Accurate sales tax reporting should be an area of concern for any business that is required to pay sales tax. This is especially true for restaurants, ecommerce and retail businesses that have revenue requiring sales tax calculation coming in from multiple products and streams.
Unless carefully monitored, tracked and reported, sales tax inaccuracies can result in red flags which can lead to audits. An audit will compare total taxable sales revenue with sales that resulted in the collection of sales tax in order to compare sales tax against what a company actually paid.
State tax agencies will launch an audit when they see signs that a business is understating its reported sales, when the sales tax return filed with the state is not in sync with what was reported to the Internal Revenue Service (IRS), or when payments are repeatedly missed. Automating sales tax will help your clients avoid this costly and time consuming issue.
These tips will help you show your client potential red flags in their current process and how automation will help them avoid them:
1. The individual states where your client does business all have their own rules, rates and requirements for sales tax collection. Automating the sales tax process makes the process of keeping on top of these varied requirements so much easier.
2. Most states’ have a statute of limitations on sales tax audits of three years from the return due date or the return filing date. If you are audited, sales tax automation can simplify and expedite the process for the periods where you were not automating the sales tax function.
3. Having any discrepancies between your sales data and your sales tax returns is a huge red flag for auditors. Sales tax automation will ensure your primary source data and sales tax returns are accurate and align seamlessly avoiding mistakes, errors, and omissions in data.
4. Not charging the correct amount of tax on purchases and not reporting the accurate amounts on business purchases is another red flag. Automation takes the human error and guesswork out of this process, ensuring that you charged and paid the appropriate amount of tax on purchases and that you charge appropriate taxes on shipping, if you are operating a business that does this.
5. If your client is in a high risk industry for sales tax audits they should be aware of this. Restaurants with cash sales or small businesses with high volumes of low-priced items may be under more scrutiny than others. The same goes for new companies and sole proprietorships. Sales tax automation provides robust reporting to make substantiating the sales tax numbers simple, especially for inexperienced owners.
6. If your client is an ecommerce reseller, this can also trigger an audit because of the chain of tax issues which can be an audit concern. If your client’s business issued resale certificates, or they have a large volume of exempt sales or deductions this can be an issue that automated sales tax helps them avoid by tracking all sales taxes paid and which products are required to have sales tax paid on them.
7. Late sales tax reporting and sales tax return filing are also an issue for auditors. Delinquent filing is, of course, also a problem that can trigger an audit. Automation of sales tax will allow your client to avoid these problems with real-time data that can flow seamlessly into a return and be ready as soon as the filing deadline approaches.
There are many potential triggers for sales tax audits, but this list contains some of the most common ones that you and your client should be aware of. Automated processes that determine and calculate sales taxes, apply rates in real time, and ensure compliance for each tax jurisdiction can help businesses avoid common audit triggers such as these listed above.
Use these tips to educate your client about the best ways to avoid these sales tax audit triggers, then review the powerful automation tools available by downloading the DAVO by Avalara eBook: "The Accountant’s Guide to Sales Tax Automation."
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