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The Audit Plan in a Sales Tax Audit

I’d like to speak with you about the Audit plan and the importance that it plays in sales tax audit. The audit plan is the agreement between either the client or the representative and auditor about the way that the audit will be handled. This is one of the most important components of the sales tax audit because it governs the road map on which the way that things are going to be handled. For example, one of the things that we do with the initial audit plan is we try and streamline the amount of disclosure that the client has to give the board and initially.

Number one, most sales tax audits are three years, they cover a three year scope. The client having to go back and dig up three years of books and records is often a pretty burdensome and arduous job on the part of the client. We want to try to avoid that for the client up front. More so, you want to have control over the documents that you’re giving the auditor. If you can shorten the scope of the period during the audit plan then you have more control over the information that’s being provided and work with that information and make sure its facts.

One of the things we try to do in the audit plan is we try and get the auditor to agree to a sample of the overall audit period and say, “Hey, auditor if we take a quarter or two-quarters of the initial audit period and everything checks out, will that suffice?” Because that way you will have done a limited amount of testing within the quarters. You can have enough information to write your report, you take a look at quarter or two, everything is fine and then we can just move on.

That is usually a great way of doing things. The audit to plan is also important for avoiding problem areas that you know the client may have. For example, if the client is under-reporting their cash sales then you’re going to want to stride the client away from any audit technique that emphasizes cash sales. What you may want to do is, you may want to do an observation test versus doing market tests.

An observation test would be the auditor coming into the client’s business and analyzing their sales on a day to day basis. If the audit period was significantly far away you could argue that the client had set an uptick in cash sales and potentially create a plausible explanation for the shortfall in cash sales but you want to be careful about how the audit plan is constructed, is tendency of clients is to move the auditor away from methods that involve direct interaction with the business and that’s really kind of the wrong approach.

What you want to do is you certainly don’t want the auditor in the tax fairness business to the extent possible or to being in the business is disruptive. It freaks client out and it causes a lot of problems but if you can steer the auditor to the direction you want to go if you understand what the client’s data is. If you understand if there are problems at the beginning of the audit with either under-reported sales or potentially purchases not being paid or whatever the issue is.

If you understand the problem at the outset, you could steer the audit plan to accomplish your objectives as a practitioner. You have the advantage over the auditor in the beginning because you have the first access to the client and to the client’s data. It’s really important to understand the client, understand the problem, understand what the consequences are and then use the audit plan to steer the auditor in the direction that you want the auditor to go. The audit plan and the initial outset of the audit because the audit plan is written down and signed by both auditor and representative. Is the best way to navigate through problems in the audit.

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This post first appeared on Brotman Law California Tax, please read the originial post: here

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The Audit Plan in a Sales Tax Audit

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