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Time to Reverse Thinking on Sales Tax Audits?

Employee on the phone getting work done in the office

Sales tax audit activity is back to normal following a pandemic-driven lull during the past two years, according to transaction tax thought leaders like my colleague, Vertex’s VP of Tax Content and Chief Tax Office Michael Bernard. Mike’s not alone: several sessions at the Tax Executive Institute’s Midyear Conference in Washington D.C. I recently attended also addressed rising audit risks and their escalation factors.

During the early waves of the pandemic, many offices closed, including those occupied by state sales tax auditors. The pace of auditing activity also declined. “Now the auditors are back,” Mike reports in a Tax Matters podcast that addresses changing tax rules and rates and other sales tax trends. “While auditors are back, many are not working on company sites where they traditionally have performed audits.” More state auditing teams have implemented the technology tools they need to conduct audits virtually, a practice that will continue even after many businesses return to in-person work models.

In other words, sales tax auditing is back to a new normal. It makes sense for transaction tax teams to take a new look at strategies for lowering auditing risks. One way to do so is by taking a fresh look at reverse audits.

In the past, many tax groups treated reverse audits as an activity to perform only after an audit occurred. They had a pressing need to address issues uncovered during the auditing process. In many cases, a proactive reverse audit represents a better option.

A reverse sales and use tax audit facilitates the identification of items and transactions for which a company may have underpaid or overpaid sales or use tax. The activity can yield substantial benefits, including:

  • Tax refunds or tax payments;
  • Enhanced compliance confidence and assurance;
  • Improvements to tax compliance processes resulting from the identification of inefficiencies;
  • The resolution of conflicts with vendors;
  • Opportunities to educate employees on sales tax compliance processes and risks; and
  • More and better engagement between the tax group and the rest of the business.

Deeper levels of engagement with business partners can help enhance the tax department’s reputation throughout the organization. This type of “brand-building” can yield difficult-to-quantify yet longer-lasting benefits than any monetary benefits produced by a reverse audit (an activity I’ll examine in more detail in future posts).

Reverse audits serve as a practical illustration of the TEI conference’s theme, “seizing opportunities and mitigating risks.” Of course, obtaining both sets of benefits requires tax groups to embrace new perspectives as our new normal unfolds.

Blog Author

Larry Mellon, Tax Directory, Vertex Inc

Larry Mellon

Tax Director, Chief Tax Office

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Larry Mellon is a Tax Director in the Chief Tax Office, where he is responsible for providing insights, thought leadership and customer-centric direction to Vertex functional groups, supporting the continued expansion of Vertex indirect tax solutions and overall enterprise strategy. He has over 30 years of experience in sales and use tax compliance, risk assessment, jurisdictional audits, administration and management, as well as VAT compliance. Larry joined Vertex in 2005 as a Sales and Income Tax Supervisor and has served as Tax Manager since 2012, where he has played a pivotal role in elevating and advancing the company’s tax management offerings.

Prior to joining Vertex, Larry served as a Senior Tax Accountant and Property Tax Manager at Foamex International, Inc., a polyurethane and advanced polymer foam product manufacturer and marketer. Mellon also held multiple roles at The Franklin Mint and is a member of the Institute of Professionals in Taxation (IPT) and Tax Executives Institute (TEI).