Costly Tax Reconciliation Errors

Many tax managers are surprised when their sales & use tax auditors ask for the federal and state income tax return.  How can either be tied to sales & use tax returns?  Not only will the auditor seek to reconcile the federal reported sales numbers to the apportioned sales for their state, but they will also ensure that the sales reported on the state income tax return match that reported on the sales & use tax returns throughout the same period.  Further, the auditor will examine the federal and state income tax returns for signs of acquisitions and or purchases sourced within the state, that have not been reported as use tax transactions.  

Auditors also reconcile the sales and/or use tax liability accounts to the tax dollars remitted.  Auditors note that under-remitted tax dollars is the #3 cause for audit assessment.  The taxes collected from the customer, even if over-collected, are due to the state.  If you fail to remit over-collected tax, you will be assessed for the difference and in many cases this type of mistake will be a flag for future audits.  

Too often, I encounter departments that have not appropriately reconciled the sales and/or use tax liability accounts to the returns, let alone the apportioned income to the state.  Performing these tasks will greatly reduce the time spent upon audit, which also equates to less time your auditor will be looking, in detail, at your transactions within their state.  The best practices to ensure risk mitigation are listed below:

  1. Reconcile the Sales/Use Tax Liability Account Monthly. The sales and use tax liability account should be reconciled to the ERP or sales system, as well as the returns and/or remittances. Any accruals remaining should represent non-monthly filings or timely filing discounts. Other reconciling items must be dealt with at the transaction level.

  2. Reconcile the Sales/Use Tax Returns to the State Income Tax Returns Annually. The sales/use tax department may need to collaborate with the state income tax department to accomplish this. The total apportioned sales factor reported on the state income tax return for the calendar year should match the gross sales reported on the sales tax returns for the calendar year.

  3. Know Your Rights. Not all states will use this methodology, but many states do. You can consult your state's taxpayer's right's section, generally this is contained in the audit documentation found online. This documentation is a very powerful tool for sales and use tax managers.

These three simple steps, could save your company time, money, fines, interest and future risk.