3 Steps to Minimize Sales Tax Audit Risk

This blog was last updated on April 20, 2023

Preventing sales tax audit risk is the best policy to have in place, versus reacting to an audit. However, when auditors do come knocking, businesses want to be able to quickly and easily find the needed documentation. When you have the right sales tax automation tools and processes in place, the chances of getting audited are less and the process of responding to those audits is easier.

Here are three key steps to minimize the risk of a sales tax audit – and will help keep you prepared for the possibility of an audit taking place.

Communication between tax and IT teams

Communication is key for minimizing audit risk, especially between the tax and IT teams. For example, the tax team should know about the company’s cloud strategy and if there are any upcoming changes to transactional systems (e.g., ERP, ecommerce, P2P). Comparatively, IT should know how much time is being spent on sales tax, where manual work could be reduced and if there is a plan in place to migrate or modernize the accounting system.

Having a “sales tax dream team” ensures all systems are updated in a timely fashion and business changes with tax implications are addressed immediately. This can only happen if all teams are working with one another toward the common goal of avoiding a sales tax audit.

Implement an adaptable strategy

It will also be key to have a sales tax strategy that can evolve with your business over time. Sales tax is evolving – your company needs to keep up. Furthermore, as your organization makes changes (e.g., adds a new product line, expands into new territories), there will be new sales tax considerations.

For example, nexus – both physical and economic – must be accounted for. Sovos’ 2022 State of Sales and Use Tax report found that nearly 800 sales tax bills are considered by state legislators each month. Additionally, the total number of jurisdictions within the U.S. grew 3.4% from 2021 to 2022, reaching 12,472.

At the beginning of 2023, every state with a sales tax has a rule in place that covers both physical presence and economic presence nexus. Details will vary from one state to the next, such as how long a business has to account for economic nexus when it crosses into a new jurisdiction. The right technology will keep pace with your business changes, helping to avoid the risk of an audit as new sales tax considerations start to impact the organization.

Prepare for the worst-case scenario

When it comes to preparing for sales tax audits, the best offense is a good defense. Businesses need to ensure they are ready before an audit actually takes place. A Sovos survey found that 80% of individuals who have responsibility for sales tax management/administration at their organization fear generating an audit or facing a financial penalty when remitting sales tax. Additionally, 18% said they worried about losing the confidence of their manager or even getting fired if they make a mistake.

However, here is where you can gain advantages with an automated sales tax solution. For example, when your business is audited it becomes easier to produce the needed documentation. It is also easier to support the audit inquiries from the specific jurisdiction.

Additionally, the right technology can ease the burden on internal teams. The majority (83%) of respondents said automating their organization’s tax management process would make them happier in their current role, and more likely to stay with the company. But just under two-thirds (62%) said their organization adopted new tech or systems in the past two to three years to combat the increasingly complex sales and use tax requirements.

Align tax and IT early to eliminate issues before they start, and to properly prepare for increased costs. The right partner can help ensure minimum interruption and maximum output, all while keeping your business compliant.