The reverse sales and use tax audit is similar in many respects to the sales and use tax audits conducted by state auditors except over-payment of taxes are researched on a reverse audit. During our review, we will look for weaknesses in the system that may allow for the over-payment of tax. A reverse audit looks back at the past four years.
Several factors can create a situation where sales and use taxes may be overpaid. In Wisconsin, field auditors have become very aggressive in assessing tax, penalty and interest. This environment has caused retailers and suppliers to be aggressive in charging sales tax to avoid a sales tax audit assessment. Often, sales tax is charged even when the sale would be exempt. Other times sellers will charge the tax because of no exemption claim or an invalid exemption certificate was submitted. Either way the purchaser may pay tax to the supplier that is not legally due.
An inadequate sales and use tax compliance system will allow tax to be paid in error. When working efficiently, the compliance system will provide reasonable assurance that exemptions have been claimed and that all tax is properly billed and paid. However, in many businesses the compliance system is lacking. Business expansion, downsizing, and employee turnover are causes of compliance system failures. A compliance system failure can result in overpaid taxes.
Normally it is the responsibility of the purchasing function to make a claim for exemption (e.g., resale, manufacturing, exempt entity, etc.). If this is not done either through miscommunication or negligence, the supplier will normally charge the tax. If an invoice is presented for payment that includes tax, the accounts payable department should identify the error and request a revised invoice if the purchase is exempt.
The first step in a reverse audit is to perform a complete study of the client’s business activities. The second step is a complete study and evaluation of the sales and use tax compliance system. The sales tax compliance system is analyzed in order to be familiar with the process of issuing sales tax on invoices. The purchasing function is analyzed to understand how purchases are made and approved.
After the review of the business, the purchasing function, and the sales and use tax compliance systems are completed. A review of the invoices will be conducted to determine which invoices may have been erroneously remitted with sales tax. Procedures are then followed to recover the overpaid sales and use tax from the vendors and the state.
After the reverse audit is completed, a written report is provided. The report identifies the audit procedures followed to recover overpaid sales and use taxes and the findings. Weaknesses found in the sales and use tax compliance system and recommendations to improve the systems are included in the report.
If you would like to discuss whether a reverse audit may be successful for your business, schedule a free consultation.