Companies are making less money in this economic downturn, which means less tax collected by the states, causing revenue collections to fall below projections.
This has created significant state budget shortfalls across the country, including Ohio. The state has done various things to maintain a balanced budget, including cutting state funded programs. Another way the state can make up for losses is through state and local tax (SALT) audits to determine if you are in compliance with state and local tax laws and regulations.
“Unpaid or underpaid state and local taxes may pose a significant risk to a company,” says Matthew Stamp, the director of state and local tax services at GBQ Partners LLC. “The magnitude of the risk depends on your size, the nature of your activities, the number of states you operate in and the type of taxes you’re responsible for. An audit assessment can have a significant impact on cash flow if you’re unaware of your filing obligations and don’t have sufficient cash reserves.”
Smart Business spoke with Stamp about what to expect during a SALT audit and how to use audit information to help increase compliance.
What role do SALT audits have in helping states generate revenue?
If the state finds that you are not in compliance with its taxes, it will issue an assessment for unpaid or underpaid tax liabilities. These taxes, which would be additional revenue for the state, would not have been identified if you were not audited. For companies, states generally target income and franchise taxes, sales and use taxes, and personal property taxes.
For companies that are meeting their tax filing obligations, the state will attempt to identify additional revenue by scrutinizing other areas. You may take a tax position that the state doesn’t agree with or fail to collect sales tax or pay use tax on certain types of transactions.
If a filing obligation exists and tax returns have not been filed, many states may audit a period of up to ten years, although this varies from state to state. You would be responsible for back taxes and extensive interest and penalty charges.
What should you expect during a SALT audit?
You need to be prepared. You should perform an internal review prior to the start of the audit to understand areas of risk and identify potential overpayments to offset any tax liabilities discovered by the auditor. You should not rely on an auditor to identify tax overpayments.
Designate one person from your company as the point of contact with the auditor. Work with the auditor to create a timeline for audit completion and monitor the progress on an ongoing basis. Information provided to the auditor should be controlled, but the auditor should not be prohibited from obtaining financial records or meeting with company personnel.
You need to understand that an auditor is just doing his or her job and should be treated with respect. Personality conflicts with auditors do arise at times, and you may request a meeting with an audit supervisor or manager to ensure the audit is completed in an organized and timely manner.
How can you work to reduce your assessment from an audit?
Prior to the final assessment, the company will have the opportunity to work with the auditor to review the initial audit findings and understand the auditor’s position. You want to make sure all the facts surrounding each transaction or tax position are clearly identified. Additional information may be offered to provide support to justify a tax position or clarify a transaction. The goal is to convince the auditor that the company’s position is accurate. The closer the auditor is to finalizing the audit, the more difficult it becomes to remove items from the proposed assessment.
If the company and auditor continue to disagree, the company will have the opportunity to appeal the decision once the assessment is issued. However, the appeal process will cost you additional time and money, if outside assistance is required.
How can you take the information from a SALT audit and use it in your company?
Be proactive. You will want to incorporate the audit findings into your current compliance processes to reduce the opportunity for future assessments. A company will never be 100 percent perfect, but you want to be in a position to increase your state tax compliance and minimize the tax risk to your company.
Understand that issues, transactions or filing methodologies scrutinized by one state will most likely be examined by another. Don’t wait for additional states to send you a nexus questionnaire or audit notice, because a lot of times that’s too late. Review your business activities by state on a regular basis so you understand where you have a filing obligation and/or potential tax exposure.