Sales Tax Audit Protest Process
Once the grueling process of a state sales tax audit is over, the audit appeal or defense process begins. The state sales tax auditor has issued their findings and supporting schedule and your state sales tax lawyer or professional has given it an honest shot to resolve it with the auditor to no avail. For the state sales tax audits that we have handled or we stepped in after the assessment has been issued, the fun has just begun.
Challenging the Assessment
Challenging an audit can lead to a sticky situation. Many federal tax lawyers and tax professionals advertise that they know the state sales tax space without having the knowledge or experience to truly be competent in the area. By not knowing what they are doing, inept tax lawyers or tax professionals are doing your business a tremendous disservice by setting you back even further and creating additional time and financial burdens.
When challenging a state sales tax assessment, the most important part to get right is to send your protest or appeal to the proper place determined by the state and within the allowed timeframe. If you do not do that, the rest might not matter. After sending your sales tax protest or appeal to the right place, within the appropriate deadline (usually 30 to 60 days), you can work on challenging the facts, challenging the law, challenging the technicalities, or challenging some or all aspects of the state sales tax audit to save your business money.
Often the state sales tax auditor will get you to sign their findings and agree to the audit. This is the classic one-sided agreement that only benefits the state, not your business. There is almost never a good reason to sign the state sales tax auditor’s findings. Doing so may sacrifice critical protest rights and the assessment will be due. If you opt not to sign, the sales tax assessment will still be due, but you will have the option to protest it.
Get Some Help, or At Least Get Some Free Guidance
Should you hire a state sales tax lawyer or sales tax pro? There are some situations where you can try to take this on yourself. If you think the assessment is mostly accurate and you just want to fight the penalties, you probably can do it alone. If, however, you are unsure if it is correct, or you know it needs to be challenged you should get a state sales tax professional on your team. As the state power of attorney allows, you do not need a state-licensed attorney to challenge the state sales tax assessment. Instead, you should be looking for someone, like our team at Sales Tax Helper, to help you fight your assessment. At a minimum, call us for a free consultation and we can discuss your state sales tax assessment with you for free!
In many states, when the final assessment is issued, it is often off the auditor’s desk at that point. While the preliminary work papers present an opportunity to work out issues with the auditor, the final assessment is a completely different ball game. Unlike the audit work papers, the assessment should be challenged with the appeals office, not the local service center or sales tax auditor. Many times, the business accountant, CPA, or its tax attorney, who is not accustomed to sales tax issues incorrectly responds to the auditor.
Check Your Deadline, and Check It Again
Aside from sending the sales tax protest or appeal to the wrong place, the most crippling mistake we see on a daily basis is not responding within the allotted deadline. In most states, the response window is 30 to 60 days. The state sales tax audit assessments tell you where and when to send your protest if you want to fight your state sales tax assessment. You do not need a state tax lawyer for $500+ an hour to make sure you file your challenge on time. Failure to protest your sales tax assessment in a timely fashion can seriously limit if not extinguish your right to fight it. Check your sales tax protest deadline, check it again, and do not miss your deadline.
NOTE: Many businesses do not receive the state sales tax assessment. The business first gets wind of the problem when their bank account is frozen, or the state sales tax department has commenced collection activity. If your business does not get notice of the state sales tax assessment and the state begins collection activity you have may have an opportunity to fight the assessment. However, it often takes a creative and well-versed sales tax professional or lawyer to get the case back open. We have experience at Sales Tax Helper getting closed audits reopened for lack of notice.
Review the Sales Tax Audit’s Factual Issues
After you or your state sales tax pro determines where and when to send the sales tax protest or appeal, it’s time to evaluate the substance of your appeal. The state sales tax auditors are humans (although it may not seem like it sometimes) and they make mistakes. If the numbers are wrong, a sample is faulty, or there is just a plain error, this is your chance to point it out. More commonly this is a chance to prove that you can reconcile your federal return to your state sales tax return, you have proper exempt sales documentation, and you paid the state sales tax on your online purchases and fixed assets. Simply developing and submitting an organized package will resolve most factual issues on a protest that you were unable to resolve directly with the state sales tax auditor.
Many state auditors stubbornly refuse to compromise on penalties during the sales tax audit. If you cannot resolve the penalties with the state sales tax auditor it is likely worth protesting the penalty on appeal.
Develop A Strategy to Appeal the Law of Your Sales Tax Audit
Many businesses that have a disagreement with the sales tax auditor’s interpretation of the law assume they need a state sales tax attorney. In most cases, that simply is not the case. Most businesses do not need an expensive state tax lawyer and most state tax lawyers are not proficient in sales tax anyway. Our team strives to match your needs with the right professional, so you get the top level of service equipped with decades of sales tax experience at a reasonable price.
Sales tax has infinite grey issues as to whether a particular transaction is subject to sales tax. Coupled with the premise that a sales tax auditor is trained to assess an item if its grey, it should come as no surprise that many sales tax audits have grey issues of law at issue. In order to combat those grey legal areas of sales tax, you or your sales tax pro should start by reviewing the applicable statute, which despite what the state tells you is the law. Interpreting the law, the state revenue agency adopts rules or regulations as to how the broad law applies to several situations that commonly arise. While the state’s interpretation is respected, it isn’t gospel. From there, there are state cases, agency interpretations, and other materials that you or your sales tax pro can look to as to how the agency views a certain transaction.
Understanding what issues the state revenue department will work with you on or when you are wasting your time and money is an art onto itself. It usually makes sense to present your argument and develop the record if you need to take your issue to the next level. But, just like dealing with the state sales tax auditor on unresolvable issues, sometimes you cannot get your issue resolved on appeal or protest within the agency. If that’s the case, it’s important for your or your sales tax attorney or tax professional to understand when its worth one honest shot and then move on.
Win Your Sales Tax Audit on Technicality
On occasion, there is a fundamental flaw with the sales tax audit from a technical perspective. This is where your sales tax lawyer or professional can really earn their keep. While a traditional tax lawyer does not fully understand the oddity that is sales and use tax, our team has extensive experience dealing with sales tax audits across the country. Such focused expertise across the many states allows us to look at the sales tax audit form a completely different perspective and allows us to showcase our outside the box thinking.
Some common technicalities that should be reviewed as part of your sales tax audit assessment are the statute of limitations, tolling of the SOL during the audit, timing or the proposed and final assessments, execution of state sales tax agreements, and other technical aspects of the audit should be reviewed by someone who knows what they are doing, not just a generic tax lawyer. Recently, our team was able to eliminate over $20 million in sales tax assessments on a technical mistake in a particular state.
To Pay or Not to Pay While Challenging Your Sales Tax Assessment
Once the sales tax audit issues their findings, there may be certain amounts that you know are due. If you chose to fight your state sales tax assessment, interest will continue to accrue during the protest. You have the option to pay those amounts at any point. The pro to paying the state sales tax that you know is ultimately due is that it stops interest from running. For that reason, many state sales tax lawyers and professionals advise paying the amounts you know to be due. However, paying those amounts can hurt your settlement leverage and should not be paid in certain circumstances. Like virtually every other area of a state sales tax audit, it’s worth exploring with your sales tax pro how it should be handled but having a one size fits all approach is usually not the best fit.
Hire Sales Tax Helper to Get the Expertise You Need
If you need assistance or representation challenging your state sales tax assessment, please contact us for a free consultation. Do you need a $500+ an hour state tax lawyer on retainer? You generally do NOT need a sales tax lawyer to solve your state administrative sales tax problems.
For starters, most states, including state, do not require a state-licensed tax attorney to represent a business before the agency. Having a power of attorney with a qualified representative is often adequate to represent your business with a sales tax issue in the state. More important than the letters after their name is whether your sales tax professional is well versed and has extensive experience with state sales tax issues, is what really matters. While our team is not licensed attorneys in the state, our team has former auditors, accountants, CPA’s and experienced sales tax attorneys that have decades of experience fighting state sales tax issues.
In the end, you get decades of sales tax know-how at a fraction of the price. Instead of traditional hourly rates charged by traditional tax lawyers, we offer fixed-fee pricing and you only pay for what you need. Unlike run of the mill tax lawyers, who often only have experience with federal tax issues, our team’s expertise is with sales tax issues and state sales tax laws.
At Sales Tax Helper, we help those in need of sales tax audits, protests, and administrative litigation. More importantly, we provide services equivalent to tax attorneys at the price of a sales tax consultant. Simply put, this is what we do, and we will work hard to reach a reasonable resolution for your business’s sales tax liabilities. We welcome the opportunity to handle your sales tax issues and be part of your team!
Sales Tax Audit FAQs
You inadvertently waived a red flag or your company landed in the small percentage selected for a random state sales tax audit. These red flags include: cash-based businesses, prior audits that resulted in owed sales tax, your sales reported to the state didn’t match what you reported to IRS, a high volume of exempt sales, filing a refund claim, or a high number of credits. There’s also a possibility that your business happens to be in an industry that your state suspects rampant under-reporting. Often times, they will target industries effected by complex sales tax laws. Learn More
1. RESPOND to the notice
2. Get organized
3. Identify/Hire your audit manager
4. Notify your auditor of who they will be corresponding with
5. Compare your sales tax returns against the federal tax return
6. Test at least one month of exempt sales
7. Reconcile your sales tax payable account versus your sales tax payments
8. Review your fixed assets purchased, did you pay sales tax on them?
9. Review your purchases on your key expense accounts to ensure tax was paid on your purchases
10. Look at our complete list that explains these steps in more detail: here
Audit duration can vary dramatically from state to state and from business to business. Waiver issues aside, an audit generally takes 3-7 months to complete. Surprisingly, some audits can drag on for a few years. Time factors usually swing on the size of the company, the ability to produce reliable and organized documentation, and the level of sophistication of the business.
We all enjoy the occasional DIY project especially when it saves us money, am I right? Before opting to go that route, consider the risk vs. rewards involved. Avalara recently conducted a study and found that the average sales tax audit costs around $115,000. When facing a sales tax audit it is beneficial to have the expertise of the financial implications on your side. That is where Sales Tax Professionals such as SalesTaxHelper can save you a lot of heartache and money by avoiding a few missteps. Learn More
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