The following is designed to help businesses perform successful internal reviews and identify areas where overpayments are likely to occur.
Establish an audit plan
The first step in a successful internal audit is an audit plan. At a minimum, this plan should accomplish the following:
- Select an audit team, with representatives from operations, MIS and accounting
- Define the audit scope
- Identify the records to review and sampling/testing techniques where records are too numerous for individual review
- Review prior tax or financial audits and the issues arising therein
- Identify significant changes in operations over the past three to five years
- Summarize recent changes in tax law and note the statute of limitations
- Identify changes in tax accounting software or systems
- Review prior tax returns
Without a clear audit plan and a thorough understanding of the law, business operations and accounting systems, the chances for a beneficial result decrease dramatically.
The audit plan should also note which taxes and tax savings are most likely to affect the business’s bottom line. For example, it may not be cost effective to spend time documenting a business’s qualification for a previously unclaimed income tax credit if the business has a net operating loss. Property taxes and sales taxes are not dependent upon profitability, therefore a review of these taxes may be more productive.
It is crucial that an internal auditor understand business operations in the performance of an audit. Business facility tours and staff interviews ensure a thorough understanding of business and accounting operations.
Tours and interviews will also allow the internal auditor to anticipate the reactions of an external tax compliance auditor, possibly reducing the risk of assessment.
Income tax savings
Georgia offers numerous income tax credits, and the internal auditor should note if the business has:
- Employer-sponsored retraining or basic skills training
- Net increased employment
- Employer-sponsored child care
- Employer-sponsored transportation
- Research activities
- Relocated or newly established headquarters
Sales and use tax savings
When reviewing sales and use tax records, the auditor should also look for duplicate vendor payments, overpayments or fraudulent payments. At the end of the audit, a tax matrix defining the tax treatment and categorization of purchase transactions should be established. A tax matrix can reduce future compliance time and expense, and improve compliance.
Property tax savings
In reviewing real property tax records, the auditor should inspect the county property record to make sure it accurately reflects the property. The auditor should also request the most current report of the sales ratio study for the county.
The information on this study can substantiate a lack of uniformity. When reviewing the personal property tax records, the auditor should remove unproductive assets from the tax records and financial records. The residual value of this property can often inflate the tax burden.
During the audit, when an overpayment is identified, source records should be documented along with the relevant authority in preparation for refund claims. This documentation should be maintained throughout the audit to prevent duplicate research during the refund claim.
Once all of the records have been reviewed, it is important to document the results and create a useful audit index. An internal audit can improve external audit efficiency. Records previously reviewed will have inconsistencies properly restated, misfilings correctly refiled and improved organization.
Even if it does not lead to a Picasso, an internal audit will leave the business in a better position, both operationally and in the face of a tax audit.
Chris W. Compton is an associate with Gambrell & Stolz. His practice areas include federal, state and local taxation; corporate law and municipal finance.