Managed Sales And Use Tax Audit Programs
A managed audit is an agreement with a state’s taxing authority in which a company self-examines its own books and records. A managed audit agreement allows the company, or an outside audit firm, to conduct a self review with guidance from the taxing state. But this occurs on its own time table.
In states that allow a self-audit, the ability to participate is usually reserved for companies that have been previously audited and that meet certain other criteria. This criteria may include type or size of business, records kept, and transactions under review. While voluntary, managed audits generally provide a company more control over the process and tend to be shorter in duration.
As an incentive to undertake and manage a self-audit, the state may offer an incentive such as a reduction in interest and/or penalty abatement on any deficiency uncovered. Although not all states offer financial incentives in their managed audit programs, in those that do, the rewards can be well worth the costs associated with a self-administered review.
Benefits of Managed Sales And Use Tax Audit Programs
In addition to reduced penalty and interest assessments, other benefits can include the following:
- Closed audit periods at the end of the managed audit process
- Resolution of questions about taxability at the field audit level, during the audit process, not afterwards in administrative appeals
- Less on-site time for state auditors and less disruption of regular business
- Reduction in protested audits
- Increased understanding of the audit process and the application of sales and use tax to the business, resulting in lower audit assessments in the future
While it may sound advantageous to undertake such an effort, a company will want to have an understanding of the increased expectation as well. For example, under a general audit, the taxpayer is not obligated to point out a known liability the auditor fails to uncover. Under a self-audit, a similar failure to disclose information could lead to a presumption of fraud.
Other aspects to consider include the company’s ability to provide the manpower and knowledge required for the self-audit. This ensures that it will work both effectively and economically. Even a managed audit requires employees to divert time away from their regular activities and job duties. Conduct an economic analysis comparing the internal cost of the audit versus the potential savings from reduced penalty and interest on uncovered liabilities before you negotiate a managed audit agreement.