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Sales and Use Tax Audit Strategies Sales and Use Tax Audit Strategies

Anticipating Auditor Requirements for Documentation, Samples, Nexus and More

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific THURSDAY, OCTOBER 20, 2011

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

James Tauber Managing Director WTAS Chicago James Tauber, Managing Director, WTAS, Chicago William Ault, Director, Crowe Horwath, New York Tom Johnson, Director, Ryan, Fort Lauderdale, Fla.

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S l d U T A dit St t i Sales and Use Tax Audit Strategies Seminar

• Oct. 20, 2011

William Ault, Crowe Horwath

william.ault@ crowehorwath.com

James Tauber, WTAS LLC

jim.j.tauber@ wtas.com

Tom Johnson, Ryan

tom.johnson@ ryan.com

Today’s Program

Preparation For the Audit [James Tauber] P d l A dit A t /Mid t M t Slide 7 – Slide 16 Slid 17 Slid 21 Procedural Audit Aspects/Midstream Management [William Ault ] Current Auditor Priorities Slide 17 – Slide 21 Slide 22 – Slide 26 [Tom Johnson] Alternatives To The Traditional Audit Process [William Ault ] Slide 27 – Slide 29 [William Ault ] After The Audit [Tom Johnson] Slide 30 – Slide 33

PREPARATION FOR THE

James Tauber, WTAS LLC

PREPARATION FOR THE AUDIT

Obj i F Thi S i Objectives For This Section

• Assignment of auditors

A di ’ di h

• Auditor’s pre-audit research
• Your pre-audit preparation/research
• Initial contact with auditor
• Preparation for the opening conference

8

State Procedures For Assigning Auditors

• Capacity

G hi i i h / d

• Geographic proximity to the taxpayer/records
• Industry experience
• Overall experience relative to the complexity/size of the

company

9

Scope Of Auditor’s Pre‐Audit Research

• General information

General information ― Google ― Company Web site ― Public financials ― Advertising (Yellow Pages, billboards, representatives, etc.) ― Press releases addressing recent activity (e.g., dispositions, acquisitions) dispositions, acquisitions) ― Visit retail locations ― Store ― Retail Web site

10

Scope Of Auditor’s Pre‐Audit Research (Cont.)

• Other tax filings

― Tax returns N ti ― Notices ― Statement of accounts Nexus questionnaires ― Nexus questionnaires

• Prior audit workpapers

Prior audit workpapers

11

Your Pre‐Audit Preparation/Research

• Audit starts before the auditor calls

Audit starts before the auditor calls ― Know where the skeletons are ― Credit/refund opportunities ― Consider impact of sampling methodologies and/or sample periods ― Know what issues have occured and how they could affect the audit ― In what condition is your exempt sales documentation? In what condition is your exempt sales documentation? ― How long it will take to get the required information? ― Impact of recent changes in law for potential exposures/opportunities (e.g., amnesty)

12

Your Pre‐Audit Preparation/Research (Cont.)

• Develop a proposed audit plan/work program

C i ti t th b i

• Communication to the business

― Let information resources know that you will be contacting them g ― Let the facility know there will be an auditor in the house ― Remind employees not to talk to or around the auditors

13

I i i l C Wi h Th A di Initial Contact With The Auditors

• Confirmation of companies and periods to be audited
• Confirmation of information requests and the request process
• Confirmation of information requests and the request process
• Confirmation of timing of field audit and anticipated return visits
• Inquire about their level of audit and industry experience
• Discuss the auditor’s plan and address any gaps compared with your
• Discuss the auditor s plan and address any gaps compared with your

plan

• Set the tone

14

f Preparation For Opening Conference

• Develop an outline of what to cover

― Timing ― Records/information requests Records/information requests ― Rules of the road ― Communication plan ― Process for resolution of issues

• Determine availability of requested documents

B f ili i h i /

• Be familiar with tax requirements/processes
• A few words about sampling agreements …
• Determine your rapport with the auditor

Determine your rapport with the auditor

15

I S In Summary

• Be prepared
• Be prepared ...

― Know your issues ― Have your resources lined up Have your resources lined up ― Review your documentation

• Develop an audit plan …
• The more you prepare in advance …

― The smoother the audit will go ― The more likely you will achieve good results

16

PROCEDURAL AUDIT

William Ault, Crowe Horwath

PROCEDURAL AUDIT ASPECTS/MIDSTREAM MANAGEMENT

Reviewing Questioned Invoices During The Field Audit

• Managing an experienced tax auditor’s negotiation strategy

Managing an experienced tax auditor s negotiation strategy ― Leave an auditor with the files or check in regularly? ― The risk of surprise and a weaker defensive position His/her time production expectations and risk of an assertion of no ― His/her time production expectations, and risk of an assertion of no cooperation ― File copies vs. pulling the invoice and contract again Mitigate the risk of the roving tax auditor ― Mitigate the risk of the roving tax auditor ― When to ask for draft workpapers

• Do I always answer their questions on the spot?

― Three truthful answers, one resulting in tax and the others in non-taxability ― Checklist for all questioned invoices: Contract, PO, complete, geography, use tax, audited dl d d ― Bundled transactions and accounting entries

18

Reviewing Exemption Certificate Records

• Proposed exception items resulting from the test of exempt sales

― Review shift of burden of proof ― Can we exclude based on nature of product/service? Can we exclude based on nature of product/service? ― Can we exclude based on destination? ― Resale or exemption certificate is missing. ― Obvious reseller or obvious exempt user ― Not-so-obvious reseller or exempt user Mi i ifi d h ll i ― Missing certificate, and the reseller or exempt user is no longer in business ― Contractors and capital improvement certificates ― What to do with a good faith challenge?

19

Audit Sample And Projection Changes

S l b l i d t ti i ?

• Sample becomes voluminous and too time-consuming?

― Expenses, sales, fixed assets Reduce block sample period ― Reduce block sample period ― Review vendor reports before invoices are pulled - obvious vendor elimination ― Multiple purchases from same vendor ― Projecting error rates over a representative population

• How often is a block sample truly significantly distortive?
• Credits and the sample error rate

20

R l F E i Th A di Rules For Engaging The Auditor

• Dealing with mid-audit problems: When and how do you go over their head?

― Inexperienced or incompetent tax auditor ― If passive: Do you have the resources to effectively conduct the audit for them? ― If aggressive: Need for paper trial of unreasonable behavior ― Fundamental technical disagreement - Our sales are NOT taxable! g ― No agreement on documents to be produced ― Auditor leaves department Th i t

• The point person
• Set a pattern early on to mirror their negotiating leverage model
• Agree to disagree on reasonably open items
• Setting the stage for a penalty waiver

21

CURRENT AUDITOR

Tom Johnson, Ryan

PRIORITIES

h d k What Auditors Are Looking For Now

• Impacts of short-staffing and reduced experience at revenue agencies

p g p g ― Sending entire assessment from the field to next level of appeal ― Less field expertise means more items for protest ― Less field expertise means more items for protest. ― Learning the protest process ― Letters with revenue agency ― Informal protest ― Formal protest Internal staff cost for audit ― Internal staff cost for audit ― External consultant cost ― Pressured to close more audits ― Measured or scored on audits for performance

23

What Auditors Are Looking For Now (Cont.)

― Making it challenging to include overpayments in assessment, as revenue agencies would prefer you file a tax refund or take a credit ― Perception of being not productive ― Require significant paperwork to justify the overpayment, in an effort to encourage this be submitted via the refund process ― Abatement of penalties ― Tiered system to determine percentage allowed Not as willing to grant full abatements ― Not as willing to grant full abatements ― Grey areas ― Not willing to allow vs. what has been allowed in the past ― Examples: Fabricated cost and rent for book purposes (FL)

24

What Auditors Are Looking For Now (Cont.)

― Trends with an impact, such as "Amazon taxes" Affili t ― Affiliate nexus ― More aggressive on issues New sources of tax revenue ― New sources of tax revenue

25

What Auditors Are Looking For Now (Cont.)

― Takeaways for this section L kill d dit ld b i b t k ― Less-skilled auditors could bring about more work. ― Familiarize yourself with electronic data being presented to the auditor prior to the delivery. p p y ― Only provide what is asked for; too much may trigger review of other areas, accounts, etc. ― Credits and overpayments ― Why take in the current audit period vs. taking as a credit a credit

26

ALTERNATIVES TO THE

William Ault, Crowe Horwath

TRADITIONAL AUDITOR PROCESS PROCESS

Could A Managed Audit Be Valuable To You?

• What is a managed audit?
• Qualifications for, statutory benefits, formal agreement,

process and review process and review

• A review of the programs in selected states

― California ― Connecticut ― Texas

• Risks

― Significant time reviewing invoices and contracts ― Review vs. a re-audit by the department

28

Could A Managed Audit Be Valuable To You? (Cont.)

• Managed audit strategies and other benefits

― Multiple entities = Multiple benefits U th i dit l k ― Use the prior audit cycle workpapers ― Net time savings from a well-planned audit Advantage of good faith bullish positions on unclear ― Advantage of good faith bullish positions on unclear transactions ― Agree in advance on workpaper format in detail ― Seek expert review of workpapers before submission ― Seek tax auditor review in steps, where possible, to avoid i surprises

29

AFTER THE AUDIT

Tom Johnson, Ryan

Af Th A di After The Audit

• Preparation for and conduct of the post-audit conference

― Outline your issues ― Pay assessment to stop interest (amnesty programs) ― Refund upon completion for items removed from assessment Refund upon completion for items removed from assessment ― Know your audience ― Are you dealing with field auditor or next level? ― Taxpayers know their issues, accounting systems, etc. but need to convey the message in simple terms (e.g., resale/exemption, statutory exemption) Exhibits binders tabs ― Exhibits, binders, tabs ― Know your deadlines ― Minimize the number of extensions requested ― Not as willing to extend deadlines ― May have to move to next step within the protest process

31

Af Th A di (C ) After The Audit (Cont.)

• Resolving auditor error and areas of disagreement

― Do as much as possible at the local level to resolve the issue with the auditor and his/her supervisor Technical letters and prior case decisions to substantiate ― Technical letters and prior case decisions to substantiate your case ― Depending on the history, issue(s) and personalities involved, it may be more beneficial to move to the next step in the protest process. ― Local authority ― Revenue agency authority ― Compromise vs. public notice ― Audit Resolution

32

Af Th A di (C ) After The Audit (Cont.)

• Takeaways for this section

― Be prepared with your issues, but also be persistent ― Look for credits, overpayments, enterprise zone refunds, bad debt allowances and statutorily exempt items that may ultimately reduce the assessment. ― They may want to compromise. ― Don’t miss a deadline

33