How To Reduce Your Risks Of Getting A Sales Tax Audit

A sales tax audit is when a government tax agency examines an organization’s financial documents to confirm if they have remitted the correct sales tax amount to the state for taxable transactions. When the auditors look at the financial records, they compare the total sales with the sales amount after payment of sales tax. They also confirm the tax payable with the actual tax amount that the company paid.

The first reason a company might undergo a sales tax audit is when the state suspects it has underrated or overstated its reported sales. Secondly, an audit is required if the sales tax return amount filed by the firm doesn’t match the Internal Revenue Service (IRS) report. In addition, if the company fails to report its sales tax, then they’re susceptible to getting a sales tax audit.

Tax departments are under pressure to stay updated on the California sales tax statute of limitations and all the laws and regulations regarding sales tax. Sales tax audits can distract a business because of the costly fees and penalties they attract. In worst-case scenarios, they can make the company start operating at a loss.

To avoid getting yourself in such a situation, it is best to employ the following strategies to help reduce the risks of getting a sales tax audit.

1. Automating Your Business Operations

The first step to achieving tax compliance is automating business operations. You can switch from storing your documents on a physical document to keeping them on the virtual cloud. Doing so will enhance not only the safety of the documents but also their accessibility.

Other reasons why you need to automate your business include the following:
- Helps in ensuring audit preparedness at all times just in case it happens
- Saving resources used in managing and monitoring the quality of sales data
- Reduces the risks of having inaccurate or incomplete sales records
- You can easily verify if you’ve used the correct tax figures

As a company, it is logical to evolve and take advantage of technology. Therefore, you’d want to forgo cabinets when storing important data and save the files in the cloud where they can’t get lost. This can help your company justify its payments and calculations because you have the correct and up-to-date evidence. Other benefits of cloud data storage include the following:
- It points out missing or expiring files
- Reduces physical and emotional disorganization
- Facilitates analytics and reporting

Otherwise, using the manual system can mess your business up because some files may be missing or taken by an unauthorized individual. Hence, you’ll be at risk of being audited if you don’t have all the necessary documents. If that happens, you’ll have to face the consequences, which might adversely affect your business.

2. Gain Insight On The Actual Cost of Sales Tax You’re Required To Pay

According to an Aberdeen survey, a startup and a middle-sized business must pay a sales tax compliance of approximately USD$63000-USD$ 68000. Different states also have an approximate amount that companies are likely to be charged in case an audit is performed.

Therefore, it’s essential to be up-to-date with what’s happening around your state, especially regarding tax compliance laws. Fortunately, there are sites where you can ask legal queries regarding state laws and get answers.

Doing that will help you know the amount of sales tax you’re required to pay and readjust in case new laws have been formulated. Moreover, following the rules will help you stay prepared if the worst happens.

3. Ensure That You Register Your Business

Some people are operating their businesses in more than one jurisdiction. And, since there’s a possibility that your business can get audited at one point or the other, it’s critical to register your company and its branches correctly. It is especially true considering that most audits might be directed towards businesses located in the states you’re not residing in.
Although business deals increase even when you’ve not registered, the negative side is that the state requires you to give more documents and an explanation in case you’re in a fix. On the contrary, if you’re registered, the state may not be as hard on you, reducing the risk of undergoing a sales tax audit.

So, in this regard, you need to know that you may never be a victim of auditing, and at the same ties, an auditor can call you any time. The best thing is to stay prepared and register your business and its branches. That way, you won’t have many problems if you go through the auditing process.

4. Know The Essence Of Use Tax And Storing Exemption Certificates

It’s essential that you validate all exempt sales in the state where you’ve decided to take your nexus. It would be best to store all your resale and exemption certificates properly (preferably online), where they can be easily updated, managed, and accessed. It can be of great help and save you from audit pain.

Also, it would be best if you were enlightened on the importance of confirming and complying with consumer use tax because most business owners often neglect it. And, since auditors know that this is among the top mistakes in the compliance list, they check that first to ascertain whether or not to dig deeper into auditing.

Therefore, you’d want to automate everything related to exemption certificates and use tax reporting to avoid placing your company at risk of getting a sales tax audit.

5. Ensure That You’re Consistent In Paying The Sales Tax

Besides remitting the correct sales tax amount, tax authorities expect you to be consistent in your payments. They also expect that you can calculate how the tax figure arrived at. Hence you need to know the following:
- Whether you’re selling a taxable product
- The tax rate for each product
- The current state law regarding sales tax

With this information, you can pay your dues diligently and evade problems.


Sales tax audits happen when a state wants to verify if the business has paid the correct sales tax to the relevant authorities. A mismatch in figures or inaccurate records can also cause this. Some ways to reduce the risk of getting a sales tax audit include: ensuring that you register your business, automation, consistency in paying your sales tax, and keeping your exemption certificates. Apart from reducing the chance of a sales tax audit, employing these strategies will help streamline your business.

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Posted - 12/27/2022