One way to identify if you may have a sales tax issue before you are contacted by a taxing authority is to review your records including sales invoices, purchase invoices, certificates, journal entries, etc. periodically. This is a great idea because it will highlight if you have all of the documentation that you will need in case you are audited. No one wants to reconstruct things while going through an audit. It is less stressful to address issues proactively.
While reviewing invoices and certificates are important, there is another thing that you can do relatively quickly to determine if your company has sales tax issues. Without getting into issues of taxability, review the following documents to quickly determine if a review of sales will highlight a compliance issue land you in hot water.
FYI- We reference these documents because they are normally reviewed by auditors when your company is undergoing a sales tax audit.
Review & Analyze Federal Income Tax Returns, Franchise Tax Returns, Sales & Use Tax Returns, etc.
Federal Income Tax Returns- Review your Federal Income Tax (FIT) Return. Record what was reported as gross receipts or total sales. Also, make a note of the accounting basis used to file the return.
Franchise Tax Returns- Review the Gross receipts or sales reported to the state taxing authority on your franchise tax or other corporate tax return.
State Sales Tax Returns- Add all “total sales” figures reported to the state taxing authority on the sales & use tax returns for the year. Make a note of the accounting basis that you are using.
Internal accounting records- Generate the yearly sales figure on the internal accounting system by running a report in QuickBooks or any other accounting software you may be using. If you do not use an electronic system, compile the yearly sales figure using information on hand. Keep in mind, auditors can request trial balances, detailed general ledger, financial statements, etc. in order to verify that you have reported total sales correctly.
Do my “Total Sales” figures match
The gross receipts or sales reported in all these reports should match if the accounting basis used to record receipts or sales for all information in the sources listed above is the same. If all gross receipts or sales in all places are accrual basis, the numbers should match. If all gross receipts or sales in all reports are on the cash basis, the numbers should match. Please note that some accounting software programs will let you choose the accounting basis on which reports are generated.
If the accounting basis is the same and the gross receipts or sales figures do not match, you should be able to produce a reconciliation that quickly describes the differences. In other words, you need to be able to explain why the numbers do not match. There are a number of legitimate reasons why there could be differences. For instance, sales reported on your state sales & use tax return may not match the federal income tax return if income is attributed to multiple states. If you cannot explain why there are differences, your company may potentially have an issue.
Why Should I Care
While every jurisdiction is different, there is some commonality as it relates to compliance. All taxing jurisdictions want to make sure you are reporting your total sales, taxable sales and taxable purchases correctly. One step in that process is comparing what was reported on your federal returns to what was reported via the sales & use tax return, sales figures per your accounting system, etc.
It is important that you are aware of and can explain away any discrepancies in order to avoid the appearance that you have been under reporting sales. If auditors think you have been underreporting sales, you may have to prove that these “additional sales” are not taxable sales. It is best to short circuit that headache by identifying the issue prior to an audit and documenting why there are discrepancies in real time, not three or four years after the fact.
For more information on sales tax tax compliance, visit Clear Invoices and Contracts for information on how billing decisions can impact your compliance. To complete a Texas Sales and Use Tax Return at Understanding Your Texas Sales and Use Tax Return.
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