During fondly remembered times of economic boom, tax audits were primarily designed to bring long-time scofflaws to justice. A good old fashioned audit would not only catch a “bad guy”; it would provide an example to frighten other companies into compliance.
The objective of an audit today is less complicated. It’s all about the money.
Audits have become a foreseeable reality for business owners. They occur with a predictable randomness that hints that the goal is less punitive justice than a steady source of revenue. It has been reported that a company doing business in California has a 20% chance in any given year to be audited. That means an audit once every five years on average.
The temptation is obvious. According to Reuters, New York State sales taxes for 2011 made up one quarter of the $101 billion in taxes collected by the state. The state is aware that there is a significant quantity of unreported or underreported sales going on and they have a healthy sized staff of auditors eager to go out and find it any way they can.
The days when a state would assign an individual to review returns for abnormalities at random by comparing past year’s returns are gone. The digital age has made it easy for states to detect the red flags that can trigger the auditing process.
Today, states are making use of the vast data available at the virtual fingertip. Electronic tax returns, or e-filling, has made it all the easier to mine and sort data. Automated programs can cross-check vendor records, compare reported sales against credit card merchant reports, analyze expected income against what is reported based on economic trends, and check for other taxes – like payroll taxes – paid to states a company isn’t registered in.
States are also making more use of whistleblower programs and awarding percentages of any money flushed out from a successful audit as compensation. It isn’t uncommon to see awards in the millions.
A 2010 Thomson Reuters survey found that 87% of business reported an increased number of tax audits while just over one-third of the same companies had taken no steps to insure they remained compliant with state tax laws.
Once a company is subjected to a field audit, where the auditor visits for a period of days and thoroughly goes over the books and conducts interviews, most businesses have a greater than 70% chance of paying extra back taxes and penalties said an Accounting Today statistic from 2012.
According to the Tax Executives Institute, an audit will cost the average company $34,000 in penalties over and above the recovered underpaid taxes. To the state, this is found money.
Even though an audit is just about a forgone conclusion at some point in a company’s lifespan, there are ways to reduce the risk and minimize the economic impact of one. Outsourcing to a tax rate provider such as Zip2Tax will show your auditor that you are serious about making sure you are charging the correct sales and use tax rates. Outsourcing tax rates is not only cost effective; it means you don’t have to devote one or more employees just to the rate and jurisdictional updates.
Call us today for a free evaluation and we’ll show you just how painless sales tax compliance can be.
Check out this article for steps to help you survive an audit
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