A sales tax audit is kind of what it sounds like. The sales tax audit is the government coming in and checking to make sure that sales tax was paid properly. The biggest problem that we see in sales tax audits is that when you’re auditing a business’s sales, it’s not very reliable. Meaning yes, you can go through a business’s records over three years and audit every single transaction, but the problem with a lot of businesses, particularly lot of retail businesses, is cash and so even if you were to go through and audit everything, it doesn’t necessarily mean that the records are going to align with the way that the auditor thinks that they should. So you can have differences of opinion where the auditor can claim that there’s unreported cash sales or that there should have been additional tax charged and a variety of different issues and the problem with sales tax audits again is the size of them. You’re dealing with all of these transactions, you’re dealing with three years of individual transactions day in and day out.
Some businesses can have tens of thousands, if not hundreds of thousands, even millions of transactions over a three-year period. How do we see businesses all the time, particularly those with low margins and high frequency, just have an insane amount of transactions? There’s no way that anybody’s going to take the time to really go through every single one of those in detail and verify each transaction, so sales tax audits are a way of assessing the amount of sales tax liability. So the auditor and the representative are working through this very large amount of data and trying to make conclusions on it to make sure the appropriate amount of taxes is paid and as I’ll talk about in future videos, there’s a lot of differences of opinion and there’s a lot of problems when that process goes through because of the high degree of variance and because you’re not always relying on direct methods of testing.