No one enjoys being subjected to a state and local tax (“SALT”) audit (typically sales tax, use tax, or commercial activity tax), but there are ways to manage the stress and possibly mitigate the audit’s impact. Despite assistance being available, we typically find that company personnel often attempt to manage SALT audits on their own. By doing so they miss many opportunities to make things easier while achieving better outcomes. SALT law can be extremely complex and any related audit can have a significant financial impact on the company while negatively impacting employee morale. Therefore, competent, available help should be utilized.
As soon as a company is notified of a forthcoming SALT audit, management should contact the company’s attorney. If that attorney does not have a proper background in SALT, the company should retain an attorney who does. This establishes an attorney-client privilege that protects certain information, a benefit Ohio law does not extend to information shared between accountants and their clients.
A good SALT lawyer will then work as the intermediary between the company and the auditors to establish a written and agreed upon audit plan that will govern the entire audit. Any such plan will properly define and restrict the audit’s scope. The audit plan will keep the auditors and company personnel on track and focused while also enabling the company to perform an internal risk assessment for audit exposure. The audit plan should also preemptively, and with specificity, identify which company documents will be shared with the auditors during the examination. This is absolutely critical because it enables the company to redact certain sensitive information that is not necessarily pertinent to the audit. Auditors typically will cooperate with these endeavors. Companies should keep in mind that redaction must take place before records are turned over to the auditors, otherwise the records become part of the audit workpapers as received and could be subject to public disclosure as part of future appeals, if any. This means that confidential customer information, contract provisions, or other private details may become public record if not otherwise appropriately and timely protected during the audit.
SALT attorneys can also help negotiate the audit’s sampling approach, including the determination of which year shall be used as a representative sample for extrapolation, the identification of outliers in the population, and other special transactions that require disparate treatment in the audit. Typically, good faith, respect, and fair dealing go a long way when negotiating with the auditors, who also have the goal of making sure the audit is fair and representative of the company. This can make negotiation very productive for both parties, but it must take place before fieldwork starts. Without the proper intermediary that understands the company facts and can apply them to the law to the business, these productive conversations likely never take place, immediately putting the company at a significant disadvantage. If an audit gets off-track, it is also detrimental to the state, which is spending time and resources on the audit as well. However, establishing the proper ground rules and framework for the audit upfront can help alleviate some of the stress and ensure an appropriate audit takes place, benefitting everyone.
Ultimately, documentation is the key to surviving and thriving under audit. And properly building the audit’s foundation – before it starts – is the key to managing documentation and ensuring a successful audit. It is far cheaper and less stressful to resolve all audit issues (according to the agreed-upon audit plan) during the audit then to risk going forward with an appeal to the Board of Tax Appeals or pursuing subsequent litigation after the audit is completed. Don’t miss opportunities to make things easier and more efficient!
Several McCarthy Lebit attorneys have significant experience working on complex SALT audits. Further, we have attorneys that are current (or former) CPAs with strong accounting and finance backgrounds. We are familiar with the necessary negotiations and the application of sales and use tax laws to a variety of business environments. We are ready to help manage the stress and position our clients for the best possible SALT audit outcomes.