The Top 10 Indirect Tax Audit Triggers

Thompson Reuters' Tax & Accounting service has released its top 10 issues likely to prompt an audit of indirect taxes. The issues are as follows:

1. Nexus, but no registration: Nexus, a confluence of factors that make a business liable for sales and use taxes, is very likely if you are paying payroll or other taxes in the state. This issue comes into play for companies that are not registered for sales tax in a state, but pay other kinds of taxes there.
2. Lack of registration in the state system: If auditors can find you online, but not in the state system, they're more likely to call you to inquire about your registration status.
3. Issued resale certificates: Issuing a resale certificate despite not being registered for sales and use tax is a red flag for auditors.
4. Use tax audits: Current audits often provide leads for future audits. If one of a company's vendors has not charged proper use tax and is audited, it's likely that company will be audited as well.
5. Visual inspections: Auditors sometimes visit major construction projects and take note of contractors on site, often leading to an audit.
6. Whistleblowers: Disgruntled employees, angry customers and competitors can call in to hotlines and give auditors information that could lead to an audit.
7. Personal observation: Auditors still notice red flags when leading their day-to-day lives.
8. Non-remission of use tax: Companies that file sales tax, but not use tax, are often selected for audits.
9. High net sales: Growing businesses often make more errors in reporting.
10. Exempt items: Exempt status is easy to misinterpret, with confusion around what is and is not exempt. Companies that deal with a lot of exempt items are ripe for audit.

Auditing 'It's a Wonderful Life'

Business news site Quartz provides a little holiday levity with an audit of the Bailey Bros. Building & Loan Association from the Christmas classic "It's a Wonderful Life." Let's just say the company's internal controls didn't inspire much confidence from the auditors from PotterHouseErnstCooper LLP. (That would be, what, the Big One?)

It wasn't just an $8,000 discrepancy on the books that led to the auditors' concerns. Vice President William "Uncle Billy" Bailey drew this scathing description:

Let us be blunt. “Uncle Billy,” as Mr. Bailey is known, exhibits clear symptoms of early stage dementia. And while we are sympathetic, his involvement in key operational activities amounts to a threat to survival of this institution.

Here's hoping the VSCPA's members working in audit don't have to deliver this kind of bad news to their clients.