As an overscheduled small business owner, the absolute last thing you need is to be audited. Running a small business is hard enough!
Even worse: there are multiple types of audits small businesses may be subjected to. Not only can the IRS demand to examine your tax records, but the state and local governments you conduct business in also have a vested interest in seeing you pay your full share of taxes.
One of the most common state tax audits is a sales tax audit. So let’s dive in and examine what a sales tax audit is, what are the common triggers for a sales tax audit, and how you can avoid a sales tax audit now and in the future.
What is a Sales Tax Audit?
A sales tax audit is an examination conducted by your state government to ensure that businesses are accurately reporting and paying the correct amount of sales tax owed to state and local governments.
It’s pretty much what you’d expect from the name: do your sales and purchases records, invoices, and receipts all match up and reflect the proper amount of sales tax? Then yay! You likely won’t be audited. If they do reveal errors? Uh oh, better get those financial records in order for a little review.
Sales tax audits may be triggered by a variety of factors, and it’s especially helpful to know what those are so you can ensure you have your ducks in a row. You don’t want to end up paying penalties or wasting valuable time on an audit when the whole thing can be avoided!
Common Small Business Sales Tax Audit Triggers
Once you know what to avoid, you can swerve around audit triggers like they’re potholes on an otherwise clear road. Here are some of the most common small business sales tax audit triggers:
Complaints and Reports
The quickest way to trigger a sales tax audit? Somebody contacting your state or local government to say, “Hey! Look at them!” If you have a complaint or a report filed against you concerning sales tax, it’s more than likely authorities are going to follow up on that.
Complaints and reports can come from inside or outside your business. Disgruntled customers are a primary source, as are unhappy or concerned employees within your company.
Do your best to make sure all these people have nothing to complain about. Practice good leadership in your small business and check in with your employees to make sure they understand state and local sales tax regulations. That way, they’ll be clear on how well you’re adhering to them.
It pays to check (and double-check) that you’ve done your returns correctly; any suspicious or unusual financial records increase your likelihood for an audit. If your business reports much higher income than the competitors in your field, that may be flagged as unusual.
You’re especially likely to be flagged for an audit if your revenue seems irregular and exceeds thresholds that demand your business complies with certain sales tax requirements. If it looks like you’re shifting numbers to get certain benefits, you could be in dangerous territory.
Of course, some businesses legitimately have unusual finances. If that’s the case for you, make sure all your tax documents are properly tracked and documented to prove it.
Major Business Changes
In a stack of local tax returns, anything out of the ordinary is going to draw attention. So if your business is going through a time of change, it might stand out (in a bad way).
Whether it’s something exciting like opening a new location or obtaining a new acquisition—or something unfortunate like closing a location or filing for bankruptcy—you’re more likely to get audited in times of change.
Be mindful to file your taxes and track financials extra carefully in years of change, and make sure to document everything.
High Numbers of Cash Transactions
When your business deals in mostly cash transactions, you run the risk of getting audited under suspicion of underreporting income. This can be a real drag for businesses that legitimately deal in a lot of cash like restaurants, bodegas, hair salons, and the like. If you fall into one of these categories, make sure your income can be easily verified.
Late Reportings or Filings
When trying to avoid an audit, so much is out of your control. A vendor your use could get audited and the trail leads back to you. A disgruntled customer could file a complaint out of spite. Or, there’s always the possibility that you could be randomly selected at any time just by luck (or misfortune) of the draw.
But one thing that is supremely in your control? Filing on time. Late reports and filing, especially recurring late reports and filing, can trigger an audit. Make sure you know your state and local tax deadlines and adhere to them.
Our Best Tip to Prevent a Sales Tax Audit?
Hire an accountant. If you’re at all nervous or worried about filing your taxes correctly, it pays to put your faith in someone who’s built their career on understanding exactly how a proper tax return should be filed. Bonus! In the cross-your-fingers-it’s-only-a-hypothetical scenario that you do get audited, having used an accountant means that when auditors come looking for errors, they’re not going to find anything.
Know Your Numbers Accounting offers top-notch accounting services specifically catered to support small businesses. Experience personalized guidance that will get your tax returns looking so clean and correct that auditors won’t look twice. KYN Accounting is also ready to swoop in and save the day during an audit if you took a swing and a miss at your own returns this year. Understanding accounting is always going to serve you well.
Schedule a free consultation to chat about your business’s needs and to get access to sample financial statements today!
Still scratching your head about sales tax audits and how to avoid them? Let us know your questions in the comments below!