n a sales and use tax audit, a state revenue auditor reviews a business to determine if state sales and/or use taxes were properly collected and paid. A sales and use tax “reverse audit,” which is conducted by tax practitioners, is similar in many ways to the state government’s review, but it seeks to identify and recover tax overpayments remitted to suppliers or filed directly as a self-assessment of use tax.
OA business can recoup erroneously paid sales and use taxes by reviewing its self-assessment of the use tax and analyzing the sales and/or use taxes remitted to the company’s suppliers on exempt purchases. Normally, the purchaser is responsible for claiming an applicable exemption; if the exemption is not claimed, the supplier will charge sales tax. Many companies have their accounts-payable group identify purchases that are exempt. If this group is not properly directed or advised, sales and/or use taxes may be paid in error.
PERFORMING THE AUDIT
The practitioner conducting the reverse audit generally starts by meeting, at the corporate office and/or plant locations, with the company’s tax professionals, accounts-payable manager, capital asset coordinator and systems personnel familiar with tax reports and accounts-payable payment files. The group focuses on understanding the company’s sales and use tax compliance system (including how taxability decisions are made for purchases.) If the taxpayer is a direct-pay permit holder, it can make purchases without remitting sales tax to a vendor but must self-assess and remit use tax directly to the government.
The practitioner should look at the sales and use tax returns, use tax self-assessment schedules, lease contracts, intercompany transactions, lists of the largest suppliers and issues from past sales and use tax audits. He or she should understand the statute of limitations for filing refund claims and whether a refund can offset a potential audit assessment.
The reviewer needs to fully understand a state’s procedures for recovering tax overpayments. While many states require taxpayers to request refunds from the suppliers to whom the tax was originally remitted, others allow taxpayers to request refunds directly from tax authorities.
After analyzing erroneous payments and composing the necessary documents, the reviewer prepares the overpayment schedules and presents the findings to the company.
Management should look at and discuss the overpayments to identify any potential issues and concerns that may arise. A refund request can trigger a sales and use tax audit.
Once the company receives its sales and use tax refunds, the reviewer should schedule a meeting with company management to present a written report of the audit procedures followed, the tax overpayments identified and the success of the tax recovery efforts. This “findings package” also should include relevant schedules, correspondence with suppliers and tax authorities and suggested improvements to the sales and use tax compliance system.
For a detailed discussion of this and other current developments, see the Tax Clinic, edited by Frank J. O’Connell Jr., in the September 2002 issue of The Tax Adviser.
—Lesli Laffie, editor
The Tax Adviser
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