Doing Business in a State I Have Not Filed Returns and I Am Contacted for Audit

Okay so the first thing that you do is not panic. I know it's a big issue, I know there's potentially a lot of liability on the table but the important thing is let's not go crazy. So the most important thing that you can do is cut off communications with the company to the auditor meaning the company should not be communicating with the auditor directly. The more information that the company provides the auditor, the more likely that the auditor will issue an assessment not in the company's favor. This is particularly true for companies that have historical Nexus in a state for multiple years and that have maintained some sort of presence there via the activities of their employees or holding inventory or whatever. So you need a third party representative because a third party representative, specifically an attorney, will be able to deflect the questions of the auditor and be able to mitigate any immediate danger. The first thing that I would tell an auditor in the situation where I have a client that's not in compliance is going through an audit is hold off while we assess the situation. This gives the company enough time to breathe, gives enough us enough time to investigate the data and going back to the whole rule, how big is the hole, how do we measure it, and then it allows us to put a plan in place to strategize how we're going to control

the scope of information. How we're going to minimize any risk or as much risk as possible and how we're going to reduce the penalties from this situation. The key in this fact pattern is if California or any other state contacts you without you filing a return or submitting information voluntarily, they must have come across some piece of information to tie you to their state and in most cases the auditors will tell you what it is and why you're being audited if you ask them. So working off of that piece of information it may not be necessary for you to admit liability further back than that piece of information goes. Now this is a delicate balance and when you're in an audit like this the stakes are particularly high because you're not allowed to make false statements to an auditor but there's a variety of ways to navigate through the issue and to deal with this responsibly and if you continue to try and work things out with the auditor or pretend like they're not going to do anything before they're going work with you then you're fooling yourself. The best strategy to take in these types of audits is defense. Defense wins championships when it comes to dealing with out-of-state audits.


Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law