What Happens in a Sales Tax Audit
(The 3-Stage Process)
How do you defend yourself in a state sales tax audit? Here are 3 stages to help you plan for the audit process:
SALES TAX AUDIT PROCESS
You receive a letter from your state, if it has a sales tax. Perhaps your business handles a lot of cash. The state will collect a wide assortment of support documents from you, plus interview you and possibly others.
The state will collect a wide assortment of support documents from you, plus interview you and possibly others.
The reason why your business is being audited is the state might challenge your actual Gross Sales against what you reported on your Sales Tax Returns. (In Illinois, sales taxes are reported on Form ST-1.)
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Possibly you have not filed all of your state sales tax returns.
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Possibly your sales per income tax return does not match your sales per state sales tax return.
Be careful. At this level, business owners could either make a false statement to the auditor or admit to making a false statement on the tax returns. Either of those acts could be considered a criminal violation, so be certain to speak through a lawyer.
There is the presentation of documents, the interview, and the argument of law as applied to the provable facts. The lawyer also argues why you should avoid penalties. Here is where your lawyer really protects you, advocates for you, and helps you achieve a good audit result.
Timeline. Overall, the timeline could range as short as 3-6 months, or up to 2 years. In that case, the state will request a “Waiver of Statute”. This is your voluntary extension of its allowable time to audit and propose changes.
Afterward, both parties hope to reach an agreed conclusion.
Sales Tax Audit Process, IRS Tax Attorney (Naperville IL)
APPEAL PROCESS
There are some sales tax audits in which the business and attorney just cannot agree with the state auditor. In those cases, the business has an opportunity for Appeal.
Every state that has a sales tax also has audits. Those states also have an appeal process. Some appeals may be created simply by orally requesting an Appeal. Some are requested to write a letter, while others require certain forms to be filled in. The process is usually more structured than the audit, often with deadlines and document limitations.
If the business cannot reach an agreement with appeals, there is still a higher level of challenge in most states. This higher level often involves a “judicial” (or “in-court”) process. It normally requires a formal document of some sort, like maybe a Petition, to be filed.
Timeline. This Appeals process often takes between 6-12 months to complete. In that case, the state will require a “Waiver of Statute” for you to be granted an Appeal.
What Happens in a Sales Tax Audit (The Process)
RESULTING INCOME TAX AUDITS
Once the sales tax audit (and Appeal) is completed, and there was determined to be some unreported income:
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The state will audit your business income tax return, if applicable. If the state determined that you had more income than determined in the sales tax audit, then it will seek the same result for calculating the business’s Income Tax.
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After auditing the business’s income tax return (like for a corporation, an LLC, a partnership, or even a sole proprietorship), the state will examine your personal income tax return. The result is based primarily on the increase of business income determined from the earlier two audits.
Timeline. This process is completed in a rather short amount of time, from 0-3 months until completion.