Smart Tax Strategies to Avoid a U.S. Audit
November 30, 2017
Smart Tax Strategies to Avoid a U.S. Audit
It can be challenging to be tax compliant as you sell products or services internationally, but claiming the excuse of being new in town will not get you very far. In fact, in the U.S. you’ll be expected to comply with 14,000 different tax jurisdictions and their specific tax codes as soon as your customers start buying. The U.S. is a whole new world compared to the more familiar VAT regimes.
You’ll need to calculate and submit the proper sales taxes for each transaction on schedule—or risk a continuous onslaught of hefty penalties. As you can imagine, getting entangled in a tax audit could easily erase your profits.
You have to be perfect. That’s a tall order for any company, even if you employ a team of Mensa geniuses. Before you scrap your plans to expand across the pond, we’ll show you what can trigger these audits, how to stay abreast of the changes in tax laws, and drastically reduce the likelihood of ever enduring one by implementing state-of-the-art automation.
Confessions of Companies Who Survived an Audit
Is it just one tiny thing that triggers an audit or reprehensible sloppiness on the part of a business or corporation? In a recent survey, we asked these companies’ accounting professionals what got them in trouble on the local, state, and federal level. In many instances it wasn’t one thing, but a multitude of things that created red flags.
What did companies do wrong to trigger a U.S. tax audit:
- They invoiced the incorrect sales tax rate
- They invoiced with taxable products or services calculated as non-taxable
- They failed to produce the correct document when requested
- They invoiced as tax exempt without valid exemption certificates on file
- Their business purchases required payment of use tax
The other downside of getting swept up in an audit? Your company is at a higher risk of being audited again once it happens the first time.
How Tax Laws Might Change in 2018
To collect? Or not to collect? That is often the question. For years, the decision by the U.S. Supreme Court in Quill Corporation v. North Dakota (1992), the guidelines were much simpler. You didn’t have to collect in a state where you didn’t have a physical presence, such as a company headquarters or warehouse. This was the original definition of “nexus.”
As eCommerce boomed, states became determined to recoup lost revenue by initiating creative legislation to broaden what is considered taxable services and required reporting for all out-of-state transactions. This will surely continue in 2018.
How Nexus Leaves Companies More Perplexed
If you’re like most companies, you are probably involved in at least one or more activities that a state or territory could define as nexus.
For example, if your company:
- Conducts business with customers who are exempt from sales tax
- Attends U.S. based trade shows
- Offers maintenance or repair services
- Employs a remote sales force
- Delivers products with your own vehicles
- Utilises an affiliate sales or marketing program
- Visits customers to install products
- Ships from a warehouse in another state
- Uses drop shipping
One thing that is certain for 2018, the rules that determine nexus are ever-changing and vary from state to state. Today’s eCommerce best practices require companies to remain vigilant about anticipating and adapting to them quickly.
The True Cost of an Audit
If you don’t define your nexus obligations correctly, you can expect an audit.
Beyond the added fees paid for penalties and interest, you’ll also have additional costs for outside tax consultants, plus accrued staffing hours to produce any necessary documents.
In a recent survey of companies that were audited:
- 22% spent between $10K- to less than $20K
- 22% spent between $20K to less than $50K
- 22% spent between $50K to less than $100K
- 34% spent more than $100k
No matter the size or industry, businesses are at more risk than ever for being the target of an audit, and there is a close eye on international businesses trading into the U.S.
How to Keep More of What Your Earn
One of the greatest burdens of doing business in the U.S. is staying abreast of inconsistent and continuously changing taxes.
Add to it the drain of staffing up your company’s accounting teams to contend with manually filing sales tax returns and remitting payments.
There are some smart tax strategies you can employ quickly to prevent tax audits and other accounting missteps while improving your cash flow and overall profitability.
- Be proactive about paying taxes before it’s collected. Sounds counterintuitive, but switching to accrual basis accounting (sales tax is reported prior to customer being invoiced) rather than cash basis accounting (sales tax is reported when payment is received), may by required in some states. Technology can help reduce the time between when receivables clear and tax are paid.
- Receive early payment discounts. Your company will receive more favourable tax treatment that will ultimately improve your cash flow.
- Plan for returns and refunds. It’s hard to predict when or how many customers will want to return goods for which you have already submitted taxes. Not all states allow sales tax refunds. Plan your cash management conservatively, especially around the holidays.
With Avalara the Pain of Sales Tax is Removed
Avalara automates the complex and ever changing world of U.S. Sales Tax as it’s unrealistic to believe that you can get it right manually. It’s difficult, time consuming, and very error prone, which is why thousands of merchants have already reduced their risk through automation.
When you have Avalara software for your sales and use tax, you’ll enjoy:
- Fast, real-time tax calculations to comply with all your tax obligations
- Rapid implementation of new tax codes with ease (and explanations of what they are in plain English)
- Built-in address verification and geolocation
- SKU-level taxability for your products and services
- Easy maintenance of your exemption certificates
- Quick, accurate filing of returns
- Reduced errors
- Reduced total compliance costs
Avalara is constantly updating its software to account for the continuously changing tax codes in 14,000+ U.S. jurisdictions. So you can spend more time growing your business, instead of worrying about tax debts.