In a State Tax Notes article titled “Surviving Sales and Use Tax Audits—During the Audit,” Mary Benton was quoted extensively on the the important steps to take—and the common pitfalls that occur—when taxpayers are managing an audit.
“Personalities can play a role in how the audit proceeds,” Benton said. “The auditor doesn’t need to become your adversary. The auditor doesn’t need to be your friend, but you don’t want to do something to make the auditor dislike your personality.”
Quoting The Godfather, Benton explained, “This is business, not personal . . . If a taxpayer feels as though they cannot have a reasoned conversation with the auditor, it may be best to remove him or herself from regular interaction with the auditor and let a third-party assume that role.”
“It’s always important to know where the auditor stands,” she said.
When it comes to information requests during the audit, Benton cautioned “that all information requests, even for commonly requested documents, should be in writing. Taxpayers should also keep a file of all information requested and provided and to be careful not to provide too much documentation in the spirit of ‘while we’re at it.’”
“Trying to anticipate what the auditor will request and providing it before the auditor requests it may backfire on the taxpayer,” Benton said.
When a taxpayer is asked for sensitive documents, such as customer lists or proprietary information, Benton advised, “[T]he taxpayer should try to convince the auditor that the information is unnecessary for the audit.”
“If the auditor insists that the information is necessary,” she continued, “there are means for the auditor to obtain the information over the taxpayer’s obligations. Most states have broad power to get information they consider necessary to the audit.”
However, “most states will accept information pursuant to a confidentiality agreement, which will prevent the information from being subject to a FOIA request,” Benton said.
When the time finally comes for the exit conference with the auditor, “if it’s not right up against the audit deadline, it is possible to point out things at this time that you don’t agree with and make sure that the auditor’s work papers are clear and consistent with what the auditor is saying,” she said.
For a quicker, more efficient audit process, “taxpayers will have the best chance of negotiating a favorable penalty amount if there has been a good relationship with the auditor,” Benton concluded.