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presents
Sales and Use Tax Audit Strategies Anticipating Auditor Requirements for Documentation
presents
Anticipating Auditor Requirements for Documentation, Samples, Nexus and More
A Live 110-Minute Teleconference/Webinar with Interactive Q&A
Today's panel features:James Tauber, Managing Director, WTAS LLC, Chicago
Steve Oldroyd, Tax Senior Director - Sales & Use Tax, Property Tax, BDO USA, San Jose, Calif.Dan Davis Principal Associated Sales Tax Consultants Sacramento Calif
Q&
Dan Davis, Principal, Associated Sales Tax Consultants, Sacramento, Calif.Jen Galbreath, Senior Manager of Indirect Taxes, Amazon.com Inc., Seattle
Thursday, September 23, 2010
The conference begins at:The conference begins at:1 pm Eastern12 pm Central
11 am Mountain10 P ifi10 am Pacific
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Sales And Use Tax AuditSales And Use Tax Audit Strategies Webinar
Sept. 23, 2010
James Tauber, WTAS [email protected]
Steve Oldroyd, BDO USA [email protected]
Dan Davis, Associated Sales Tax Consultants
Jen Galbreath, Amazon.com Inc. [email protected]
Today’s ProgramToday s Program
Preparing For The Audit Slides 6-15 (James Tauber)
Midstream Management Of The Audit Slides 16-22
(Steve Oldroyd)
What Auditors Typically Look For Slides 23-28 (Dan Davis)( )
Post-Audit Procedures Slides 29-39 (Dan Davis)
A I E i Slid 40 50Amazon.com Inc. Experience Slides 40-50 (Jen Galbreath)
5
P i F Th A diPreparing For The Audit
James Tauber, WTAS LLC
6
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
7
State’s Procedures For Assigning Auditors
• Capacity• Capacity
• Geographic proximity to the taxpayer/records
• Industry experience
• Overall experience relative to the complexity/size of the company
8
Scope Of Auditor’s Pre-Audit Research
• General infoo Googleo Googleo Company Web siteo Public financialso Advertising (Yellow Pages, billboards, representatives,
etc.)o Press releases for recent activity (e.g., dispositions,
)acquisitions)o Visit retail locations Store
9
Retail Web site
Scope Of Auditor’s Pre-Audit Research (Cont.)
• Other tax filingso Tax returnso Tax returnso Noticeso Statement of accountso Nexus questionnaires
• Prior audit work papers
10
Your Pre-Audit Preparation/Research
• Audit starts before the auditor callso Know where the skeletons areo Know where the skeletons areo Credit/refund opportunitieso Consider what type of sampling/sample periodso Know what issues have occurred and could affect the audito In what condition is your exempt documentation?o How long it will take to get information?o Review recent changes in law for potential
exposures/opportunities (e.g., amnesty)
11
Your Pre-Audit Preparation/Research (Cont.)
• Develop a proposed audit plan/work program• Develop a proposed audit plan/work program
• Communication to the businesso Let information resources know that you will be contacting
themo Let the facility know there will be an auditor in the houseo Remind employees not to talk to auditors
12
Initial Contact With The Auditor• Confirmation of companies and periods
• Confirmation of information request/process
• Confirmation of timing of field audit and anticipated return visitsg p
• Inquire about their level of experience
• Discuss the auditor’s audit plan and address any gaps compared with your plan
13
• Set the tone
Preparation For Opening Conference
• Develop an outline of what to covero Timingo Recordso Rules of the roado Communication plano Communication plano Process for resolution of issues
• Availability of requested documentsB f ili ith t i t /• Be familiar with tax requirements/processes
• A few words about sampling agreement…• Determine your rapport with auditor
14
In Summary
• Be prepared …• Know your issues• Know your issues• Have your resources lined up• Review your documentation
• Develop an audit plan…
• The more your prepare in advance …• The smoother the audit will go • The more likely you will achieve good results
15
The more likely you will achieve good results
Midstream Management Of TheMidstream Management Of The Audit
St Old d BDO USASteve Oldroyd, BDO USA
16
Sales Tax ExaminationSales Tax Examination
Analysis of revenue streams
• Taxability of products and services• Destination-based sourcing• State and local tax rates (2.9% to 10%)• Statutory exemptions • Exemption certificates• Exemption organizations
17
Use Tax ExaminationUse Tax Examination• Fixed assets
• Accounts payable
• Inventory withdrawals
• Inter-company
• Mergers and acquisitions
18
Statistical SamplingStatistical Sampling
Sampling trends
• Electronic vs. manual
• Statistical vs non-statisticalStatistical vs. non statistical
19
Transaction Sampling Transaction Sampling
Bl k li• Block sampling
• Statistical sampling
20
Block Sample Block Sample
• Selecting a period of time Select g a pe od o t e
• Grouping
• Most recent transactions
21
Statistical Random Sample Statistical Random Sample
Advantages of a statistical random sample• Basic premise that every item in the population has an equal
chance of being selected
• The sample result is objective and defensible
• Results can be evaluated and supported mathematically. Results can be evaluated and supported mathematically.
• Standard deviations and confident levels of the results can be computed computed.
• Multiple samples or strata can be made and evaluated separately, or combined and evaluated together
22
or combined and evaluated together.
Wh t A dit T i ll L k FWhat Auditors Typically Look For
Dan Davis, Associated Sales Tax C lt tConsultants
23
Auditors’ Preliminary Objectives
• Review internal file; determine points of interest
• Review reporting history; compare with prior audit for significant differences
• Determine if fixed asset dispositions and/or changes in entity are indicated
24
Purchases Subject To Use Tax
• Overall, largest area of audit assessment
• Untaxed purchases of fixed assets, including computer hardware & software
• Untaxed purchases of supplies
• Inventory withdrawals
25
Questionable Exemptions And Credits
• Reviewed on sample basis• Reviewed on sample basis
• Based on sample, a percentage of disallowance is computed.
26
Additional Taxable Sales
• Total sales reconciled differences assessed• Total sales reconciled – differences assessed
• Indirect audit methods
27
Other Areas Of Auditor Interest
• Sales of fixed assets• Sales of fixed assets
• Changes in entity or sale of division
28
Post-Audit Procedures
Dan Davis, Associated Sales Tax Consultants
29
Post-Audit Procedures In General
• Post audit administrative protest processes vary widely from state to• Post-audit administrative protest processes vary widely from state to state. Some states allow only one level of administrative appeal before the case must proceed to court. Most provide two levels, and a few provide three. The details and procedures differ greatly among theprovide three. The details and procedures differ greatly among the states and should never be taken for granted.
30
Representation• Taxpayers generally may be represented by outside parties at the first• Taxpayers generally may be represented by outside parties at the first
level of appeal.– Qualifications for permitted representatives vary from state to
statestate.
• Requirements may be more restrictive at higher levels; where the di i j di i l ( h ld b f d i i t ti lproceedings are quasi-judicial (e.g., held before an administrative law
judge), an attorney and/or the taxpayer may be the only representatives permitted.
• However, a non-attorney may be allowed at any level as a general or expert witness.
31
Audit Exit Conference
• Held by auditor or immediate supervisor at completion of audit field workwork
• The auditor should provide complete copies of the audit work papers.
• If a conference is held solely by auditor, taxpayer can request an additional meeting with supervisor.
32
Informal District Conference
• May be held with highest ranking supervisor in the audit district• May be held with highest ranking supervisor in the audit district
• Provided for in many, but not all, states
33
Official Billing (Notice OfOfficial Billing (Notice Of Determination, Of Assessment, Etc.)
• Generally issued after audit exit conference and/or district conference• Generally issued after audit exit conference and/or district conference
• Must be protested in writing within statutory time limit or the billing ill b fi l if billi b fi l th l ti ll i twill become final; if billing becomes final, the only option usually is to
pay the assessment and sue for refund in court.
34
Second Level Of Hearing
• Generally held before the tax department
• May be formal or informal, depending on the state
• May be quasi-judicial
• Generally should submit written arguments, with citations and exhibits where applicable
35
Third Level Of Hearing (If Any)
• Often quasi-judicial
• Usually at an executive level (director of revenue, or elected or i t d t b d)appointed tax board)
36
Alternative Administrative ResolutionAlternative Administrative Resolution (Not Available In All States)
• Mediation
• Settlement (may be based on ability to pay strength of state’s case or• Settlement (may be based on ability to pay, strength of state s case, or a combination, depending on the state)
I t th lt ti b i k d hil l• In most cases, these alternatives may be invoked while a normal protest is in process.
• If alternatives are agreed to, they’re usually final.
37
Proceeding To Court
• In most states, assessment must be paid in full, although a few allow bonds to be posted.
• Some states require exhaustion of all administrative remedies prior to proceeding to court; others allow some steps to be bypassed.
• Depending on the state and the procedural method chosen, the case may be heard solely on issues previously raised or treated as a trial de novo The court may limit its rulings to legal issues or may alsonovo. The court may limit its rulings to legal issues or may also entertain factual arguments.
38
In Conclusion
• At all stages of protest: Take nothing for granted learn the• At all stages of protest: Take nothing for granted, learn the requirements and complete all required steps in a timely manner. o not assume the state will notify you of the next required step, even where it’s required by law to do so.it s required by law to do so.
39
Amazon.com Inc. Experience
Jen Galbreath, Amazon.com Inc.Jen Galbreath, Amazon.com Inc.
40
Audit Best Practices And Experiencesp41
Develop tax audit best practices Engage other tax functions: Income, international, payroll,
planningplanning
IDR’s increasingly cross-tax types D t i f d t ti i / i ff Determine process for documentation review/sign-off
Protocol for auditor interactions Leverage data and research happening in other areas Reconcile tax returns
Example: Corporate vs. license gross receipts
Audit Best Practices And Experiences (Cont.)42
Develop tax audit best practicesp p Engage other departments: Finance and business groups
Contracts and agreements (Legal) Contracts and agreements (Legal) Detailed journal entries (Accounting) Inter-company agreements and entries (Inter-Company
Accounting) Business groups
Schedule auditor visits during times when key groups have availability to answer questions that come up while the auditor is on site
Audit Best Practices And Experiences (Cont.)43
Preparing for the audit Develop (and maintain) a grid for “key events and happenings” Develop (and maintain) a grid for key events and happenings
Whiteboard/bulletin board/Wiki/spreadsheet New business initiatives/system changes/organizational
updates Attend business update meetings/read press releases/review
Web sites and FAQs/customer service responses
Audit Best Practices And Experiences (Cont.)44
Preparing for the audit (Cont.) Be a customer (the auditor might be) Be a customer (the auditor might be)
Store/online experience: Signage, receipts, packaging Reward programs, e-mail lists, advertising Tax holidays, rate and taxability changes
Helpful for selecting sample periods, stratification of results
Audit Best Practices And Experiences (Cont.)45
Preparing for the audit (Cont.) Amazon 101 Amazon 101
Provide background on business operations Utilizes screen shots and other publicly available data FAQs
Other business process documentation
Audit Best Practices And Experiences (Cont.)Audit Best Practices And Experiences (Cont.)46
Once the audit notification arrives Pre-audit conference (auditor/supervisor)
Clarify IDR other auditor requests Clarify IDR, other auditor requests Provide report examples Sticking points: Any data you can’t (or won’t) provide Discuss timeline & critical dates Document and circulate (DOR/Tax Department)
Audit Best Practices And Experiences (Cont.)Audit Best Practices And Experiences (Cont.)47
Once the audit notification arrives (Cont.) Pre-audit conference (auditor/supervisor)
Routine audit or “special” selection Auditor experience
Auditor information sheet
Travel information: Hotels, restaurants, etc. Guidelines for visiting your office
Security parking Security, parking
Audit Best Practices And Experiences (Cont.)Audit Best Practices And Experiences (Cont.)48
Field work Field work Facilitating an effective visit
O i dit ti G d l d il ffi lif Opening audit meeting: Ground rules, daily office life Walk through documentation being provided Explain processes, show examples Check in, answer questions
Answer questions during field work
Audit Best Practices And Experiences (Cont.)49
Post-field work Keeping the momentum Keeping the momentum
Schedule check-in calls/meetings (weekly/monthly) Set expectations and deliver as promised
Closing things out: Subsequent field work trip or travel to the Closing things out: Subsequent field work trip or travel to the DOR to close out final items
Audit Best Practices And Experiences (Cont.)50
Taking it full circle Successes and “Opportunities”
Let managements know results Let managements know results Communicate throughout audit cycle Leverage exposures into processes improvements