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1 Presenting a live 110 minute teleconference with interactive Q&A Sales and Use Tax Audit Strategies Anticipating Auditor Requirements for Documentation, Samples, Nexus and More THURSDAY, OCTOBER 20, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: James Tauber, Managing Director, WTAS, Chicago William Ault, Director, Crowe Horwath, New York Tom Johnson, Director, Ryan, Fort Lauderdale, Fla. For this program, attendees must listen to the audio over the telephone. Please refer to the instructions ed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at ext. 10.

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5 Sales and Use Tax Audit Strategies t Seminar Oct. 20, 2011 James Tauber, WTAS LLC jim.j.tauber@wtas.com William Ault, Crowe Horwath william.ault@crowehorwath.com Tom Johnson, Ryan tom.johnson@ryan.com

6 Today s Program Preparation For the Audit [James Tauber] Slide 7 Slide 16 Procedural Audit Aspects/Midstream t Management [William Ault] Slide 17 Slide 21 Current Auditor Priorities [Tom Johnson] Slide 22 Slide 26 Alternatives To The Traditional Audit Process [William Ault] Slide 27 Slide 29 After The Audit [Tom Johnson] Slide 30 Slide 33

7 James Tauber, WTAS LLC PREPARATION FOR THE AUDIT

8 Objectives For This Section Assignment of auditors Auditor s pre-audit research Your pre-audit preparation/research Initial contact with auditor Preparation for the opening conference 8

9 State Procedures For Assigning Auditors Capacity Geographic proximity to the taxpayer/records Industry experience Overall experience relative to the complexity/size of the company 9

10 Scope Of Auditor s Pre Audit Research General information Google Company Web site Public financials Advertising (Yellow Pages, billboards, representatives, etc.) Press releases addressing recent activity (e.g., dispositions, acquisitions) Visit retail locations Store Retail Web site 10

11 Scope Of Auditor s Pre Audit Research (Cont.) Other tax filings Tax returns Notices Statement of accounts Nexus questionnaires Prior audit workpapers 11

12 Your Pre Audit Preparation/Research Audit starts before the auditor calls Know where the skeletons are Credit/refund opportunities Consider impact of sampling methodologies and/or sample periods Know what issues have occured and how they could affect the audit In what condition is your exempt sales documentation? How long it will take to get the required information? Impact of recent changes in law for potential exposures/opportunities (e.g., amnesty) 12

13 Your Pre Audit Preparation/Research (Cont.) Develop a proposed audit plan/work program Communication to the business Let information resources know that you will be contacting them Let the facility know there will be an auditor in the house Remind employees not to talk to or around the auditors 13

14 Initial i Contact With The Auditors Confirmation of companies and periods to be audited Confirmation of information requests and the request process Confirmation of timing of field audit and anticipated return visits Inquire about their level of audit and industry experience Discuss the auditor s plan and address any gaps compared with your plan Set the tone 14

15 Preparation For Opening Conference Develop an outline of what to cover Timing Records/information requests Rules of the road Communication plan Process for resolution of issues Determine availability of requested documents Be familiar with tax requirements/processes A few words about sampling agreements Determine your rapport with the auditor 15

16 In Summary Be prepared... Know your issues Have your resources lined up Review your documentation Develop an audit plan The more you prepare in advance The smoother the audit will go The more likely you will achieve good results 16

17 William Ault, Crowe Horwath PROCEDURAL AUDIT ASPECTS/MIDSTREAM MANAGEMENT

18 Reviewing Questioned Invoices During The Field Audit Managing an experienced tax auditor s negotiation strategy Leave an auditor with the files or check in regularly? The risk of surprise and a weaker defensive position His/her time production expectations, and risk of an assertion of no cooperation File copies vs. pulling the invoice and contract again Mitigate the risk of the roving tax auditor When to ask for draft workpapers Do I always answer their questions on the spot? Three truthful answers, one resulting in tax and the others in non-taxability Checklist for all questioned invoices: Contract, PO, complete, geography, use tax, audited Bundled transactions and accounting entries 18

19 Reviewing Exemption Certificate Records Proposed exception items resulting from the test of exempt sales Review shift of burden of proof Can we exclude based on nature of product/service? Can we exclude based on destination? Resale or exemption certificate is missing. Obvious reseller or obvious exempt user Not-so-obvious reseller or exempt user Missing certificate, and the reseller or exempt user is no longer in business Contractors and capital improvement certificates What to do with a good faith challenge? 19

20 Audit Sample And Projection Changes Sample becomes voluminous and too time-consuming? i Expenses, sales, fixed assets Reduce block sample period Review vendor reports before invoices are pulled - obvious vendor elimination Multiple purchases from same vendor Projecting error rates over a representative population How often is a block sample truly significantly distortive? Credits and the sample error rate 20

21 Rules For Engaging The Auditor Dealing with mid-audit problems: When and how do you go over their head? Inexperienced or incompetent tax auditor If passive: Do you have the resources to effectively conduct the audit for them? If aggressive: Need for paper trial of unreasonable behavior Fundamental technical disagreement - Our sales are NOT taxable! No agreement on documents to be produced Auditor leaves department The point person Set a pattern early on to mirror their negotiating leverage model Agree to disagree on reasonably open items Setting the stage for a penalty waiver 21

22 Tom Johnson, Ryan CURRENT AUDITOR PRIORITIES

23 What Auditors Are Looking For Now Impacts of short-staffing and reduced experience at revenue agencies Sending entire assessment from the field to next level of appeal Less field expertise means more items for protest. Learning the protest process Letters with revenue agency Informal protest Formal protest Internal staff cost for audit External consultant cost Pressured to close more audits Measured or scored on audits for performance 23

24 What Auditors Are Looking For Now (Cont.) Making it challenging to include overpayments in assessment, as revenue agencies would prefer you file a tax refund or take a credit Perception of being not productive Require significant paperwork to justify the overpayment, in an effort to encourage this be submitted via the refund process Abatement of penalties Tiered system to determine percentage allowed Not as willing to grant full abatements Grey areas Not willing to allow vs. what has been allowed in the past Examples: Fabricated cost and rent for book purposes (FL) 24

25 What Auditors Are Looking For Now (Cont.) Trends with an impact, such as "Amazon taxes" Affiliate nexus More aggressive on issues New sources of tax revenue 25

26 What Auditors Are Looking For Now (Cont.) Takeaways for this section Less-skilled auditors could bring about more work. Familiarize yourself with electronic data being presented to the auditor prior to the delivery. Only provide what is asked for; too much may trigger review of other areas, accounts, etc. Credits and overpayments Why take in the current audit period vs. taking as a credit 26

27 William Ault, Crowe Horwath ALTERNATIVES TO THE TRADITIONAL AUDITOR PROCESS

28 Could A Managed Audit Be Valuable To You? What is a managed audit? Qualifications for, statutory benefits, formal agreement, process and review A review of the programs in selected states Risks California Connecticut Texas Significant time reviewing invoices and contracts Review vs. a re-audit by the department 28

29 Could A Managed Audit Be Valuable To You? (Cont.) Managed audit strategies and other benefits Multiple entities = Multiple benefits Use the prior audit cycle workpapers Net time savings from a well-planned audit Advantage of good faith bullish positions on unclear transactions Agree in advance on workpaper format in detail Seek expert review of workpapers before submission Seek tax auditor review in steps, where possible, to avoid surprises 29

30 Tom Johnson, Ryan AFTER THE AUDIT

31 After The Audit Preparation for and conduct of the post-audit conference 31 Outline your issues Pay assessment to stop interest (amnesty programs) Refund upon completion for items removed from assessment Know your audience Are you dealing with field auditor or next level? Taxpayers know their issues, accounting systems, etc. but need to convey the message in simple terms (e.g., resale/exemption, statutory exemption) Exhibits, binders, tabs Know your deadlines Minimize the number of extensions requested Not as willing to extend deadlines May have to move to next step within the protest process

32 After The Audit (Cont.) Resolving auditor error and areas of disagreement Do as much as possible at the local level to resolve the issue with the auditor and his/her supervisor Technical letters and prior case decisions to substantiate your case Depending on the history, issue(s) and personalities involved, it may be more beneficial to move to the next step in the protest process. Local authority Revenue agency authority Compromise vs. public notice Audit Resolution 32

33 After The Audit (Cont.) Takeaways for this section Be prepared with your issues, but also be persistent Look for credits, overpayments, enterprise zone refunds, bad debt allowances and statutorily exempt items that may ultimately reduce the assessment. They may want to compromise. Don t miss a deadline 33