Business owners are likely to be subjected to a sales tax audit from time to time. Sales tax calculations can be complicated enough. The government has lots of handy investigative tools for audit selection. On your part, you should try to avoid mistakes that can increase the chances of an audit. There are sales tax consultants who use the latest in Audit Management Software can advise you on how you can avoid an audit.
Small business owners and sole proprietors have a slightly more chance of facing sales tax audits than the general public. IRS has triggers that will automatically pick a return for an audit. However, it is not necessary that if you face an audit you’ll have to pay fines or interest money. But auditing involves a lot of receipt-collection, showing old records and explanations to be made. All these are too much time-consuming. So better to keep yourself safe by following certain audit tips. We have mentioned 5 sales tax audit tips in this write up for small businesses. Take sales tax support from a sales tax consultant if needed.
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Timely and complete filing
File your tax return every year if you don’t want to raise any kind of suspicion. Do complete filing even if your business didn’t earn a profit. Incomplete or no filing can show that you’re trying to hide something. You have to register with a state where you’ll be doing business for a sales tax permit (sometimes we call it license). There you’re informed about your filing frequency i.e. how often you’ll need to file a sales tax return.
Filing frequency usually depends on the amount of sales tax you are projected to pay. Obviously, for a new business you can’t predict it for sure. You have to keep yourself informed regarding filing frequency and due date. You will be charged late penalties if you don’t file the return on time. And if you keep repeating this, you’ll mostly likely going to face an audit.
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Put the right numbers on the report
For the IRS, you are not the only source of information regarding your financial reports. Employees, vendors and others will report what you paid them. From a self-employed freelancer, IRS will get copies of W-2s and 1099s. From a sole proprietor, Schedule C should have all the profits and losses for the year. IRS will be comparing your reports to what they have on file. So always show the right figures while filing returns.
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Always file your taxes on time
Late filing incurs penalties so always file your estimated sales tax on time. Keep yourself informed regarding the due dates and make complete payments to the state. You might require filing your tax monthly, quarterly, yearly or at some other time. You are also notified about the specific date of the month by which the state must receive your return. The due dates are adjustable according to holidays and weekends. Like, if the 20th of the month was your due date and it fell on Sunday then the actual deadline will be Monday 21st. There are even tax calculation software available in the market these days for calculating the taxes with which you can easily calculate your tax.
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Never report a personal lifestyle that doesn’t match your income level
Remember that your personal tax return is also reviewed along with your business return. So don’t report a figure in your personal tax return which in no way synchronizes with your business’s income. Your business isn’t showing a profit and you’ve purchased a fancy car or a bigger home. You’re likely to be scrutinized. The cash-heavy businesses especially fail to report all of their earnings. Report all your profits so that no imbalance is shown between your personal and business tax returns.
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If you are showing an enormous change in income, support it with proper documentation
If you’re showing a steady decent amount of profits for the last few years and all of a sudden you post a huge uptick this year, you’re most likely going to catch attention. If you have to show big profits then support the figures with proper documentation. Show documents of all the steps you had taken and all the expenses made by you in the year. Put up all the receipts and invoices that will make you clear.
Conclusion
You can always take the help of sales tax consultants. The best idea is to file taxes on time. File them accurately and with integrity. Take sales tax support from various sources. Keep yourself informed regarding the deadlines.