You may have heard the saying: Smart people learn from their mistakes, but wise people learn from the mistakes of others. A tax audit might not exactly fall into the category of 'a mistake,' but we can definitely learn from audits that others have gone through.
In fact, Avalara has prepared a free, 15-page report about how tax audits are commonly handled. The data analyzed includes over 60,000 Texas audits and demographic details from an entire year of California audits. Several of the report's key findings have been summarized in Kerry Alexander's post on the Avalara blog.
For example, tax auditors don't merely draw business names out of a hat. Certain industries get more attention than others. This is usually because the relevant tax policies are more complex than for other industries. With increased complexity comes an increased chance of error, so auditors give increased attention to those areas of the market. Likewise, there are often red flags that auditors recognize in a company's tax reporting, such as high ratios of exempt sales or out-of-state purchases.
The industries that seem to be targeted most by state audit divisions are Construction, Food Service, Manufacturing, Retail, and Wholesale/Distribution. These business avenues all share difficulties in clearly assigning sales tax nexus, while they each had at least one other major trigger for audits:
- Retailers, wholesalers, and food services struggle with details of product taxability, especially different states tax different products and services
- Manufacturers and construction companies often get tripped up with use tax and exempt sales
- Distribution companies have complicated rules for drop shipping
The Avalara Sales and Use Tax Audits Uncovered report goes into more details about these tax compliance trouble-spots.
The smart answer, of course, for avoiding an expensive tax audit is to not make any mistakes in recording and reporting. Easier said than done. The wise corollary to the smart answer is to get help from tax specialists and automated tax software.
Offering seamless integration with Avalara's AvaTax product, aACE 5 can also help simplify your tax compliance burden. This robust yet affordable software solution for small and mid-sized businesses gives you increased visibility into your company's accounting, CRM, and ERP. Built on FileMaker, aACE 5 can deploy on Mac or PC, can be easily customized, and provides mobile and ecommerce functionality for additional flexibility. So whether you're the CEO who is tired of not knowing what your company's true cash position is or the owner-operator who feels like you're steering a ship in the dark, look into how aACE can bring your business data to light.
"aCE has been able to fully integrate full scale accounting, construction project bidding and fulfillment, point-of-sale order processing, field service via iPad, web store management and fulfillment, and much more into one seamless package." ~ Alvaro Mendoza, President/CEO, Commercial Energy Specialists, Inc.