Sales Tax Audits: Why Experienced Accountants Avoid Providing Audit Representation
As a tax defense attorney, I represent a significant number of clients in state sales tax audits, particularly in my home state of Illinois.
I should explain that this article is not a criticism of accountants. In fact, it has been my experience that the best accountants protect their clients by referring the sales tax representation to a tax attorney.
The Temptation to Represent Clients is Real
CPAs want to please their important clients. If that means the accountant must prepare sales tax returns, the accountant is happy to provide that service. So what happens when those sales tax returns become subject to state audit? The accountant wants to protect the client from bad audit results.
But what if …
-What if the client did not report all of its sales, and the accountant knew?
-What if there was no good accounting for cash sales, because no reliable system was used, and the accountant still prepared the sales tax returns?
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What if the CPA made a “sensitive” judgment call that needs an effective legal argument to avoid a large audit change?
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What if the auditor suggests that the accountant should also be a responsible party?
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What if the auditor was extremely aggressive, and defending this treatment may need some legal protection?
5 Big Reasons Why CPAs Must Avoid Providing Representation
Most accountants understand why they should never be the representative. Why? Here are 5 common reasons why CPAs should avoid providing representation for a sales tax audit:
1- The accountant’s self-defense – Audit representation forces the accountants to defend their own work. Their numbers, their methodology, and even their documentation suddenly become a new problem for the accountant. And most often, because the accountant did not invest much time into reporting the sales taxes, they must rely on someone else’s numbers, methodology, and documentation.
This is even more of a problem when there are unreported cash sales. This is especially dangerous in restaurants, bars, and consumer retail, where cash is unavoidable, but not always tracked perfectly.
The tax attorney should present the defense independently. Because think of what happens when you defend yourself over your client …
2- The accountant’s ethical conflict of interest – If the auditor finds underreported sales, either the client or the accountant gets blamed by the auditor. Either way, it’s a problem for the accountant. It exposes the accountant to the risk of an auditor’s finding that “you knew or should have known” (also called “constructive knowledge”).
Even if the accountant did nothing wrong, the appearance of defending their own work is enough to create this conflict exposure.
It is a huge advantage to both the client and the accountant to avoid the ethical conflict and have a common defense that protects both against other legal exposure.
3- The accountant’s low reward – Sales tax audits are high-risk and low-reward for accountants. The representation is provided as a matter of goodwill or is heavily discounted. And the number of hours invested is hardly worth the very limited fee, just to protect the relationship.
Instead, when the accountant asks the tax attorney to protect the client, this also helps protect the accountant-client relationship.
4- The accountant must avoid becoming the “fall guy” – This is the “unspoken” reason. No matter what the result, sales tax audits can damage client trust. If the accountant defends the sales taxes successfully, the client asks why the audit happened in the first place. But if the accountant gets a really unfavorable result, the client automatically blames the accountant. The accountant becomes the fall guy when there is no attorney buffer between the two to protect the relationship.
No matter how good the accountant is, without an attorney buffer, the CPA becomes the easiest person to blame.
It protects everyone when the tax attorney can present the defense independently.
5- Should the accountant practice law? – Audit defense is not forwarding copies of bank statements and point-of-sale reports to the state’s exam agent. Effective audit defense is a legal process, not an accounting service. Usually, in sales tax audits, very little accounting or reconciliation is provided by the representative.
Instead, effectively defending an audit requires defending evidence, explaining both the client’s and the accountant’s actions, arguing regulations and state law, and arguing methodology. These are not accounting skills. This is a law practice.
(Plus, attempting these activities is how accountants lose their licenses!)
Sales Tax Audits & CPA, IRS Tax Attorney (Naperville, IL)
Experienced Accountants Know that Good Lawyering Pays for Itself with Audits
Favorable audit results come from experienced lawyering.
Again, the CPA wants to protect his relationship with the client. That means, to some degree, being the client’s gatekeeper. In that protective role, experienced accountants prefer to hand off sales tax audits to attorneys. This protects their reputation, rather than threatens it.
The most respected accountants in Illinois do not see legal referral as losing control of the client. Instead, they see it as protecting the client and safeguarding their own professional reputation.
The accountant’s best practices include:
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Resisting the temptation to provide statements to the auditor. When the accountant speaks with the auditor, information harmful either to the client or the CPA (and sometimes both) is unknowingly shared.
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Only referring to an attorney with a strong reputation and background in handling state audits. If possible, speak with the attorney first to communicate the audit concerns.
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Confirming with the tax attorney that the legal fees must reflect the size of the audit and be fair to the client. (Because the CPA’s reputation as a financial problem-solver is also at stake.)
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Asking for periodic updates, so that the accountant may timely inform their client of the progress. Everyone must respect that the CPA must be the conduit and gatekeeper.
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Being open to communication with the tax lawyer. Often, the audit results turn on facts related to everyone’s understanding, and everyone’s conduct. The lawyer is there to protect the client and his business. This often includes the CPA-client business relationship.
For further information, I can be reached via email at info@biztaxcorp.com.
The author, Anton Collins, Tax Attorney (Former IRS), is the principal owner of Tax Law Offices Inc., based in Naperville, IL. The firm’s website is www.StopIRSProblem.com.
FAQs
1. Why shouldn’t a CPA represent a client in a state sales tax audit?
A CPA has an inherent conflict of interest when defending their own prior work. If an auditor finds underreported sales, it becomes unclear whether:
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The client withheld information
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The accountant made an error
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A willful misstatement occurred
This exposes both the CPA and the client to:
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Ethical conflicts
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Legal risk
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Damage to the professional relationship
An independent sales tax attorney removes those conflicts and provides legal defense the CPA cannot ethically or legally offer.
2. Can a CPA get in trouble for representing a client during a sales tax audit?
Yes. When a CPA argues audit methods, challenges regulations, or disputes an auditor’s legal conclusions, they may cross into the unauthorized practice of law, which is prohibited.
Additional risks include:
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Being viewed as having “known or should have known” about underreported sales
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Potential exposure to claims of willful knowledge
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Ethical conflict of interest
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Risk to the CPA’s professional license
3. Why do auditors compare Form 1099-K numbers to reported sales in restaurant and retail audits?
Form 1099-K reports credit card payments only, not cash.
If reported sales match the 1099-K but show too few cash transactions, auditors assume cash was underreported.
The state may then:
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Estimate cash sales using its own formulas
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Increase taxable sales and sales tax due
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Assess penalties and interest
A skilled tax attorney can challenge the state’s percentage assumptions and methodology.
4. What is the biggest risk for accountants during a sales tax audit?
The largest risk is the ethical conflict of interest created when:
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A client’s income is materially understated, and
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The CPA’s prior work becomes part of the audit findings
The CPA must then either:
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Defend their own work, or
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Advocate for the client
Either choice creates exposure.
An attorney eliminates this conflict by presenting an independent defense that protects both the accountant and the client.
5. How does bringing in a tax attorney protect both the client and the accountant?
A tax attorney provides:
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Independent legal analysis
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Authority-based legal arguments
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Professional audit representation
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Defense of facts, documentation, and methodology
This protects:
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The client’s financial outcome
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The accountant’s reputation and license
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The accountant–client relationship
The attorney manages negotiations, confrontations, and legal arguments, allowing the CPA to remain uninvolved in defending their own work.
6. Do I need an attorney for a sales tax audit if my accountant already filed the returns?
Yes. Sales tax audits involve legal interpretation, not just accounting. Many taxpayers discover too late that:
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The accountant who prepared the returns is not trained in legal defense
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The CPA inadvertently creates a conflict of interest by defending their own filings
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The audit outcome becomes less favorable without a legal strategy
A tax attorney builds a fact-driven, legally grounded defense that protects the client and preserves the accountant–client relationship.