Posted on June 20, 2019
Performing a reverse tax audit can be a rewarding way for companies to identify and recover overpaid sales and use taxes. The word “audit” may be received with negative feelings within some companies and perhaps reflected upon with frustration and avoidance. Nobody likes the idea of having to pay more taxes or having to endure the details of an audit. However, performing a reverse tax audit may be an opportunity for you to get paid for being compliant.
What is a reverse tax audit?
A reverse (tax) audit, sometimes called an “overpayment review,” is an optional review of a company’s use tax accrued and/or sales tax paid on purchases that identify overaccruals or overpayments to states, in the form of use tax or vendors in the form of sales tax. Ultimately, the goal is to obtain a tax refund from the state, locality of the sales, or use tax it has overpaid. The review can be performed by a company itself or by a third-party tax professional skilled in the nuances of US state and local taxes. A typical reverse audit covers a period of 3-4 years commensurate with the state sales tax statute of limitations or period of time subject to sales and use tax audit depending on if a waiver was signed by the taxpayer or not.
Benefits of reverse audit
Many times, with the unwavering goal of becoming compliant, companies will simply pay every possible tax that they could be held accountable for collecting. It is important for every company to be aware of tax laws, it is also beneficial to perform periodic reverse audits although they can be tedious and time consuming. To initiate a reverse tax audit, ensure that you are apprised of the statute of limitations for filing a refund claim and evaluate whether you are currently under a sales tax audit by a state revenue department.
The benefits of performing a reverse audit are not limited to finding opportunities for refunds. It is also a chance for a company to find errors in its compliance and correct them before a state revenue auditor enforces a penalty. Having a third party review your purchases and the application of sales tax or use tax accruals coupled with taxability and exemptions, offers an unbiased review of your processes that may unveil prospective rewards. The results of a reverse audit will be in your favor either way whether with a refund, discovery of a faulty process and opportunity to correct it, or confirmation of a sound accrual practice.
Some areas proven worthy of review include sales tax paid and use tax accrued. It is possible for a company to have paid sales tax to the vendor at the time of purchase of the item then later self-accrued use tax and remitted it to the state. This results in a double payment of sales/use tax.
Another potential pitfall occurs when a taxpayer defaults to accruing use tax on all purchases and does not have a strong internal review process for each purchase to determine taxability. Many items may be statutorily non-taxable and the taxpayer may have accrued in error.
A purchased item may typically be taxable in a given state, but the nature of the taxpayer’s business may provide an exemption for this taxpayer (e.g., manufacturer). Knowing what exemptions are available for your business and whether your business qualifies are key to successfully obtaining exemptions from sales tax for the purchase of such items that are typically taxable to others.
Enterprise software, electronically downloaded software, and similar licenses may be non-taxable in certain states. These provisions afford opportunities for taxpayers to review their purchases and determine if the applicable purchased item is taxable or non-taxable and then to analyze whether they paid sales tax on the purchase to the vendor and/or accrued use tax and remitted it to the state.
There have been situations where a taxpayer accrued use tax to a home state (e.g., Illinois) when the item was physically shipped to and used in another state (e.g., Montana). A review of purchase orders and invoices focusing on “ship to” destinations may reveal potential overpayments made to the wrong state.
Allyn is dedicated to promoting the success of our clients. We allocate our resources to ensure that no potential value is left unrealized while our clients focus on their core business. Reverse tax audits are just one of the services that Allyn offers to ensure client success. Allyn employees work diligently during the audit process by reviewing use tax accruals and tax paid on purchases within the specified period. We look for potential erroneous payments and file the necessary paperwork when they are identified. We file refund claims with states and manage refund recovery. We also identify compliance and process improvement opportunities during our review and report back to you with the results of our findings.
A few examples of our recent successes include the following refund checks for a given client per state:
Tips for the Taxpayer
In a post-Wayfair tax world, more vendors than ever may potentially be charging sales tax due to relaxed nexus and registration requirements. These new vendors in the tax arena may or may not be critically examining their determinations on when to charge state and local sales tax. This potential uncertainty can give rise to mistakes which in turn can result in over-appropriation of sales or use taxes to states.
It is important to understand what is taxable in all the states in which you operate or make purchases in and to know if any exemptions exist for your business and such items being purchased. Confirm your self-accrual of use tax process and sales tax payment process to ensure your company is consistently reviewing invoices for the correct physical ship-to destination of items, coupled with proper use tax accruals. Take advantage of the opportunity while under audit by state sales tax revenue departments to ensure that your company is correctly accruing and remitting use tax. Overpayments could be addressed during audit or filed under a separate refund claim with the state. Identify and correct any erroneous internal processes.
Determine whether you have the manpower, expertise, and time to manage a reverse audit and consciously make the decision to select an expert resource who can manage the entire process for you and maximize your refund. Decide whether you can afford to continue overpaying sales and use tax to states or whether you will take back what is truly yours.
How Can We Help?
Allyn’s tax team is staffed with seasoned tax professionals experienced in all aspects of Federal, multi-state and local tax compliance and consulting for large US and global corporations. Allyn performs reverse audits routinely for businesses located or paying sales tax throughout the US. Allyn tax professionals are well-versed in technical sales tax regulations, exemptions, procedures, and practices. We use that experience to your advantage.
When performing a reverse audit for a client, we analyze invoices that support the payments made to identify overpayments and underpayments and notify the client of our findings before proceeding. We identify issues with accrual processes and taxability and report our findings to you. We provide options for solutions to tax issues. To ensure the success of the refund claim, we prepare documentation to support the exemption or non-taxability of the purchases. We also offer the client solutions to minimize repeat errors in payments or accruals. We are dedicated to seeing this process through to completion and following up with the state throughout the project.
It is very simple and easy for a company to engage Allyn in a reverse audit. Just reach out to us, and we will only require minimal data from you to get us started. We minimize the time that you will spend on the audit while we focus on the details and keep you apprised of the progress and findings.
Contact us and we can provide a customized cost-effective solution to meet your company’s needs. For further information on Allyn Tax services, please contact: firstname.lastname@example.org.
For More Information
If you are interested in learning more about this topic or other tax topics, please visit our Tax Publications under News and Events at www.allynintl.com.
Contributors: Abra Moore and Trisha Davidson
About Allyn International
Allyn International is dedicated to providing high quality, customer centric services and solutions for the global marketplace. Allyn's core products include transportation management, logistics sourcing, freight forwarding, supply chain consulting, tax management and global trade compliance. Allyn clients range from small local businesses to Fortune 500 firms. Allyn conducts business in more than 20 languages and has extensive experience in both developed and emerging markets. Highly trained experts are positioned throughout North and South America, Europe and Asia. Allyn’s regional headquarters are strategically located in Fort Myers, Florida, U.S.A., Shanghai, P.R. China and Prague, Czech Republic. For more information, visit www.allynintl.com.