Benefits Of A Reverse Audit?
If a corporation inadvertently underpays its sales and uses taxes, there’s a good chance the state or local department of Revenue will find the error and collect. That’s why in many states, the field auditors became very aggressive in assessing tax, penalty and interest. This environment has caused the retailers and suppliers to be aggressive in charging sales tax to avoid a sales tax audit deficiency. Often, sales tax is charged even when the sale would be exempt. Other times they’re going to inappropriately charge the tax due to no exemption claim or an invalid exemption certificate was submitted. Either way the purchaser may pay tax to the supplier that’s not legally due. An inadequate sales and use tax compliance system will allow tax to be paid in error.
When working efficiently, the compliance system will provide reasonable assurance that exemptions are claimed in which all tax is correctly billed and paid. However, in many companies the compliance system isn’t operational. Business expansion, downsizing, and turnover rate are causes of compliance system failures. A compliance system failure may result in overpaid taxes.
Some companies don’t have a built-out tax department, which might review transactions. Turnover in accounts payable departments or a change of vendor also can create the problem. Truly, most companies don’t have the personnel needed to accomplish the labor-intensive work.
Internal audits within the traditional sense won’t catch these costly tax mistakes, as that kind of audit tends to specialize in a company’s policies, procedures, and budgets. A sales and use tax consulting team could perform a reverse audit, combing through thousands, and sometimes countless transactions with a company’s vendors.
The reverse sales and use tax audit is comparable in many respects to the sales and use tax audits conducted by state auditors except its purposes are to spot and recover tax overpayments remitted to suppliers or paid on to the taxing authority. Sales and use tax consulting perform Reverse Audits in much the same way the sales and use tax audits are performed.
The reverse audit process may start with a gathering with a company’s tax professionals, accounts-payable manager, capital asset coordinator and other employees aware of tax reports and accounts payable files.
The first step during a reverse audit is to perform an entire study of the business activities of the client. It’s vital to spot and understand the manufacturing, warehouse and retail locations of the business, the merchandise lines, and the way the business pays sales and use tax. It is important to work out what exceptions may apply to their business.
The second step may be a complete study and evaluation of the sales and use tax compliance system. The sales tax compliance system is analyzed to be familiar with the method of issuing sales tax on the clients’ invoices. The purchasing function is explained to get a deep understanding of how purchases are made and approved. A sample review of invoices is traced from the purchasing function through the payment and accounting for the acquisition. Particular attention is paid to the sales tax and use tax compliance function. The use tax compliance function is thoroughly analyzed to make sure an entire understanding of the method.
After the reverse audit is completed, a report is provided. The report identifies the audit procedures followed to recover overpaid sales and use taxes and, therefore, the findings. Weaknesses found within the sales and use tax compliance system and proposals to enhance the methods are included within the report.