What Are the First Steps I Should Take in a Sales Tax Audit?

These audits are very complex and the reason that they're complex is they involve a very large degree of data. So for example, when you're dealing with an income tax audit you can go through a company's bank deposits and determine pretty quickly how much income they had or didn't have. With a sales tax audit you're dealing with taxable sales so if you picture a restaurant, for example. Say your average restaurant does a hundred transactions in a day over

the course of 365 days where the restaurant is open. That's over 36,000 transactions. You take that over a three-year period and it just presents an immeasurable amount of data for an auditor to measure. So in order to do that, the very first thing that you should deal with in a sales tax audit is your key sources of data: your federal income tax returns, your sales tax returns, your profit and loss statements, your sales summaries, your 1099 Ks, your merchant accounts and then any other piece of data that is a primary source document with relation to your taxable sales. You want to take a look at this data and gather it all together, because it's going to be one of the important starting points of your sales tax audit. The next thing you want to do after gathering data is you want to try and assess your risk. It's really important going into a sales tax audit to try and figure out why the Department of Tax and Fee Administration selected you for audit. When you're looking at risk, it's a good idea to get a tax professional involved because most people aren't comfortable with assessing their sales tax risk. At the very least I'd recommend that you sit down and do a consultation with someone so that you can understand where the risk is. You could understand what the playing field is and you can understand how to appropriately deal with the sales tax audit. Notice that in all these steps I didn't say contact the state. Before having any contact with the auditor you want to make sure that you gather your documents together, at least an initial sampling of those documents so that you can look forward to scrap and seize between those key areas of reporting. You want to know what your risk is going into the audit so that you can understand how you schedule an audit plan with the auditor that's going to be most in your favor. So I'd recommend taking those actions first and then reaching out to the auditor in order to begin the audit.


Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
Brotman Law