Use of Reverse Audit
In our law practice we are often asked about the reverse audit strategy and whether it might be good to do in a certain case. The answer is Yes, quite often it is a good thing to undertake when there is the suspicion that sales and use taxes may have been overpaid. The sales and use tax reverse audit undertaken by a tax lawyer or CPA mirrors the kind of approach taken by the state’s sales and use tax auditors. The whole point of the reverse audit is to of course help the taxpayer be in compliance with state tax laws.
Goals of a Sales and Use Tax Reverse Audit
Like the federal income tax, the state sales tax procedure is set up to be self-assessing, meaning the taxpayer audits his own records and pays what his records and the law says he owes. This is true for when the tax is paid in the first place. A reverse audit is accomplished by going back over how this was done, what records were sampled, and the extent of sampling, which might have been error-prone.
The sales and use tax reverse audit conducted by tax lawyers and CPAs mirrors the sales and use tax examinations conducted by state tax auditors, except the lawyer or CPA is seeking to identify and seek refund of overpayments of such sales and use taxes.
Objective of a Sales and Use Tax Reverse Audit
The goal of recovering overpayments of sales and use tax can is often realized by our tax lawyer or CPA auditing a company’s payments of use tax and sales and use tax paid to a company’s suppliers for purchases that might qualify for certain tax exemptions.
Over the past several years we have seen an upswing in state tax auditors denying tax exemptions and charging taxes on items that are normally exempt. If your company is under-utilizing a first class sales and use tax audit system then you may be allowing tax to be wrongly paid on purchases and as sales tax billed to customers on sales. It is most often the purchaser who has the responsibility of claiming the exemption. If your accounts payable group is not properly directed, sales and use tax may be erroneously paid to suppliers.
Please remember we can help with this kind of audit, the reverse audit, and that we can probably and will save you and your company money by implementing proper internal audit procedures and guidance for your own employees when dealing with these issues.