If a company inadvertently underpays its sales and use taxes, there’s a good chance the state and/or local Department of Revenue will find the error and collect. Ah, but, when it’s the other way around, and a company has inadvertently paid too much tax, a reverse audit may be the only way to catch the error. And, that nifty reverse audit can mean thousands of dollars in refunds.
Manage your Sales and Use Tax Burden with a Reverse Audit
A sales and use tax “reverse audit” can help you maximize tax exemptions and incentives. While similar to a taxing jurisdiction’s audit, the purpose of a reverse audit is to identify and recover tax overpayments remitted to suppliers or paid directly to the taxing authority. A sales and use tax audit performed by a governmental taxing jurisdiction is specifically designed to identify and assess for tax underpayments.
Internal audits in the traditional sense might not catch these costly tax mistakes, as that type of audit tends to focus on a company’s policies, procedures, and budgets. A reverse audit, completed by a professional services firm, combs through thousands and sometimes millions of transactions with a company’s vendors.
Ten industries frequently overpay sales and use taxes, according to an Accounting Today story citing a study by a Chicago tax and consulting firm. Those are manufacturing, engineering/research, and development, biotechnology, printing/publishing, technology, telecommunications, financial services, insurance, healthcare, and pharmaceuticals.
Some companies don’t have a built-out tax department, which would review transactions. Turnover in accounts payable departments or a change of vendor can also create the problem. Truly, most companies don’t have the personnel needed to complete the labor-intensive work.
|Examples: A manufacturing client was under a state audit and the auditor had attempted to assess taxes of over $400,000. With LBMC’s help, the auditor reduced the assessment then conducted a reverse audit and found the company had overpaid almost $900,000 extra in taxes. That company ultimately received a net refund of over $500,000.
A company that paid taxes on computers, office supplies, software, building maintenance and more each month to its vendors but also paid the Department of Revenue on the same transactions. In essence, the company inadvertently paid taxes twice on some things — once to the vendor and once to the state. A reverse audit on four years of transactions resulted in nearly a $1 million tax refund to the company.
According to an article in the Journal of Accountancy, a policy and procedures review is one tool to address the sales and use tax risk.
“The risk posed by state and local sales and use taxes should be viewed in the same manner as other business risks, e.g., product liability, theft and casualty,” the article notes.
The reverse audit process may start with a meeting with a company’s tax professionals, accounts-payable manager, capital asset coordinator and other employees familiar with tax reports and accounts payable files.
Once an overpayment is found, the next step should be to educate the company so it won’t happen again.
Why Perform a Reverse Audit?
LBMC tries to educate our clients about when they should pay tax and when they should not. We work with the client to stop the bleeding.
- Sales and Use tax laws are different in every state and continually changing.
- Sales/Use tax audits performed by taxing authorities are “one-sided” with little to no regard for tax incorrectly overpaid.
- Uncover costly mistakes made by vendors or within accounting systems; recover that capital and put it to work for you.
- Stop and/or minimize loss of recovery opportunities via statutes of limitations.
- SALT Expertise: Dedicated state and local tax practice with over 45 years of collective experience working for the Department of Revenue.
- SALT Expertise: Dedicated state and local tax practice with over 100 years of collective experience in state and local taxation.
- SALT Expertise: Complete performance and management of all processes, start to finish.
- Value Proposition: Client has final approval of any and all filings.
- Value Proposition: In most cases, LBMC performs services on a success fee basis. LBMC does not get paid until you get paid!
Reverse Audits Can Help Find Work Opportunity Tax Credits
Another type of reverse audit can help companies find Work Opportunity Tax Credits they may have missed. A company hiring from certain groups — including food stamp recipients, qualified disabled or unemployed veterans, qualified ex-felons, the long-term unemployed, Empowerment Zone residents and more — may be eligible for the credit. These are federal tax credits distributed at the state level and ranging from $2,400 to $9,600 depending on the group.
- Discovering and claiming these credits takes time and requires digging into an employee’s history for addresses, ethnicity and unemployment records.
- Documentation of credits is very tedious and labor intensive. Most companies do not have the staff to perform a WOTC review.
Work Opportunity Tax Credits save Tennessee businesses thousands of dollars in employee-related taxes by reducing the company’s liability for eligible employees. The Tennessee Department of Labor and Workforce Development (TDLWD) estimates that on average, 10-15% of all new employees may qualify for a tax credit.
As TDLWD Commissioner Burns Phillips explained, this program helps both employer and employee. “The amount of funding the Work Opportunity Tax Credit offers Tennessee employers can be of an enormous benefit to a company’s financial situation, while at the same time helping an individual who is struggling to find meaningful employment,” said Phillips.
The WOTC provides federal tax credit incentives to employers who hire eligible individuals. A company can receive $1,500 – $9,600 per approved employee in tax credits.
A tax expert can provide more information or answer questions specific to your company. If you’re interested in learning whether your company can save money with a reverse audit, LBMC will, in many cases, conduct a reverse audit at no additional cost to the company. A fee is collected only after an overpayment has been identified and realized.