries

18

Reviewing Exemption Certificate Records

• Proposed exception items resulting from the test of exempt sales

― Review shift of burden of proof

― Can we exclude based on nature of product/service?Can we exclude based on nature of product/service?

― Can we exclude based on destination?

― Resale or exemption certificate is missing.

― Obvious reseller or obvious exempt user

― Not-so-obvious reseller or exempt user

Mi i ifi d h ll i ― Missing certificate, and the reseller or exempt user is no longer in business

― Contractors and capital improvement certificates

― What to do with a good faith challenge?

19

Audit Sample And Projection Changes

S l b l i d t ti i ?• Sample becomes voluminous and too time-consuming?

― Expenses, sales, fixed assets

Reduce block sample period― Reduce block sample period

― Review vendor reports before invoices are pulled - obvious vendor elimination

― Multiple purchases from same vendor

― Projecting error rates over a representative population

• How often is a block sample truly significantly distortive?

• Credits and the sample error rate

20

R l F E i Th A diRules For Engaging The Auditor

• Dealing with mid-audit problems: When and how do you go over their head?

― Inexperienced or incompetent tax auditor

― If passive: Do you have the resources to effectively conduct the audit for them?

― If aggressive: Need for paper trial of unreasonable behavior

― Fundamental technical disagreement - Our sales are NOT taxable!g

― No agreement on documents to be produced

― Auditor leaves department

Th i t • The point person

• Set a pattern early on to mirror their negotiating leverage model

• Agree to disagree on reasonably open items

• Setting the stage for a penalty waiver

21

CURRENT AUDITOR Tom Johnson, Ryan

PRIORITIES

h d kWhat Auditors Are Looking For Now• Impacts of short-staffing and reduced experience at revenue agenciesp g p g

― Sending entire assessment from the field to next level of appeal

― Less field expertise means more items for protest― Less field expertise means more items for protest.

― Learning the protest process

― Letters with revenue agency

― Informal protest

― Formal protest

Internal staff cost for audit ― Internal staff cost for audit

― External consultant cost

― Pressured to close more audits

― Measured or scored on audits for performance

23

What Auditors Are Looking For Now (Cont.)― Making it challenging to include overpayments in assessment,

as revenue agencies would prefer you file a tax refund or take a credit

― Perception of being not productive

― Require significant paperwork to justify the overpayment, in an effort to encourage this be submitted via the refund process

― Abatement of penalties

― Tiered system to determine percentage allowed

Not as willing to grant full abatements― Not as willing to grant full abatements

― Grey areas

― Not willing to allow vs. what has been allowed in the past

― Examples: Fabricated cost and rent for book purposes (FL)

24

What Auditors Are Looking For Now (Cont.)

― Trends with an impact, such as "Amazon taxes"

Affili t ― Affiliate nexus

― More aggressive on issues

New sources of tax revenue― New sources of tax revenue

25

What Auditors Are Looking For Now (Cont.)

― Takeaways for this section

L kill d dit ld b i b t k― Less-skilled auditors could bring about more work.

― Familiarize yourself with electronic data being presented to the auditor prior to the delivery.p p y

― Only provide what is asked for; too much may trigger review of other areas, accounts, etc.

― Credits and overpayments

― Why take in the current audit period vs. taking as a credita credit

26

ALTERNATIVES TO THE William Ault, Crowe Horwath

TRADITIONAL AUDITOR PROCESSPROCESS

Could A Managed Audit Be Valuable To You?

• What is a managed audit?

• Qualifications for, statutory benefits, formal agreement, process and reviewprocess and review

• A review of the programs in selected states

― California

― Connecticut

― Texas

• Risks

― Significant time reviewing invoices and contracts

― Review vs. a re-audit by the department

28

Could A Managed Audit Be Valuable To You? (Cont.)

• Managed audit strategies and other benefits

― Multiple entities = Multiple benefits

U th i dit l k― Use the prior audit cycle workpapers

― Net time savings from a well-planned audit

Advantage of good faith bullish positions on unclear ― Advantage of good faith bullish positions on unclear transactions

― Agree in advance on workpaper format in detail

― Seek expert review of workpapers before submission

― Seek tax auditor review in steps, where possible, to avoid isurprises

29

AFTER THE AUDITTom Johnson, Ryan

Af Th A diAfter The Audit• Preparation for and conduct of the post-audit conference

― Outline your issues

― Pay assessment to stop interest (amnesty programs)

― Refund upon completion for items removed from assessmentRefund upon completion for items removed from assessment

― Know your audience

― Are you dealing with field auditor or next level?

― Taxpayers know their issues, accounting systems, etc. but need to convey the message in simple terms (e.g., resale/exemption, statutory exemption)

Exhibits binders tabs ― Exhibits, binders, tabs

― Know your deadlines

― Minimize the number of extensions requested

― Not as willing to extend deadlines

― May have to move to next step within the protest process31

Af Th A di (C )After The Audit (Cont.)• Resolving auditor error and areas of disagreement

― Do as much as possible at the local level to resolve the issue with the auditor and his/her supervisor

Technical letters and prior case decisions to substantiate ― Technical letters and prior case decisions to substantiate your case

― Depending on the history, issue(s) and personalities involved, it may be more beneficial to move to the next step in the protest process.

― Local authorityy

― Revenue agency authority

― Compromise vs. public notice

― Audit Resolution

32

Af Th A di (C )After The Audit (Cont.)

• Takeaways for this section

― Be prepared with your issues, but also be persistent

― Look for credits, overpayments, enterprise zone refunds, bad debt allowances and statutorily exempt items that may ultimately reduce the assessment.

― They may want to compromise.

― Don’t miss a deadline

33

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