It is critical that you pay attention to your sales tax accrual account. This account is a key document that should be used when completing your sales tax return. One of the first things an auditor does when reviewing company records is reconcile your sales tax accrual account with the amounts reported on your sales and use tax returns.
The Sales Tax Accrual Account and Fraud
If sales tax was collected and not remitted, fraud has occurred. Taxing authorities are not forgiving of fraud. When you collect sales tax, that is the taxing authority’s money…not yours. Make sure you give the tax authority their money.
The Sales Tax Accrual Account as the Cornerstone of the Sales Tax Return
When compiling the sales and use return, you must report all sales and use taxes collected from customers and give the money to the taxing authority. The account that normally tracks sales tax billed is the sales tax accrual account. It also reflects collections if you have a cash and carry business. This account is key, make sure that it accurately reflects sales and use taxes billed and/or collected and that it reflects that you paid the money to the appropriate tax authority. Any reductions to the account should be easily explained.
Document all errors in the account, payments to the taxing authority, and any discounts taken that result in less money being remitted than was collected. Some states offer timely filing discounts and prepayment discounts. If you take advantage of these discounts, document it fully. Also, if you take a credit to the sales tax accrual account retain all support for the reduction. The sales tax accrual account and all notes are important work papers that should be retained for the applicable statute of limitations and should be ready for review in the event of a compliance audit.
The Sales Tax Accrual Account and Tips on Your Sales Tax Return
When compiling your sales and use tax return, make sure that you do the following:
Give all collected money to the appropriate state taxing authority.
Exclude sales or use tax collections from your sales or revenue figures.
If you take early filing or pre-payment discounts, document that clearly so that any auditor can follow the trail.
Review the sales tax accrual account to make sure all collections are remitted periodically. Don’t leave it to one person. If you own the business or serve as a responsible party, check it!
Retain the account detail that was generated when the sales and use tax return is compiled. Adjusting journal entries, year-end journal entries, and other correcting entries can obliterate the audit trail. You must retain a clear audit trail for the applicable statute of limitations. Make sure you have documentation of the sales tax accrual account when you wrote the report.
NOTE: There will be a balance in the account due to timing differences. If you are a monthly filer, the return for the preceding month is due in the middle of the following month. When you file the return, tax collected in the current month will remain in the account as you remit tax receipts collected during the prior month.
The Sales Tax Accrual Account and Your Compliance Audit
The auditor must make sure that all sales tax collected is remitted to the state tax authority. One of the first things the auditor does is reconcile your sales tax accrual account with amounts reported to the tax authority. Any discrepancies must be addressed. You do not want a determination that sales or use tax was collected on behalf of the tax authority and not given to the state. This finding dictates that you collected tax in bad faith. Of course, you have the opportunity to pay the state the tax, along with related interest and penalties. However, it is optimal to maintain a good reputation with the tax authority and avoid tax collected not remitted.
There are accounts that are HOT spots in all businesses. Your sales tax accrual account is one of those accounts. Don’t expect mercy if the account is not handled appropriately. You may be treated kindly but the tax authority wants the funds. Turn the money in when your customers give it to you and keep all documentation for the applicable statute of limitations.
For more information on sales tax compliance issues, visit Know if You Have A Sales Tax Issue.
For access to an online class that explains how to complete a Texas sales and use tax return, visit Understanding Your Texas Sales and Use Tax Return.
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