Facing major budget gaps, state revenue officials across the United States are leaving no stones unturned as they try to collect unpaid taxes. Given the greater scrutiny from increasingly aggressive tax authorities, mid-sized businesses can prepare for possible tax audits by reviewing their sales-and-use tax obligations and evaluating their compliance processes.
Several strategies provide mid-sized businesses with the opportunity to reduce their sales-and-use tax liabilities and significantly improve their compliance processes:
• Conduct a reverse audit to identify and recover tax overpayments, missed credits, exemptions, or refund opportunities.
• Perform a sales-and-use tax compliance review to assess compliance with state tax laws and regulations.
• Establish managed compliance agreements by using state-approved models to estimate use tax.
• Participate in voluntary disclosure and tax amnesty programs, where available, to correct past mistakes.
• Determine if it makes sense to register with the Streamlined Sales Tax Registration System, a multi-state initiative that facilitates uniform tax calculations and collections.
These strategies, described in more detail below, may help your business comply with its tax obligations and, therefore, stay out of trouble with tax authorities.
As state officials step up tax enforcement, they’re conducting an increasing number of sales-and-use tax audits, reviewing businesses to determine whether they properly collect and pay state sales-and-use taxes. But sometimes businesses overpay, not underpay, taxes. Many retain tax professionals to conduct sales-and-use tax “reverse audits,” which seek to identify and recover tax overpayments remitted to suppliers or filed directly as self-assessments of use taxes.
A business can recoup erroneously paid sales-and-use taxes by reviewing its self-assessment of use tax, as well as analyzing the sales-and-use taxes it remitted to suppliers on tax-exempt purchases. Normally, the buyer is responsible for claiming an applicable tax exemption. However, if the buyer doesn’t claim the tax exemption, the supplier will charge sales tax. Many companies have their accounts-payable department identify exempt purchases, but they may occasionally pay taxes in error. An effective reverse audit can yield increased cash flow, more efficient compliance processes, and reduced penalties and interest.
Sales Tax Compliance Review
Performing a sales tax compliance review can help a business determine how accurately it’s complying with sales-and-use tax laws and regulations. This review helps ensure the business has adequate processes and procedures in place for efficiently determining and reporting sales tax and that it completes its tax returns accurately and on deadline. The review includes an evaluation of whether the business could benefit by using state-approved tax estimation models or third-party software to make the tax reporting process easier. Because this review requires time, expertise, and other resources, a business may want its tax and accounts payable departments to work with a professional tax consultant who can provide a unique perspective on how state revenue agencies are treating other similarly situated taxpayers.
A typical review analyzes a sample period of the business’ accounts receivable, accounts payable, tax payments, and related accounting transactions to determine whether the business is underpaying or overpaying (or both or neither) sales-and-use taxes. If underpayment is detected, the company and its consultants can work with state tax authorities to file amended returns and negotiate a reduction or elimination of penalties. If overpayment is detected, the company can seek to identify and recover erroneously paid sales-and-use taxes as would happen in a reverse audit. After tidying up past deficiencies, businesses often turn their attention to improving compliance processes.
Managed Compliance Agreements
Many state revenue agencies are receptive to businesses reporting use tax on an estimated aggregate basis using formulary percentage-based models. Instead of plowing through hundreds or perhaps thousands of vendor invoices each reporting period to determine reportable use tax, many businesses employ state-approved estimation models.
By starting with a representative sample of purchasing activity, businesses work with state revenue agencies or their tax advisors to establish taxability percentages for certain agreed-upon general-ledger accounts. After the percentage models are fully developed, the business applies that same percentage to the select general ledger accounts each month to report use taxes. This eliminates the need for accounts payable personnel to make tax decisions and creates a more efficient sales-and-use tax compliance process.
Voluntary Disclosure and Tax Amnesty Programs
Voluntary disclosure and tax amnesty programs can correct past deficiencies in sales-and-use tax payments. Businesses voluntarily may pay back taxes and file late tax returns with reduced penalties. State governments sometimes offer limited-time-only amnesty programs, with the goal of collecting as much in back taxes as possible in a very short period of time—usually two or three months. Most authorities offer a full or partial waiver of penalties as long as a participating business pays the entire amount of taxes due, plus any interest, by the program’s deadline. Some authorities impose larger-than-normal penalties if a business fails to take action during an amnesty period. Whether making a voluntary disclosure or participating in an amnesty program, a company may have to sign a settlement agreement, promising to file and to pay all future taxes on time. IBI